'Fair share' of oil revenue must apply to both sides

In a series of recent op-eds (July 3, Oct. 1, Oct. 25) Robin Brena has argued that the state's "fair share" of oil revenues should be what the historical share of gross oil market value has been, which he claims is 33 percent.

[Alaska can't afford current oil tax credits but should think twice before raising taxes]

There are two things wrong with this. First, the historical share since North Slope production began has been 23 percent, much lower than 33 percent. If you take the Alaska's Clear and Equitable Share (ACES) years out (2007-2013), where there were very high oil prices and tax rates, the long-term share is more like 20 percent. (This includes royalties and production, property, and state corporate income taxes, including restricted royalties going to the Permanent Fund.) Anyone can confirm this data using historical information from the Department of Revenue's "Revenue Sources Books."

The second problem is that this is an ill-advised way to ascribe "fair share." In fiscal year 2016 the state received $1.3 billion in petroleum revenues, 17 percent of gross market value, while the taxpayers were losing money.

On Oct. 25 Brena said:

"To illustrate our one-third fair share by example, for 2017 the state has projected there will be 521,000 barrels per day sold at $56.24 per barrel (Alaska North Slope for West Coast delivery). Based on these assumptions, there will be $10.7 billion in gross sales, and our fair share would be one-third of the gross sales or $3.6 billion in net petroleum revenues."

Suppose oil prices were $56 per barrel in 2017. Per DOR's most recent Sources Book it costs about $11 per barrel to transport oil from the North Slope by pipeline and marine tanker to the West Coast. And the average North Slope barrel costs $37 to produce. That would give the producers $8 per barrel profit before paying production taxes and royalties. After these payments (net of credits) they would make $1 per barrel before paying corporate income tax. (See http://tax.alaska.gov/programs/documentviewer/viewer.aspx?1240r, Page 113.)

Total state petroleum revenues under the current system would total $1.6 billion. Per the Brena perspective state petroleum revenues should be $3.6 billion. Where is the other $2 billion supposed to come from?

['Tax the oil companies more' is not the answer to Alaska's fiscal plight]

This underscores why gross revenue is a poor basis for taxation compared to net revenue. The state had a gross system of production taxes until switching to a net tax in 2006. Prior to the switch to net there was a drain on investment as producers were taking their Alaska profits and investing them elsewhere where they could deduct the costs.

Over time as upstream costs increased there was an ever-widening divide between gross and net values as the former came increasingly to distort the actual economics.

But still under the current net-tax system there is a minimum tax based on gross revenue at low prices. Royalties are based on gross as well.

So what should constitute fair share? Capital is finite. Capital is fluid. Capital goes to where it gets the best deal. Fair share is what you can get in a competitive environment. If taxes are higher than that, investment will go elsewhere and production will suffer.

In jurisdictions with similar conditions to Alaska the total share of pre-tax profits going to government (total state and federal) is 60 to 65 percent of net revenue. At today's prices ($50 per barrel), with both taxes and royalties based on gross, in Alaska the governments together receive a total of more than 100 percent of the pre-tax profits.

Something cannot be "fair" to just one side. Unless it is fair to both sides it is not fair.

Roger Marks is a petroleum economist in private practice in Anchorage. 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 and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email to commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com