Compass: Oil tax rollback in SB 21 is wise long-range investment

By ROGER MARKSApril 28, 2013 

The enactment of ACES in 2007 represented a very large tax increase to one of the highest in the world among jurisdictions similar to Alaska. By 2008 the tax rate was five-fold what it had been just two years earlier. Many corporations consider such actions no different than a seizing of assets.

At that time on the North Slope there was upwards of $60 billion in infrastructure from past investments that had nowhere to go. It was "captive" investment. This infrastructure was put in place to produce oil over an extended number of years, including the present and the future.

So after 2007 production from that past investment continued, paying much higher taxes. The state made lots of money, and some of that money no doubt did good things, but it has come at a price.

Whereas worldwide investment has increased 75 percent since 2007, when oil prices were $60 per barrel, in Alaska it has only increased 25 percent. North Slope production has dropped from 734,000 to 538,000 barrels per day (bpd) in that time. Under ACES, production is forecasted to drop to 300,000 bpd in 10 years.

The legacy (currently producing) oil does not produce itself. If the producers were to abandon the North Slope nothing would be produced. It takes a combination of old and new investments to produce oil. The producers could be spending more to produce more, or spending less to produce less. In that regard all oil is new oil. The legacy oil here competes with the legacy oil everywhere else.

The policy enacted in 2007 effectively punished production from past investments that couldn't go anywhere, because some production from this previous investment would continue anyway.

In the oil tax debate many have insisted on a promise from the producers to produce more if taxes were reduced. Funny, no one made them promise not to produce less when taxes were raised in 2007. Yet the economic response was quite predictable. Economic principles demonstrate it should work the other way with reduced taxes.

There are many reasons corporations cannot make these promises. In their budget cycles they need to line up projects to see how they compete. And there are forces out of their control, like oil prices or regulatory delays.

But at a deeper level, there cannot be a commitment because the state is legally forbidden from any such arrangement. The state constitution prohibits one legislature from binding a future legislature. The state could unravel any deal at any time.

This is exactly what we see happening now. Hardly is the ink dry on the new oil tax bill (SB 21) and there is a referendum to repeal it, sponsored by those who insist on these promises.

And this from a state that set a dangerous precedent of baiting investors with lower taxes and then in 2007 punishing them once the investment could not go anywhere. This is a game you may only be able to play once. How will Alaska ever get a $65 billion gas line if this is the way it does business?

Insisting on these promises, which the state cannot honor, is a self-fulfilling prophecy. The producers may not invest, or promise to invest, when the threat of 2007 happening again is always just a referendum or a legislative vote away.

The trap ACES has created is that there will be lead times for the production response from competitive tax rates, and the state will lose money in the short run. Under SB 21 it would only take a long-term increase of about 40,000 bpd to bring in more total petroleum revenue (royalties and production, property, and state corporate income taxes) under the new tax than ACES. There is no question the additional oil is there.

The oil tax debate isa trade-off between current and future revenue. When the state constitution calls for the use of natural resources for the maximum benefit of its people, it presumably means future Alaskans too. Let us not vilify those looking after them.

Roger Marks is a petroleum economist in private practice. He has worked as a consultant to the Alaska Legislature and is a former senior petroleum economist with the state Department of Revenue.

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