Alaska Editorial: Fundamental reform is needed in the oil patch

This editorial first appeared in the Fairbanks Daily News-Miner:

The headlines last week reported that one of Alaska’s favorite oil experts strongly criticized Gov. Sean Parnell’s proposed tax revisions. If one didn’t read the articles, one might think that the expert, Pedro van Meurs, disagrees with the fundamental premise driving the governor’s oil tax reform package.

Far from it. Van Meurs, in fact, echoed the governor’s assertion that the state’s highly progressive production tax creates a disincentive for oil companies to invest in Alaska. As oil prices rise, Alaska’s oil taxes rise, so much that they drive investment elsewhere. Alaska needs that investment; it needs oil tax reform.

Van Meurs, an internationally renowned private consultant, has studied Alaska’s oil taxes and worked on various reforms for many years. Few people know as much about how our tax system compares to the wider world’s. So people rightly pay attention to what he says.

Last week, van Meurs testified before the Senate Finance and Resources committees about the governor’s reform bill, which the House passed last year but the Senate did not consider. During the Tuesday hearing, van Meurs opposed several parts of the bill. He asserted that it would cut taxes on Alaska’s existing oil fields by an unnecessarily large amount. The bill also fails to curb excessive tax cuts for exploration work in Alaska, he said. And the bill doesn’t fix the bizarre fact that start-up of a major natural gas pipeline could actually cut the state’s total oil and gas tax revenues, he said.

All these might be important criticisms to consider, but, fundamentally, van Meurs agreed with the governor that Alaska’s oil tax system, called Alaska’s Clear and Equitable Share, sets rates that are too high to attract investment in new fields.

“The three major oil companies are in a ‘harvesting mode,’ which means their main objective is drawing cash out of Alaska to invest elsewhere,” van Meurs told the committees during his presentation Tuesday. “The reasons for this are: No large and attractive projects available in Alaska under current fiscal terms for major oil companies (and) attractive opportunities outside Alaska.”

In other words, Alaska needs to change its tax structure if it hopes to get the companies to reinvest some of the billions they are earning on Alaska’s oil.

Van Meurs offered the committees a comprehensive revision of Alaska’s tax system that would dampen the progressivity in the existing tax rate significantly.

His proposed system is far different from the governor’s, to be sure. He would use a different method to increase the state’s take as oil prices rise. But, while he wouldn’t cut taxes on existing production as much as the governor, he would still cut them. Under the governor’s bill, the total government take of oil profits at prices of $100 per barrel would drop to about 67 percent on existing production, down from the current 76 percent under ACES. Van Meurs’ proposal would cut the total government take to 72 percent, based on his judgment that “it is not necessary to give up significant revenues” on existing fields.

However, van Meurs would offer new fields almost exactly the same total government take as the governor — just more than 64 percent at $100 per barrel. And he’d throw in even more extras for heavy oil, shale oil and natural gas. The idea is to get the oil companies to invest in those large Alaska projects that aren’t currently getting any interest.

This is hardly a refutation of the governor’s fundamental premise. Rather, it’s a modified endorsement of the idea that we can use tax reform to boost oil work in Alaska and improve the state’s long-term financial stability.

The major oil companies in Alaska might be in “harvest mode,” but Alaska itself doesn’t have to accept that mode. We should modify our oil tax structure to ensure that oil companies enter a “reinvestment mode,” and soon.

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