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Energy Economics conference: Did Alaska cut oil tax too much, or not enough?

Alex DeMarban
Divergent views on oil taxes came to the fore during a four-day Anchorage meeting of the U.S. Association for Energy Economics, a gathering of some 300 experts and executives discussing global energy and issues critical to Alaska's future. Aaron Jansen illustration

A researcher for a University of Alaska think tank said the tax cut passed by the Legislature this spring is worse than the scandal-laced oil-tax bill passed in 2006, and that it will eventually need to be rewritten because it won't bring the state enough revenue.

Offering a completely different perspective is ConocoPhillips’ chief economist, who said the new incentives don't go far enough to offset the fact that oil companies in Alaska face some of the steepest costs in the world.

The divergent views came during a four-day Anchorage meeting of the U.S. Association for Energy Economics, a gathering of some 300 economists, consultants and oil industry executives who discussed global energy and issues critical to Alaska's future.

One of the more notable presentations came from Matt Berman with UAA's Institute of Social and Economic Research, who said his quick, preliminary review of the new oil-production-tax cut shows it will result in less state income than the 2006 law that was tainted by the conviction of several Alaska lawmakers for accepting bribes from an oilfield services company.

2007 oil-tax law called punitive

Because of the corruption, an alliance of Democrats and Republicans, including Gov. Sarah Palin, replaced the 2006 law one year later, instituting a much stiffer tax that remains on the books until Aug. 20.

Large oil companies have called that 2007 law punitive and say it has led to reduced investment in the oil patch.

A consultant for ConocoPhillips told Berman after his presentation that a portion of the analysis was wrong. At low oil prices, the new bill brings in more revenue than the current tax and the 2006 tax, he said.

Berman's talk included a historic look at the oil industry that has long been Alaska's top source of tax revenue, providing so much money that Alaskans pay no income tax and receive an annual check from a wealth fund built with oil income.

Berman said that over the last five decades, the state has developed more expertise in dealing with oil policy, while the public has become more comfortable with a lack of transparency involving industry activities.

He said the number of independent oil companies operating in Alaska has grown, the result of the existing tax policy that favors wildcatters.

Historically, tax rates had been extremely regressive and relatively stable for more than four decades, he said. But the 2006 law taxed net profits for the first time and dramatically increased progressivity, with the state collecting more as industry profits grew. The state's progressive take ratcheted even higher the next year under Palin, who was then a conservative populist who challenged the oil companies, Berman said.

Does this year's tax cut overreach?

That 2007 tax hike was a little excessive, hitting the oil companies too heavily, Berman said. But the 2013 tax cut overreaches in the other direction. It will ultimately hurt the state because it doesn't tax new oil production -- from new fields and expansions of existing fields -- enough.

The problem is that eventually most of the production will be new, and Alaska won't be able to collect enough revenue, forcing the state yet again to change its tax policy, he said.

"I'm confident they'll have to revisit this because they'll run out of revenues," he said.  

Berman presented a chart showing the new tax cut producing less revenue at high and low oil prices than the 2006 law.

"They did a pretty good job in 2006," Berman said of lawmakers attempting to balance the needs of the state and oil producers. "I'm told they can't go back to that tax because it's a bribery tax. Maybe they should have."

Mark Miller, a ConocoPhillips consultant, told Berman afterward that he was wrong on one count: The new tax cut will produce more state revenue than the 2006 and the 2007 law, if North Slope crude prices fall to $70 a barrel and below.

North Slope crude prices have averaged about $110 a barrel so far this year. Prices last fell below $70 in 2010, and were well below $70 for much of 2009.

The lower-price benefit comes primarily because under the new law, oil is taxed at a base rate of 35 percent, Miller argued.

The base rate under the 2006 law was 22.5 percent. The base rate under the 2007 law was 25 percent. Both taxes rose once the price of oil exceeded $50 a barrel or so, though the 2007 law took a much bigger tax bite from industry than the 2006 law.

Miller asked for a copy of Berman's charts. Berman said he was not yet releasing them. He said he intended to write a thorough analysis for public review later, after the new law goes into effect in late August.

Complicated legislation

Both Miller and Berman agreed that the new tax system is too complicated. A fuller analysis would likely help voters who may get the chance to decide in August 2014 if the new law should remain on the books, assuming an referendum to do so continues to clear hurdles to appear on the statewide ballot next fall. The lieutenant governor must still certify the referendum, which is also open to a court challenge.

Also at the energy conference, Marianne Kah, chief economist for ConocoPhillips, discussed the role that taxes play in investment decisions. High marginal taxes can throw a prospective project into the red, ruining any hope of profit and forcing a company to abandon plans in favor of other projects worldwide.

There are a host of factors that play into development decisions, such as the amount of time a project will take to reach production, plus regulatory hurdles and operating and capital costs, all of which are relatively high in Alaska. Some benefits of the shale boom in the Lower 48, she said, include a short time from exploration to production and therefore a quick return on investments, as well as readily available infrastructure like roads to support development. That’s another benefit Alaska usually lacks.

"Challenged basins can't support the same level of taxation" as basins where development hurdles are lower, Kah said.

Alaska's new tax regime has improved the business climate and will generate additional investment in oil fields, Kah said. She noted that Conoco is working to bring up an additional rig to the North Slope that would increase production. She also said it's working with partners, including BP and Exxon Mobil, to assess developing a new drilling site on the southwest edge of the Kuparuk River unit.   

Despite those improvements, Alaska is not competitive with many of the other places ConocoPhillips invests, she said. Operating and capital costs are extremely high in Alaska, and the new tax rates don't do enough to address those costs, she said.

"I would argue you can't just have competitive rates to attract investment in Alaska," she said. "You need to be able to offset or compensate for the higher costs to give the companies the same return they would get in a place that has lower costs."

Kah did not clarify the statement, and attempts by this reporter to find clarity after the presentation were rebuffed by a ConocoPhillips spokeswoman.

Amy Jennings Burnett said Kah did not want to talk to the press and was late for an appointment.

Contact Alex DeMarban at alex(at)alaskadispatch.com

(Correction: The 2006 tax law increased the state's take from the previous tax system, and was not a tax cut, as this article orginally stated in error.)

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