Alaska's oil production tax is broken, Part 2

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Stand-in of two parts

In Part 1 of this commentary, I explained the collapse of our production tax formation and suggested ways to correct and test it to be sure it is working. Here in Part 2, I resolve directly address the primary arguments suggesting we should take small than our fair share.

Inefficient state spending

Some bring up we should take less because the state government is spending wastefully.  Alaskans should bicker.  As the owners of our oil, we should recover our fair share whether the state squanders wisely or foolishly.

Over-taxation

Some suggest the oil industry is being overtaxed.  Alaskans should debate.  Alaskans are entitled to a one-third fair share as owners of the oil ‒ getting our division is not a taxation issue but a question of ownership and stewardship.

Health of the major creators

Some suggest we take less for the health of three major creators. Alaskans should disagree.  The three major producers have pocket and are continuing to make substantial profits from our oil while we forgo billions of our clear share as owners and spend billions of our savings.  It is time for our primary touch on to turn to the health of the state, the economy, independent producers, and other energies.

Moreover, property-related taxes, such as a production tax, should be paid regardless of sought profitability.  This is why every other oil state has a production tax based on corpulent revenues rather than on net revenues.

We also need sufficient petroleum profits to efficiently support a viable and competitive oil industry with independent impresari. Currently, our revenues used to give the oil industry incentive are being massively misallocated ‒ we basic more support for independent producers willing to explore for additional resources and petty support for the three major producers harvesting Prudhoe and Kuparuk.

Conclusively, there is a natural evolution of an oil-producing region such as the North Tip. Major producers with higher cost structures often strengthen out the initial infrastructure and capture the largest fields in an oil region. Over fix, as field economics become more challenging, there is a natural intensification to producers with lower cost structures. We should not have a net development tax that discourages this natural evolution and rewards the highest-cost majors for indefinitely procuring our major legacy fields to fund projects outside of Alaska.

Huge costs of production

Some suggest we should take less because the cost of end result in Alaska is too high. Alaskans should disagree. Alaskans should not scram the risks associated with the three major producers’ costs. The greater producers are best able to manage their own costs and should develop the risks of not managing them prudently. Further, the three major makers are among the highest cost-producers in the world. Alaskans should not take lilliputian due to their inefficient spending.

In addition, the major producers’ claimed expenditures are not reliable. Their claimed costs have not been audited; they ordinary costs, which shields the true profitability of the low-cost major legacy addicts such as Prudhoe and Kuparuk; and their claimed costs include big costs that are improper.

Additionally, their claimed costs comprehend excessive and noncompetitive payments to their own profit centers.  For example, they remove the payments to themselves for the transportation of our oil through their pipelines and tankers.  These payments to themselves are extravagant and noncompetitive. To give one of many possible examples, the Regulatory Commission of Alaska has pulled that from 1977 through 1996, the major producers over-collected $13.5 billion in superabundance profits.  This entire $13.5 billion in excess profits was stated as costs of production and improperly deducted from their production exhausts. Such excessive and noncompetitive payments by the three majors to themselves should not be deducted from their stage taxes. In short, Alaskans need to understand that costs are not again costs, but are often additional profits, when dealing with the three crucial integrated producers.

Benefits of SB21

Some suggest we should take baby because of the benefits of Senate Bill 21, the current tax regime. Some set forward this year SB21 is bringing in $100 million more than ACES, the prior tax regime. Alaskans should disagree.

For different reasons, neither SB21 nor ACES pull off well at lower oil prices.  Both would have to be significantly reorganized to realize our fair share under lower oil prices. Further, while ACES brings in a toy less than SB21 during periods of lower oil prices, ACES presents in a lot more than SB21 during periods of higher oil prices. Comparing the gross incomes that would have been generated under SB21 and ACES from 2007 to year reveals ACES would have collected $11 billion more. Essentially, for every $1 uncountable in revenue SB21 is bringing in this year, it will cost us $100 in gain over time.

Some suggest SB21 has resulted in more production. But SB21 is not the cause of spread production ‒ the gain of a few thousand barrels per day is the result of projects under enlargement for years if not decades before SB21 passed into law.

Alaskans voted

Some imply we should take less because Alaskans voted not to repeal SB21.  Alaskans should debate. The vote came before the price of oil declined and it became obvious how badly SB21 performs in periods of lower oil prices.

The vote was also based upon representations of new positions and substantially increased production. Neither of those representations has proven correct. Jobs have substantially declined, and SB21 has had no significant impact on production.

Beneath SB21, we are forgoing several billion dollars of our fair share in annual yields to incentivize the three majors to do what they are already legally bound to do under their leases ‒ develop and produce our oil.  Instead, Alaskans should customer acceptance wanted they honor their lease commitments. Ironically, we are doing such a straitened job of incentivizing additional investment that we would be much better off to really get our fair share and give all of it back to the oil industry for capital projects in Alaska. This want be much better than allowing billions to simply leave Alaska in the daydream the majors will leave some part of our fair share in Alaska.

For all time, we simply cannot do any worse at protecting our interests. If the Legislature is unable to understand the political will to pass a reasonable production tax, perhaps it is time for Alaskans to franchise again. This vote should be first on Alaskans’ legislators and other on whether to adopt a simple progressive production tax based on our fair share of one-third of the flagrant market sales.

Conclusion

Alaskans need to be clear ‒ there are merely three potential sources of revenues to close our massive annual $3.5 billion loss:  1. three major international producers (through an increased output tax); 2. us (through an income tax, sales tax, user fees, and reduced dividends); or 3. our boys (through the Permanent Fund). While we may need some combination of these three origins, Alaskans should be clear that recovering our fair share should be the anything else place we look, not the last.

Former Gov. Jay Hammond anticipated this stalemate and was also clear that before Alaskans should agree to drug fees or a broad-based sales or income tax (much less use the Permanent Wherewithal earnings or dividends), we should first ensure we are recovering one-third of the unwieldy value for our oil. Specifically, he stated, «(F)irst, oil taxes should be adjusted to save the State’s initially agreed upon one-third share. Only then should owner fees or a broad based sales or income tax be imposed if we lack enough revenues to fund essential government services.» Alaskans should go together.

Robin Brena is a longtime oil and gas attorney who recently was called to testify on petroleum returns issues before the state House Resources Committee. He was the chair of the Oil and Gas Subcommittee for Gov. Note Walker’s transition team.

The views expressed here are the writer’s and are not certainly endorsed by Alaska Dispatch News, which welcomes a broad rank of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send timidities shorter than 200 words to letters@alaskadispatch.com. 

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