Alaska has struggled with difficulties grasping the complex realities of North Slope oil economics since 1977, when oil companies first pulled oil from the nation’s largest onshore oil reservoir at Prudhoe Bay. Due to our extreme dependence on that revenue, state budget and petroleum revenue issues have been closely linked. These problems continue today. As legislators argue during the special session called by the governor to deal with reduced revenues due to plunging global oil prices, conflicts over oil data create clouds of confusion that obscure important facts about North Slope petroleum economics.
But instead of working to clarify fundamental information regarding this oil-dependent state's present and future condition, the state legislative majorities, deadlocked in disagreement with their minority counterparts, recently took time off. To safeguard the public interest, the Legislature should use this hiatus to seek clarity on chronic petroleum revenue issues that are essential to long-term state policy goals.
The current need to focus on seven specific aspects of North Slope petroleum economics, which will be listed below, is demonstrated by the following historical record of Trans-Alaska Pipeline System shipping charges (TAPS tariffs). During the first eight years of North Slope production excessive pipeline tariffs on the 800-mile pipeline pitted the handful of pipeline owners that were also major North Slope producers against smaller independent shippers, whose interests the state was supposed to protect. But in 1985 the state changed course on the tariff case, ending that dispute by adopting a complicated new tariff settlement methodology (TSM). Seventeen years later, a 2002 decision by the Regulatory Commission of Alaska (RCA) on 1997 tariffs determined that during the first two decades of North Slope operations under TSM the pipeline producer-owners had collected more than $9.9 billion in pipeline tariff overcharges, adding to their oil profits from more than 90 percent of North Slope production.
Because transportation costs are subtracted from the price of oil to calculate state tax and royalty payments, the state was the biggest loser. But producer-owner overcharges also handicap independent North Slope producers, who must pay the three major North Slope competitors to transport their oil. The 2002 RCA decision ordered tariff cuts by independent shippers from 1997 forward, reducing them from $6 to $2 per barrel to level the competitive playing field. In subsequent years, findings against the owners were upheld by the Alaska Supreme Court, while the Federal Energy Regulatory Commission (FERC) followed suit on tariffs under federal jurisdiction.
Continuing to pursue their own economic interests in other state arenas, the major North Slope producers sometimes use questionable practices. For example, during the 2013 campaign to cut state petroleum payments by ditching the progressive ACES production tax, ConocoPhillips presented a chart on six occasions that gave the false impression that industry revenue decreased as oil prices increased from $80 to $130 per barrel. In the 2014 statewide petition to repeal the tax cut, the industry profited from confusion as the three major North Slope producers played a major role financing the continuing tax cut campaign, outspending their opponents by a ratio of more than 20 to 1. With that financing, the major companies inundated Alaska's airwaves with misleading data as they defeated the tax cut repeal by a significantly narrower margin.
In light of this background, these seven focus items would help reduce the plethora of confusing petroleum numbers:
1. Focus on industry profitability -- information essential to policy deliberations notably ignored by some esteemed state economic analysts.
2. Focus on conversion of fiscal year data to calendar year data to enable assessment of relationships between government revenues and industry profits, as well as trends in global costs, supply and demand.
3. Focus on total net revenues, without which percentages of government "take" and industry profits are meaningless, if not misleading.
4. Focus on the degree of corporate consolidation of Alaska petroleum production facilities and operations to assure a competitive economic environment that will attract investors.
5. Focus on improving the state petroleum auditing program, utilizing the preceding guidelines to provide a clear economic framework that will also include additional profits from the final two elements.
6. Focus on field cost accounting to ensure that excessive field costs paid by independent producers do not undermine a competitive economic environment.
7. Focus on transportation accounting to assure correct attribution of regulated pipeline costs and profits to shippers and producer-owners.
Addressing these concerns will disperse clouds of confusion, thereby helping Alaskans apply past savings and future North Slope oil revenues to the state's fiscal needs.
Richard A. Fineberg is an independent analyst who lives in Ester. He covered Alaska North Slope development as a reporter during the 1970s, worked in the governor’s office in the 1980s, serving as a senior advisor to the governor on oil and gas policy from 1987 to 1989, and testified as an expert witness in the Regulatory Commission of Alaska TAPS tariff case in 2001.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.