Revenue forecasts: 'Facts' used in oil tax debate may not be

Richard Mauer
The Trans-Alaska Pipeline, seen here near Delta Junction. The 800-mile oil pipeline is a critical part of the state's oil production infrastructure, and oil revenue is crucial to Alaska's economy. On Aug. 19, Alaskans will vote on whether to keep a recently-created oil tax structure or revert to a former tax system. Loren Holmes photo

Which oil-tax system is best for Alaska’s future?

When voters make the choice on primary day, Aug. 19, between ACES and MAPA, will they have facts to help them decide? Or will they be voting their feelings about the oil industry, love it or hate it, trust it or suspect it?

In the run up to the referendum on repealing Senate Bill 21, the 2013 law that replaced ACES with a tax regime sought by industry, information about what either tax would do in the years ahead has been contradictory and equivocal.

“The vote is about the future -- and there are no facts about the future,” said Roger Marks, a former state petroleum economist and now a private consultant who wants to keep SB 21, the tax cuts known as the More Alaska Production Act.

A "no" vote will leave intact SB 21. A "yes" vote will repeal it and restore ACES, Alaska’s Clear and Equitable Share, the tax law passed in 2007.

With the dearth of facts about what either measure would do in the years ahead, partisans from both sides have turned to the state’s semi-annual revenue forecast, a tool that attempts to predict tax receipts, oil production and oil prices over the next decade. It’s produced by a team of economists, analysts and outside contractors inside the Alaska Department of Revenue with assistance from the Department of Natural Resources.

Nearly all of the state’s unrestricted general fund revenue derives from oil taxes and royalties. The forecasts are supposed to help administrations and legislators figure out how much money is available for programs and building projects and for credit-rating agencies to help determine the strength of Alaska as a borrower. Taking a part in a tax system debate is a new adjunct role.

Supporters of the referendum say the forecasts prove ACES was encouraging investment in the state’s oil fields while returning substantial taxes to the state, the owner of the resource.

Opponents of the referendum say the revenue forecasts show the ACES was choking the state and leading to a decline in production, and that the new system is working to reverse that trend.

While acknowledging that a revenue forecast was not the same thing as a provable fact, Sen. Hollis French described it as “the best we have.” French, an Anchorage Democrat and opponent of SB 21, said, “I don’t think there’s anything else out there that’s as authoritative. The Department of Revenue sits in a position of access to total information. Given the statutory mandate that the industry turn over to them monthly numbers, no one else is in the position to calculate oil going forward as they are, as difficult as it is.”

As if to confirm the ambiguities of looking ahead, each side claims the oil-forecast oracle backs up its position.

Rep. Les Gara, an Anchorage Democrat who wants to repeal SB 21, used the revenue forecasts as the basis for his contention that the oil companies were misleading the public in their election advertising claiming that oil production was on the increase because of SB 21.

“You’re entitled to your own opinion, but not your own facts,” Gara wrote in a statement to reporters in June. “Every state forecast shows oil production will continue to steeply decline, even more sharply under SB 21 than under previous laws. (Gov. Sean) Parnell’s Department of Revenue concedes production will fall from 500,000 barrels a day today to roughly 300,000 barrels by 2023 under the new law the oil companies are promoting as creating ‘more production.’”

Gara added that the Spring 2013 forecast, when ACES was still the tax law, predicted more modest production declines from 2014 through 2022 than the later forecasts did under SB 21.

On the other side, economist Scott Goldsmith cited the revenue forecasts in a report in which he said the tax loss to the state from SB 21 would be $90 million in 2014, much less than opponents had predicted.

“Critics say the oil industry doesn’t base investment decision on tax structure, and that the revised tax is a giveaway to the industry,” Goldsmith said in his study. “They cite as evidence the $2.1 billion drop in the Alaska Department of Revenue’s forecast of expected 2014 oil revenues after the new law was passed.”

But most of the drop can be attributed to lower production and price assumptions in the forecast and increased lease expenses, Goldsmith said, as well as carryover tax credits from ACES. The actual loss of revenue due to SB 21 is but a 4 percent sliver of the pie, he said.

Former Revenue Commissioner Pat Galvin, one of the engineers of ACES, said the forecast is the only “theoretically consistent benchmark” from year to year, but suffers from the way its prepared. 

“Even the Department of Revenue doesn’t get the most candid data from the companies,” Galvin said. “They’re getting a particular report that they just have to take on faith.”

The oil companies began a public relations campaign against ACES in 2009. Parnell initially backed ACES as former Gov. Sarah Palin’s lieutenant governor, and continued to support it when she quit in 2009 and he became governor. But shortly before Parnell was elected on his own Nov. 2, 2010, he began changing his position on oil taxes, and following the election cleaned out some of Palin’s appointments. Galvin lost his job as revenue commissioner.

In a status report to the public on ACES issued Jan. 14, 2010, Galvin’s revenue department said the reporting requirements of the tax law were providing the state with better information about industry operations and plans than it ever had before. Monthly reports allowed state economists to monitor company production and spending and review estimates of taxes. Twice a year, the companies were directed to provide future expenditures and production plans.

It was the companies’ own information that allowed the 2010 report to discredit assertions in the anti-ACES campaign that claimed the industry was losing interest in Alaska and going elsewhere, like North Dakota.

“Capital spending on the North Slope totaled over $2.2 billion in fiscal year 2009, an increase over Fiscal Year 2008. This is nearly the highest level of capital spending in nominal dollars once oil production began in the state,” the report said. “Employment in the industry has also increased steadily since the implementation of PPT (the 2006 tax law) and ACES, with 2009 forecast to be the highest in state history.”

Responding to industry claims that a lot of the capital expenses were for repairing rusty pipes and not for producing more oil, the report added:

“While capital expenditures on pipeline repairs at Prudhoe Bay increased after the Prudhoe Bay corrosion incidents (spills) in 2006, the majority of growth in capital expenditures is attributable to drilling, seismic and other projects.”

The report also predicted a slowdown in investment in 2011 and 2012, and then a “re-surge thereafter to the level of the recent past or higher.” That appears to be what is happening now.

Still, though ACES encouraged investment through tax credits, the report said that high oil prices and not tax policy was the main factor in increased activity on the North Slope.

After Parnell was elected, the revenue department began to change the way it forecast production. It told the consultant who prepared the production forecast, Dudley Platt, that it was going to rebid his contract. Platt, who had been doing the forecasts since 1990, declined to seek another contract. He now works for the North Slope Borough and testified as an expert in the big trans-Alaska pipeline property tax cases.

In an interview, Platt said the department thought his forecasts of future oil production were too optimistic, a complaint that ACES supporters also had. But Platt said he was relying on information from industry itself, and in any event, the oil would eventually be brought up from the ground.

“The oil didn’t go anywhere -- I know where it’s at,” Platt said.

John Tichotsky, audit master for the department of revenue and head of the group that prepares the forecasts, said the production forecasting methods were changed “to better reflect what the field was actually doing.”

But there’s no way for experts outside the department to review the raw information because of the secrecy shrouding it. 

“You’re basically interviewing oil companies about something that’s extremely sensitive. They don’t want their competitors to know and it’s timely information about their future plans. It’s the holy grail, and they’re willing to share that with the state under conditions where they’re guaranteed confidentiality and secrecy,” Tichotsky said.

The changed forecast showed up in Fall 2013, when the revenue department predicted daily output from the North Slope to be 508,200 barrels in 2014, down from 526,600 barrels in the Spring 2013 forecast.

The forecast was issued just before SB 21 took effect, and opponents wondered whether the department was deliberately setting a low target that could be beat after the year began. The then-deputy director of the department who oversaw Tichotsky’s group, Bruce Tangeman, did nothing to allay those suspicions when he spoke to a breakfast meeting of the Resource Development Council in February.

“Over the last couple of years, since I’ve taken this job, we’ve taken it as a goal to especially correct the production forecasts because over the last couple of decades, it’s been very, very optimistic, starting three, four, five years out,” Tangeman said. “So the goal that I had when we undertook this is to put a production forecast in place and beat it for the first time in two decades, and I think we might actually be on our way to doing that.”

In fact, the next forecast, issued in the spring, showed a marked improvement for 2014: 521,800 barrels a day.

In an interview, Tangeman said he was “pretty shocked” that he would be accused of manipulating the numbers to make the case for SB 21.

“It had absolutely nothing to do with trying to set an artificial number and coming above it,” said Tangeman, who now works for the state gas line corporation. “It was a completely separate issue from the oil-tax issue in my mind. This was a budget tool that was being used to make decisions today and into the future.”

Contact Richard Mauer at rmauer@adn.com.

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