I am a Juneau resident who spent 23 years in the oil industry. I read last Sunday’s Juneau Empire article regarding oil industry expert Mr. Rick Harper’s address to the Legislature. He made several statements that need to be challenged.
1. Mr. Harper says that tax rates play a small part in project economics. He says the industry makes decisions primarily on resource prospects, development costs and other factors. I say, when a company allocates a portion of its exploration budget to a prospective oil and gas play, it has already calculated the chances of finding hydrocarbons and the likely amounts. It has also projected forward the development cost, the expenses to be incurred in producing and transporting the hydrocarbon to market, the taxes due on that production and calculated a return. Only if the return meets or exceeds the company’s cost of capital will funds be allocated. With rates ranging to 78%, taxes are an enormously important part of that calculation.
Additionally, it is not always necessary to discover new oil fields in order to increase production. More oil can be coaxed out of existing fields with enhanced oil recovery methods (EOR). When considering an EOR investment, a company definitely makes estimates of the increased production and projects forward its after-tax cash flow. Tax rates are crucial in determining the expected return.
I would like to provide an example of the importance taxes play in companies’ investment decisions. Production in the UK sector of the North Sea ramped up steadily from the basin’s early days in 1975 to a peak of about 2.4 million barrels per day (mmbpd) in 1985. It then started to decline, dropping down substantially below 2 mmbpd for the years 1989 to 1993. In 1993, the UK Government reacted to the declining production by reducing the Petroleum Revenue Tax for existing fields from a rate of 85% to 50%. UK North Sea production increased over the next nine years to nearly 3 mmbpd (mostly from existing fields). This increase was achieved, in my opinion, with investment resulting from the tax reduction and certainly not from high oil prices. Prices at the time were generally low, e.g., under $12/bbl in 1998.
In Alaska’s case, it is difficult to determine how much potential our legacy fields possess because the information is largely proprietary. However, according to our Department of Revenue (DOR), Alaska’s North Slope is underdeveloped. We also know there is substantial potential for further discoveries. According to the US Geological Survey, there are 4 billion barrels of recoverable conventional oil yet to be found (without counting NPRA and ANWR). This is a very significant amount that is not going to be found if the stunning decline in exploration wells drilled in our state is not reversed.
Exploration in Alaska is riskier than in many other places because there is no current outlet for our natural gas. Anywhere else, if a company’s exploration efforts result in natural gas finds, they have hit pay dirt. In Alaska, it means they have struck out. We are therefore at a disadvantage and need to compensate for it somehow.
My question is: how can Alaska attract investment in exploration and EOR? Let’s learn from the UK’s 1993 example by making sure our tax structure is competitive.
2. The Empire also quotes Mr. Harper as saying ACES is already competitive. I dispute that statement: (i) by pointing to third party studies that show the opposite (e.g., the Independent Petroleum Association of America’s report on International Petroleum Taxation available at ippa.org); and (ii) with my own calculations comparing Alaska with Louisiana (which, after Alaska, has the highest severance tax of any state in the US), the UK and Norway.
The table accompanying this article shows how much a company would keep from one more barrel of production, assuming oil is at the current $100/bbl. Expenses are assumed to be the same in each location as Alaska’s DOR estimates for North Slope production for 2012, namely: $26.00 in production expenses and $6.39 in transportation expenses. Alaska’s tax rate is capped at 50% as per Governor Parnell’s proposal.
As the table points out, due to taxes, Alaska is a substantially less profitable place than the UK, Louisiana or any other US state, even after Governor Parnell’s proposed reduction. Only Norway is less profitable – but that comparison is not entirely valid for the following two reasons: (i) Norway has a 67% ownership interest in a company named Statoil, which has a large presence in the Norwegian sector of the North Sea; and (ii) the Norwegian government will invest directly in projects to make up for the lack of private company investment. Therefore, it does not matter to Norway whether their revenue comes from taxes or from direct equity stakes in projects or from their investment in Statoil. Alaska, needless to say, has no state oil company and does not invest directly alongside private sector companies.
I hope I have made a case for the importance that oil production taxes play in determining investment. Naturally, I conclude that there is little choice but to adopt Governor Parnell’s plan.
• Meyer is a Juneau resident.
Comments (15)
Add commentSo what you are saying
Is that we should own our own oil fields in order not to get screwed. Good Idea!
Unanswered Questions
Looks good on the surface, but that's as far as it goes.
First of all, Mr. Meyer deals with a hypothetical barrel of oil, as if costs for drilling, exploration and maintenance are the same for a barrel from a mature field with complete infrastructure (Prudhoe), a deep-sea offshore rig (Louisiana, North Sea) or a new unexplored field in Alaska. That's not the case. Oil doesn't exist in a vacuum. It's highly unlikely that the expense of producing oil from those very different sources only varies from $31.59 to $32.39. The costs between Prudhoe and an undeveloped field are certainly not all $31.59. Averaging that expense oversimplifies the situation.
Following that, it ignores the current 40% tax credit for exploratory wells. In other words, the state pays up to 40% of the cost of any new exploration. Mr. Meyer fails to include that in his risk/reward analysis and in the net profit calculations.
Secondly, even if one were to accept his figures (provided, I imagine, by an oil industry group) he doesn't address the particulars of Parnell's bill. Parnell's bill cuts taxes not only on new production, but on existing production, which will be pumped anyway. It's not an incentive, it's a giveaway. Likewise, it requires nothing on behalf of the oil companies in terms of commitment to drill new wells. It's no accident that they failed to promise anything.
Third, while Mr. Meyer points to an increase in North Sea oil production from 1994 to 2002, he does not say whether, at the lower tax rate, this was a net gain to British citizens, to whom the oil belongs. If a finite resource was drawn down at no net gain to the citizens, it represents a loss to them, whatever the production figures were. In the case of Alaska, it is highly unlikely that the revenue shortfall to the state will ever be recovered, even in the long-term. We would be very fortunate to even return to our present revenue figures.
(Incidentally, the $12.00 price he mentions (not adjusted for inflation) was a blip in a sequence of years that averaged roughly double that.)
Fourth, Mr. Meyer ignores the effect on the state of an instant $2 billion revenue shortfall. Is blowing through our savings really a net gain for Alaskans, in the hope of someday balancing the budget on un-promised development by oil companies? Or, is cutting $2 billion from our budget, with the concurrent loss of jobs, infrastructure etc worth whatever oil-field jobs that might result, especially when 40% of North Slope workers are not Alaska residents?
What we need are intelligent incentives based on our desire to exploit new fields, not untargeted tax cuts that do nothing to spur new production while destroying our balanced budget.
Governor Parnell has done grave damage to us by putting the whole tax issue into play. Now, smaller companies that were beginning to invest (Repsol, etc) may hold back in hopes of playing us, the way everybody plays us. The "smash the state" Republicanism espoused by Parnell has wrecked the financial health of the Federal Government and many states. For goodness sake, let's not do that here!
You lost me at
"who spent 23 years in the oil industry. "
Whatever.... you are completely biased and therefore, I can't listen to you.
However, I did skim thorough and see this: "Alaska, needless to say, has no state oil company and does not invest directly alongside private sector companies."
So I see that what we need is a state oil company and (thanks momzilla!) to OWN OUR OWN OIL FIELDS!! Brilliant idea! I bet we could use ONE billion to help that along, save the other billion for our budget, and have an ALASKAN company reap the profits of ALASKA'S oil!
A lease is not a real estate buy
Big oil forgets that simple fact. They own nothing. We are selling the right to sell oil FOR US to them. We owe them nothing. They will have us believe otherwise.
Let's imagine this scenario. You have a car that I'd like to sell for you. But let's negotiate my perks to the point that you don't actually make any money AND you'll be out of a car at the end of the day. Good deal for me, right? Not so good for you.
Big Oil playing Alaskans as chumps for decades and some pretty pitiful Leggers that imagine they are smart enough to work a deal with them? They don't understand they already had their pants down when they waddled into the room. Man up and stand your ground! You are not doing "nothing" as parnell keeps spinning, you are there to protect Alaska's interest. It's OUR resource, don't forget that. WE can develop it ourselves if need be. Period.
Own our own
Well now that would really irk the folks who wand state subsidies for exploration so private enterprise can make a profit. Maybe it is time to explore the profitability of such a plan. At least that might end all this foolishness over how to tax oil companies.
Good Points
Thank you for taking the time point out our unique differences in Alaska compared with other states and countries. You're points are valid and accurate. We need a lower tax structure to make ourselves competitive once again.
Just stating the obvious
Does no one understand that the oil isn't going anywhere, and if we wait for the price of oil to rise enough for exploration to be (more) profitable, then the state will take in more revenue?
Oil is like an investment, and this industry shill is trying to make us withdraw our 401(k) early.
How can this give-back to the
How can this give-back to the industry comply with the constitutional directive to maximize the benefit to all Alaskans? Please just DEMONSTRATE that to me, with the facts you are supposed to be debating. All I have seen is a give-back that, based on large producer testimony, will go nowhere and spur no new oil in Alaska, and that gets us nothing in return other than the angst that we know will come from cutting out tax receipts to the point where we do not have adequate funds, to service the growth in the amount and quality of our in-state infrastructure (roads to resources etc). Federal help we know will diminish. How can we construct the infrastructure to grow and diversify our state revenue base if we give away our ability to force companies to develop leases and proven reserves they balk at developing only as a tool to extract tax concessions from this state. This 10-20 billion dollar (over ten years) give back in the hopes it will spur "new" oil, is an exercise we as Alaskans would be fools to make. But more than that, it violates the state constitution until such a loss can be justified by facts presented to the people assembled. No facts have been presented about any quid pro quo from the three majors who control access to the TAPS line that for X they will do Y. How is that good business as defined in the state constitution? There is no nexus. This is extortion by a powerful special interest that used to enjoy unfettered control over tax legislation (that led to "ELF", for one).. then the famous note Bill Allen was handing across the rail to his chosen "bought" senators and representatives. HB110 gives 20 billion back to that outfit. For nothing. Because record Alaskan profits IN A RECESSION, is not enough? In Iraq they make $1.50 a barrel profit. "Progressivity" (state sharing in windfall profits) doesn`t begin in Alaska until they make $30.00 profit PER BARREL!..and THATS not enough for them they say. Based on those facts alone, passing HB110 out of the house is fiscal insanity for future legislators and the people of Alaska, who are not being represented well by those blindly pushing passage of this bill.
your prognostications and
your prognostications and chosen examples certainly do not justify such a sacrifice by the people of Alaska, of the value of a resource they own in common. We are an owner state. We should be, at the minimum, getting quid-pro-quo`s from the industry we have granted so many leases and rights to. Where is their obligation in return for this give-back?? If they can extort Alaska`s fair share of tax revenue that we are entitled to levy as the sovereign, with no apparent reciprocity, then we are no longer sovereign. We are no longer one state among equals. We are a park, a province. But we are no longer a sovereign state.
How can this give-back to the
How can this give-back to the industry comply with the constitutional directive to maximize the benefit to all Alaskans? Please just DEMONSTRATE that to me, with the facts you are supposed to be debating. All I have seen is a give-back that, based on large producer testimony, will go nowhere and spur no new oil in Alaska, and that gets us nothing in return other than the angst that we know will come from cutting out tax receipts to the point where we do not have adequate funds, to service the growth in the amount and quality of our in-state infrastructure (roads to resources etc). Federal help we know will diminish. How can we construct the infrastructure to grow and diversify our state revenue base if we give away our ability to force companies to develop leases and proven reserves they balk at developing only as a tool to extract tax concessions from this state. This 10-20 billion dollar (over ten years) give back in the hopes it will spur "new" oil, is an exercise we as Alaskans would be fools to make. But more than that, it violates the state constitution until such a loss can be justified by facts presented to the people assembled. No facts have been presented about any quid pro quo from the three majors who control access to the TAPS line that for X they will do Y. How is that good business as defined in the state constitution? There is no nexus. This is extortion by a powerful special interest that used to enjoy unfettered control over tax legislation (that led to "ELF", for one).. then the famous note Bill Allen was handing across the rail to his chosen "bought" senators and representatives. HB110 gives 20 billion back to that outfit. For nothing. Because record Alaskan profits IN A RECESSION, is not enough? In Iraq they make $1.50 a barrel profit. "Progressivity" (state sharing in windfall profits) doesn`t begin until they make $30.00 profit PER BARREL!..and THAT'S not enough for them they say what they will do with the twenty billion our ex-lobbyist governor wants to give them. Based on those facts alone, passing HB110 out of the house is fiscal insanity for future legislators and the people of Alaska, who are not being represented well by those blindly pushing passage of this bill.
John Meyer: B.S. on you!
John Meyer:
B.S. on you! Repeating lies does not make them the truth. Many places have much higher taxes and the oil companies are still investing.
That's what we need - a state
That's what we need - a state oil company. OMG people, that's called socialism. Then our gasoline could be 29 cents a gallon like Venezuela because it's so highly subsidized. You know, kind of like those unsustainable government subsidies that green energy is getting now. Ridiculous and way too expensive.
North Dakota is struggling with tax rates to charge oil companies too but they seem to be letting cooler heads prevail. Greed has a funny way of clouding ones thinking.
http://plainsdaily.com/entry/north_dakota_legislature_considers_oil_extr...
Yep we could run our industries like third world countries.
I guess you could do it the way Venezuela does if you want to, me I'd just settle for a reasonable price on a State owned resource. Say 3.00 a gallon or so.
North Dakota
Have you been to North Dakota? That place has been getting raped since the first white man shot the first buffalo, doesn't mean it has to happen here.
Lol Momzilla
Exactly! Who the he!! wants to live in North Dakota, anyway? I certainly don't want Alaska looking like North Dakota!!