Tim Bradner: New oil taxed differently than old oil

Tim Bradner | Alaska Journal of Commerce

New Alaska oil production tax is often criticized as a "giveaway" to industry. Critics say there are no guarantees of performance in return for tax breaks.

Are the charges true? Like anything else, it all depends.

We now know, for example, that at current oil prices the new tax will bring in about the same amount of revenue next year as the former tax, known as ACES. In fact, the new tax brings in a bit more money. This comparison can shift back and forth, the Department of Revenue says, depending on oil price changes and other factors, but there doesn't seem to be a huge giveaway.

A closer examination of the criticism is merited, however. Critics who are informed, for example, single out a per-barrel tax credit that companies receive for oil produced in the large, existing fields as a giveaway.

In my last column I wrote about the sharp disagreements that developed in the Legislature in 2013 over tax reductions for "new oil," meaning oil from undeveloped new fields (or new deposits within existing fields,) and "old oil," which comes from the producing, large "legacy" reservoirs. The debate got complicated because there is actually a lot of new oil that can be squeezed from older producing reservoirs.

When politicians try to sort out politically sensitive issues like this, the solution is generally complicated, and this is no exception.

In Senate Bill 21, the Legislature devised a two-tiered set of tax incentives, one that is more generous for new oil, from new deposits, and another for old oil, from the legacy fields. Both offer per-barrel tax credits but in differing amounts. New oil also got an additional 20 percent tax reduction, called the "Gross Value Exception," that old oil did not get.

The "old oil" per-barrel tax credit is on a sliding scale linked to prices, and it works out to about $6 per barrel at current oil prices.

Unlike the tax credits for new oil, where companies have to produce measurable new barrels to get them, the critics argue that industry doesn't have to really do anything to get the old oil tax credit. That's the giveaway, they say. Actually, the companies do a lot to keep those old fields producing, and they do seem to be doing a lot more now.

But giving critics their point, how can we measure performance for the old oil tax reduction? Realistically, the only way is to do it is just watch what the companies do, and how much oil they produce. If the producers are bending the curve, slowing the decline of the old fields, we will know something is happening.

We do know activity levels in the older fields are up sharply -- more rigs are working and more "workovers" of old wells are being done, and the companies say it's due to the tax change. We also have some encouraging word from the Department of Revenue that so far this year -- the first six months of the fiscal year -- production on the North Slope is running above expectations.

This additional production, which helps offset the decline, consists of barrels that will be likely be classed as old oil not eligible for the generous new-oil tax breaks because of the technical difficulties of metering the oil to qualify as new under the state tax law.

Let's not confuse this, however, with the companies' recent announcements of projects to develop truly new oil from new deposits. It will take a while for this to show up in the pipeline but so far I count $6 billion in projects announced since SB 21 passed in 2013. These will produce about 30,000 barrels a day of new oil beginning in 2018 and another 30,000 barrels a day beginning in 2022, the companies say.

This will bend the curve a bit, but is the new activity enough to stop the decline, or reverse it? It might be, if enough drill rigs get busy, but I believe we have to be realistic and count ourselves lucky just to stop the decline.

Which brings me to one more thing. I hear my Democrat friends (and I'm a Democrat) in the Legislature scolding Gov. Sean Parnell for promising, with the passage of SB 21, to restore production to a million barrels a day. They cite the Department of Revenue's official production forecast that shows a continued long-term decline.

Two things about this: First, the revenue department's production forecast is very conservative. It doesn't include many new discoveries. Anyone familiar with forecasting knows accuracy wanes with time. It's useful only as a baseline, what we have if nothing else happens.

But second, Parnell promised no such thing. I remember the governor making a speech in March 2011 in which he set a goal that in 10 years, with enough effort and money, we might see a million barrels a day again (North Slope production was once 2 million barrels a day).

Parnell was giving us something to shoot for. It was not a promise.

When President Kennedy announced the moon mission in 1961 he set a goal for a lunar landing in 1969 to inspire us. It wasn't a promise. We actually did it, of course, which shows the power of setting lofty goals.

I followed SB 21 closely as it wound its way through the Legislature and I do not recall any statements by the administration, or the industry, that the bill would increase production. There were statements that it was likely to spur activity, which would likely increase production, I recall, but no promises.

Now we are seeing new activity, and the revenue department is measuring new production, at least over what was estimated. There are still no guarantees. But things do appear to be happening, and that's good.


Tim Bradner