" … and very difficult to take less than nothing." Hence the conflicted approach of the Walker administration's proposed oil tax bill (HB 247 / SB 130). While it recognizes that in the current oil price environment there is simply no money for Alaska to pay out certain oil tax credits, it does not recognize there is also no money for the producers to pay a minimum tax.
Given the state's fiscal situation, the state's current practice of purchasing producer credits has become a significant drain on cash flow.
A net operating loss is when expenditures exceed revenues. Under the state oil production tax, as well as most other corporate taxation (i.e., federal), there is a floor of zero on the tax. So when losses occur, normally the losses are carried forward to the future to that time when there is income (triggering a tax liability) that can be offset. And if the tax rate is 35 percent, the value of carrying the loss forward is 35 percent of the loss.
Under the Alaska production tax, if a producer incurs a loss, they get a tax credit they can carry forward valued at their loss times the 35 percent tax rate. This has been part of the production tax code since 2006.
Small and new producers and explorers often have no offsetting income. Since 2007 the state has been purchasing those credits from them. This allows them the full benefit of deducting their expenditures when incurred, putting them on equal footing with the large producers. But today everyone is losing money, so everyone is on equal footing.
(We are not talking about the per-barrel produced credit, which is high at low prices and low at high prices. Although it is called a credit it does not function as a credit, but rather as a mechanism for progressivity. It does not involve cash outlays by the state.)
One problem with the loss-carry-forward program is that the activity from an explorer earning the credits may not result in production. There is never a tax liability. The issue of deducting costs is moot. And the credits make no sense. In effect, they operate just like exploration incentive credits, a program that was sunsetted for policy reasons in 2013 because it was not bringing in the bang for the buck.
In Cook Inlet where producers pay no tax on oil regardless of price (and very little tax on natural gas, which is then passed on to customers), the idea of buying credits for nonexistent deductions also makes no sense. The exclusion from taxation itself is a generous enough benefit.
Cook Inlet also has a 40-percent well expenditure credit instituted in the Cook Inlet Recovery Act in 2010. And while the act was no doubt responsible for discovering much-needed natural gas supplies, the current issue is affordability. Moreover, many of the power generators in Southcentral Alaska are equipped to use distillate fuel oil as an alternative to gas. And distillate, like crude oil, is dirt cheap now. If the amount of the credits is added to the price of gas, it gets close to the price of distillate. Thus the situation that renders the credits unaffordable also creates alternative energy supplies.
Page 112 of the state's latest revenue forecast lays out the stark condition of North Slope oil production. Upstream operating and capital costs average $36/bbl. Downstream transportation costs (pipelines and marine shipping) average $11/bbl.
So at the current $30 Alaska North Slope crude (ANS) market price production is losing $17/bbl before taxes and royalties. And after paying royalties and property tax, the producers would be losing money preproduction tax at a $55/bbl price.
The administration's reaction to this is to raise taxes. The proposal is to raise the minimum tax from 4 percent of gross revenue to 5 percent.
The difference between gross economics and net economics is significant. At $30/bbl ANS the gross value is positive $19/bbl (market price less transportation). The net value, again, is negative $17/bbl (gross value less upstream costs).
In 2006, the state made a deliberative decision to switch the basis of taxation from a gross to a net basis. Obviously the net value depicts the actual economic situation. And by deducting upstream costs investment was incentivized when producers could reduce their taxes by investing here. Otherwise they would take their Alaska profits and invest them elsewhere where they could reduce their taxes.
The minimum tax is subtly turning the whole tax back into a gross system unless prices rise to near $80 (at 4 percent or 5 percent). Currently the government take vastly exceeds 100 percent of the pretax income.
Minimum taxes are very rare nationally or internationally. Especially in tax and royalty regimes, minimum taxes are not used explicitly because governments are getting something from the royalty (based on gross). The burden of such a tax in the current environment could lead to premature shutdown of production.
At current oil prices the state is in deficit and the producers are losing money. There's nothing left for the parties to extract from each other.
Correction: Upon first publication, the preceding commentary incorrectly referred readers to page 121 of the state's latest revenue forecast for calculations of North Slope production costs. The reference should have pointed to page 112. It has been corrected above.
Roger Marks is a petroleum economist in private practice in Anchorage, specializing in petroleum economics and taxation. Between 1983-2008 he was a senior petroleum economist with the Tax Division of the Alaska Department of Revenue.
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@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.