At current prices and costs the economics of North Slope oil production are marginal, and some production is losing money. The following is a snapshot of those economics. Alaska oil prices have averaged $55 per barrel this year. Pipeline and marine transportation costs are $9 per barrel. That leaves a gross value of $46 per barrel. The average upstream capital and operating cost (including $2 per barrel in property tax) is $35 per barrel. This leaves the net value at $11 per barrel.

Royalties are 12.5 percent of gross value. At $46 per barrel gross the royalty is $5.75 per barrel. That alone eviscerates 52 percent of the $11 net. The production tax on the nonroyalty barrels is the higher of 35 percent of the net value, less a sliding scale per barrel produced credit ("per-barrel credit"), or 4 percent of gross.

At current prices most taxes are being paid on the latter. That is $1.61 per barrel. That leaves pre-income tax value of $3.64 per barrel. At that level, state corporate income tax is 34 cents per barrel, and federal is $1.16 per barrel.

Adding that, and including the property tax, the state takes $9.70 per barrel, and the federal government $1.16 per barrel. That leaves the producers with $2.14 per barrel, just 19 percent of the net value.

For those interested in raising taxes there is not much more to take. One bill submitted this legislative session called for a production tax of 12.5 percent of gross. At that level the production tax and royalty together would be $10.78 per barrel. After property and income taxes the producers would be left with 13 cents.

Some have expressed concern regarding the tax's credit structure. However, what are called "credits" are integral to providing a reasonable tax structure within the entire context of the fiscal system. For North Slope production there are two main credits: the loss carry forward credits, and the per-barrel credits. (The 20 percent capital credit for the North Slope was eliminated in SB 21.)

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 they can offset income. And if the tax rate is 35 percent, the value of carrying the loss forward is 35 percent of the loss.

It works a little differently under the Alaska production tax, but the outcome is identical. 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.

Production with higher costs is losing money now. This credit allows taxpayers the full benefit of deducting their expenditures when they incur losses. If it operated the same as in the federal code it would not be called a "credit." As shown above, when prices are low and costs are high, and gross value is much higher than net value, a royalty on gross will absorb a very large share of net income. The per-barrel credit was intentionally designed in SB 21 to partially offset that outcome.

The credit works as follows: For legacy fields (93 percent of production), at gross value up to $80 per barrel there is an $8 per barrel credit. For every $10 that gross value increases, the per-barrel credit drops by $1 per barrel. When gross value gets to $150 per barrel there is no credit. (New oil has a flat $5 per barrel credit.)

The royalty effect is most onerous at low prices. Were there a flat 35 percent tax rate at current prices with no credit, today's economics would be even more woeful. With the minimum tax the effective tax rate is currently 15 percent of net value. As prices rise, the royalty effect becomes less burdensome, and the credit decreases. The effective tax rate converges toward the 35 percent nominal rate at high prices. The credit simply tempers the effective tax rate in synch with economic reality. In that regard the per barrel credit is no more a "credit" than having a tax rate less than 100 percent is.

That the amount of credits may exceed the amount of tax should not be an indictment of the tax system. At low prices the income is simply not there to pay a lot of tax.

The credits do not work in a vacuum. The entire oil fiscal scheme needs to be viewed as an integrated system, especially in view of the high amount of royalties received at low prices. As a result the fiscal system is functional and competitive across a broad spectrum of prices.

Roger Marks is a former state petroleum economist and is currently an oil and gas consultant.

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, e-mail