I recently wrote an article describing why ACES, Alaska's oil tax system, needs to be adjusted sufficiently to cause the producers to again invest in Alaska's North Slope fields and to promote an aggressive exploration program. Oil taxes now supply 90 percent of our state revenue -- the highest ever. The rate of decline in oil flow through the Trans Alaska Pipeline System (TAPS) is increasing. Producer investment in Alaska is decreasing -- and no wonder.
Alaska was in the mid-range of oil tax regimes for competitiveness under the Murkowski Administration, but enacted the highest marginal tax rate in the world under Gov. Sarah Palin. This is demonstrated by the numbers.
At a $100 market price for a barrel of oil the current marginal tax rate for the Gulf of Mexico is 43 percent, for Alberta it is 55 percent, and for Alaska under ACES it is 85 percent. Alaskans simply cannot compete with the Gulf of Mexico for oil and gas exploration and development capital by imposing a tax that is twice the amount charged there.
The Jan. 31, 2010, issue of Petroleum News quoted remarks by Larry Archibald, Conoco Philip's Senior Vice President for Exploration and Business Development at an Anchorage conference:
Investment on state lands in Alaska isn't competitive with investment opportunities the company has elsewhere, Archibald said, comparing Alaska's competitiveness rank under the tax system initiated when ACES, Alaska's Clear and Equitable Share, was passed in 2007 with Alaska's rank prior to the passage of ACES.
Prior to ACES, he said, the Alaska fiscal regime was about "in the middle of the pack" as consultancy Wood Mackenzie ranked the profitability of fiscal regimes for investors.
But after ACES, Alaska moved to the right on the chart, where regimes "take so much of royalty, taxes and other fees there isn't really much left for the investor in the success case," excluding the capital the companies put at risk in exploration and appraisal before any production occurs, Archibald said.
Alberta had the same experience with the loss of oil and gas exploration and development capital when it increased royalties in 2007. As a result there was a marked decrease in investment, similar to what is occurring in Alaska. Earlier this year Alberta reformed its tax structure by reducing taxes to achieve its policy goal of making Alberta more competitive with other oil and gas provinces. There has since been a dramatic rebound in investment.
Some say that lowering ACES' tax take sufficiently to make Alaska's government take competitive with that of other oil bearing provinces around the world would result in a "giveaway" to the oil companies. This is not the case because ACES can be changed in an objective fashion.
The first public policy decision we need to make is to change ACES sufficiently to make Alaska competitive with other oil producing provinces. Conversely, if the political will is not there to amend ACES sufficiently to restore the North Slope as a competitive area in which to invest, then an ACES bill would actually do more harm than good. This is because it would make legislators "bleed" politically without changing producer investment decisions.
The second public policy choice is to determine the extent to which we want Alaska to be competitive compared to other regions. Since we know the "government take" of competing areas, we can make judgments about where Alaska should fit in.
The governor and legislature would decide how to adjust ACES to hit a mid range competitiveness target. For example, they could make ACES a graduated tax, and/or increase the price per barrel at which progressivity kicks in. We could reduce the progressivity rate, and/or increase investment credits, or some combination of these.
The priority is for Alaska to act now in a decisive way that will make Alaska's oil tax competitive in 2011 -- especially since we have just learned of the United States Energy Information Administration's estimate that Alaska's natural gas line will not be competitive for another 20 years.
Frank Murkowski was a U.S. Senator from Alaska from 1981 to 2002 and governor of Alaska from 2002 to 2006.
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