Anchorage attorney Robin Brena, a well-known political fundraiser, recently posted two opinion pieces with suggestions for how to solve Alaska's fiscal crisis. His proposal suggests that the oil industry be tasked with funding the entirety of the state of Alaska's $3 billion-$4 billion deficit, which would essentially demand increasing taxes on oil companies by more than 300 percent to 400 percent. This response is not meant to simply offer additional rhetoric. Reasonable people can disagree on what the appropriate and prudent path might be for the state moving forward. Brena is certainly entitled to his own opinion. However, he is not entitled to his own facts.
Fact 1: Low oil prices are responsible for Alaska's budget shortfall, not the tax policy.
Alaska has seen a sudden and dramatic decrease in petroleum revenues but that drop is driven solely by price, not tax policy. Those who blame our current tax policy as the reason for the deficit should know that Department of Revenue Commissioner Randy Hoffbeck has repeatedly stated, "SB 21 (current tax policy) brings in 'substantially more' revenue to the State at low prices than ACES (former tax policy)." (Senate Finance Committee, Jan. 26, 2015) Regardless of how you might feel about our current predicament, blaming our current tax regime is misplaced.
Fact 2: Increasing taxes on an industry with negative cash flow is bad economic policy.
Some suggest going back to a historical "fair share" of petroleum revenues. Let's examine what "fair share" really means. According to the Department of Revenue, the average cost for companies to produce and transport a barrel of oil from Alaska to market is about $40 per barrel. This is before industry pays any federal, state or local taxes, not to mention the pipeline and marine costs to move the oil to market. Forty dollars per barrel is barely below average oil price since January ($41 per barrel). Even when prices were lower (December 2015 through March 2016) and it cost the industry more to produce and transport the oil than it cost to sell the oil, the state still received petroleum revenue, including production taxes. How are Alaska oil producers supposed to absorb a 300 percent-400 percent tax increase, or any tax increase for that matter, when the industry is currently struggling just to break even?
Fact 3: The state continues to receive a fair share of oil revenue, even at low prices.
In his opinion piece, Brena compares gross value of the product versus the net revenue industry pays. He used the example that in 2012, the gross value of Alaska oil production was $24 billion and the state was receiving $8.5 billion in petroleum revenue. The opinion piece went on to say that in 2015, the gross value decreased to $13.8 billion and the state was receiving just over $1.1 billion. Brena asserts that this is not a fair share because it is lower than the state's 35 percent historical percentage share of petroleum revenues. But if you look at the numbers in this way, the dramatic drop in oil prices in four years decreased the gross value by $10.2 billion but the state revenue decreased by $7.4 billion during that same time frame. In other words, even though state revenues have been deeply affected by oil price, the industry's financial losses have been greater.
Either way, the loss of revenue during a price decline illustrates the fundamental problem: The state's share of oil revenue is so enormous that the current price has resulted in significant revenue losses to the state.
However, even at these low oil prices, and after credits are accounted for, the overall government share (state, federal and local) of revenues in Alaska is still about 75 percent (IHS Energy).
As for adding progressivity back into the mix, it's hard to express just how bad a move that would be. Why on earth, when the state of Alaska just saw its first increase in oil production in 15 years, would we go back to a policy that failed to increase production or investment? In fact, even when oil prices were high, investment was stagnant and oil production continued its decline. Alaska voters flatly rejected progressivity two years ago, and for good reason: If Alaska wants to increase oil production, we need investment dollars. If we resurrect progressivity, we lose investment. Period.
Fact 4: Raising oil taxes will just reduce investment in the state when Alaska needs it most.
Finally, if producer taxes were increased yet again, where would that money come from? Brena suggests that the industry can easily afford $3 billion in new taxes. Here's the harsh reality: At these oil prices, paying any additional tax will force companies to cut their spending in Alaska and a $3 billion increase will cause massive reductions in capital and operating expenses. That leads to less oil production in the short term and virtually guarantees rapid oil production declines in the future. Any reduction will cost many more Alaskans their jobs. This isn't semantics; it's common sense. Alaska would be cutting off its nose to spite its face under this scenario.
Fact 5: Alaska is not running out of oil and we are not living in the waning days of an oil economy.
It is remarkable that despite this drawn-out period of low oil prices, we continue to see incredible development opportunities in Alaska. Just this week, Caelus Energy Alaska announced a major new find that could rival the Arctic National Wildlife Refuge in terms of oil in the ground. Alaska alone is home to one-third of all the oil and gas reserves in the United States and that is just what we know about. So we have plenty of oil left to produce; the question is whether Alaska's policies will support developing it or leaving it in the ground.
As an old saying in Alaska goes, we don't have problems below ground in Alaska: We are home to world-class, oil-rich rocks, as Caelus can testify. Instead, our challenges in Alaska are above ground: constantly changing tax policies and, frankly, political gamesmanship. The dilemma for Caelus and all companies looking to develop new sources of oil is whether the state of Alaska will offer a stable fiscal environment or engage in political decision-making that makes project economics untenable. If Alaska goes that route, Alaska will lose out on these opportunities when companies move their investments elsewhere.
Fact 6: We need new ideas; raising oil taxes can't save us this time.
Alaskans need real solutions, not bumper sticker rhetoric. It should be noted that Brena's name will sound familiar to Alaskans who are hearing his name listed as one of the top contributors to a political action committee. This group is using misleading political statements and blaming oil policy as the reason for the state deficit, which is false. Oil prices, not tax policy, caused the state's budget shortfall. It is time for all concerned Alaskans to think outside the "just tax the oil companies more" box and advocate for solutions that will actually fix the problem.
Kara Moriarty is executive director of the Alaska Oil and Gas Association.
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