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Energy

Alaska's oil-tax income at lowest since pipeline's first days

  • Author: Alex DeMarban
  • Updated: September 28, 2016
  • Published April 12, 2015

The oil production tax that has long been Alaska's sugar daddy has collapsed with the price of oil, to a low rarely seen in state history. Adjusted for inflation, state revenue from the tax is on track to have its worst year since the early days of the trans-Alaska pipeline nearly four decades ago.

The hit is so bad the treasury is making a small fraction of what it did in 2014, or about $2.30 for every taxed barrel.

The troubling statistics are just two takeaways from Alaska's latest revenue forecast -- and decades of revenue records -- in which the numbers paint a grim picture of the state's stark reversal in fortune as it faces a $3.5 billion deficit.

More than just oil prices are at play. Projected tax credits the state pays to industry amount to more than $1 billion a year, this year and next. And producers are expected to deduct record expenses, limiting profits available to be taxed under state law by more than $6 billion a year.

Also, oil production has dropped for decades. In the late 1980s, the state provided 20 percent of the nation's oil supply as North Slope production reached above 2 million barrels daily. Today, with production at 550,000 daily barrels, the state supplies 5 percent of the country's needs.

Big tax credits for industry

Calling it a "hard truth," Gov. Bill Walker in a January opinion column, said the state expects to pay $500 million more in credits over two years – this year and next year -- than it will receive in production tax income.

The truth has gotten harder.

Walker made his comparison based on estimates that existed last fall, when oil prices were higher. The drop to around $50 a barrel in recent months has lowered the state's production tax income. If Walker were writing his column today, he could boost the losses to $643 million over two years.

Meanwhile, the estimated industry credits the state will pay over two years remain huge, at $2.5 billion.

Critics have said the comparison presents an overly simplistic, misleading picture. That's in part because it ignores other industry revenue, such as the corporate income and property taxes that are expected to bring Alaska $610 million over two years.

But even counting that, the deficit still exists, at $33 million over two years.

Fortunately, the state is still making royalty income from its oil, at $1 billion a year.

Big Oil’s deal is sweet, but it still pays

The governor's column caused some Alaskans to mistakenly believe the state's big North Slope oil producers – BP, ConocoPhillips and ExxonMobil – took more than they gave.

But not all credits are equal.

Many of the credits the state pays will go to those smaller companies with little to no production, including in Cook Inlet, where there is no oil production tax. (Oil production is low there, about 16,000 barrels daily in 2014.)

The state's North Slope producers do receive a good share of credits -- $570 million will help reduce their overall tax bill this fiscal year. Despite that benefit, the state still expects to take in $363 million in production-tax income from North Slope producers.

That amount is a pittance, historically speaking. Alaska's production tax earned $2.6 billion one year ago, and $4.1 billion in 2013.

The last time that income was so low was in 1999, when the tax brought in $359 million. Adjusted for inflation, however, that amounts to $506 million.

Production-tax income had its lowest year -- and lowest inflation-adjusted year -- when Jimmy Carter was president. In fiscal year 1978, beginning shortly after oil began flowing through the trans-Alaska pipeline, the tax brought in $108 million. Inflation-adjusted, that'd be worth $349 million today, slightly less than the value of this year's projected income.

(In that first full fiscal year of oil flow, prices ranged from $12.30 a barrel to $13.12, on average. Meanwhile, North Slope production was 702,000 barrels daily.)

Per-barrel income plunges

Oil prices fell 38 percent from 2014 to this year's estimate -- from $108 a barrel to $67 a barrel.

In fiscal year 2014, the state collected $15.80 for every barrel of oil it taxed. This year, Alaska will collect $2.30.

The remarkable 85 percent drop was driven by the falling price of oil. But that doesn't tell the whole story.

Also at play is Alaska's net-profit production tax, the only one among the nation's oil provinces. The state used a gross-production tax until 2006, but a proposal by Gov. Frank Murkowski led to the overhaul. It was seen as a way to help the state share in the costs of oil-field development, with the goal being more production.

But a big problem arises when deductible expenses are high and prices are low -- very little profit is left to be taxed.

Deductible North Slope expenditures, this year and last, have reached record levels, $6.6 billion in 2014 and $6.5 billion this year. As prices drop, Alaska gets left with a smaller share of the pie.

Some say that's a good thing, with capital expenditures of $3.7 billion in 2014 potentially setting the stage for more production. Time will tell.

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