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The history of oil wealth

Alaska has long struggled with balancing the government's take

Posted: August 15, 2014 - 12:09am
  Graphic by Melissa Griffiths
Graphic by Melissa Griffiths

Since the discovery that Alaska has a wealth of oil, there have been debates about how best to spread that wealth between the state and oil industry. Alaskans will vote on Tuesday on whether to repeal the fifth tax regime since the oil boom of the 1970s.

The state of Alaska collects oil revenue in several ways, including through royalties, property taxes, corporate income taxes and production or severance taxes.

Alaska’s first production tax was enacted in 1977. ELF was named after its characteristic Economic Limit Factor. The ELF was a figure from 0 to 1 in the equation to determine production taxes for each field. It’s the point at which production continues by operating at a loss.

Discussing ELF in 2005 at a presentation organized by Commonwealth Northwest, Department of Revenue’s Dan Dickinson said “... tax should never be a thing that caused a field to shut (down) ... the production tax shouldn’t be the thing that makes (the oil field) not be able to cover its costs.”

ELF was based on each individual oil field’s productivity — production per day per well.

The tax equaled a base rate multiplied by ELF, multiplied again by the wellhead production value.

Fields with high productivity would be taxed near or at the highest rate, with an ELF at or near 1. Fields with low productivity would be taxed at or near the lowest rate, with an ELF at or near 0. ELF reaches 0 at 300 barrels per day or less.

In 1989, to protect marginal fields, according to Dickinson, or to increase state revenue, according to BP’s Tom Williams, ELF was altered to account for field size.

It was assumed that larger fields were more efficient, so the largest fields would have a higher ELF and tax rate, while smaller fields would have a lower ELF and tax rate. As some large fields, like at Prudhoe Bay, become less productive — they brought up more gas and water instead of oil — the profit margins were diminishing.

Smaller fields were taxed at low rates or not at all, so oil companies began focusing efforts on those newer, smaller fields.

That made ELF II unsustainable, since Alaska relied — and still does — on oil revenue to cover its general budget.

In 2005, the Department of Revenue used its ability to aggregate leases or properties by combining smaller, untaxed fields to turn them into bigger ones that paid higher taxes.

With aggregation, Prudhoe Bay’s ELF went from 0.8 to 0.89. For other fields, the change in tax rates was far more dramatic.

“For a number of satellites, the ELF went from zero to 0.89,” Williams said. “So it was a very substantial increase for the satellites...”

When both the state and the oil companies recognized ELF II was unsustainable, the Alaska Legislature enacted the Petroleum Profit Tax in 2006, a proposal pushed by Gov. Frank Murkowski and tax consultant Pedro Van Meurs.

PPT was a progressive tax regime as initially enacted and was based on production tax value rather than gross wellhead value.

PPT and successive tax regimes have used the same basic equation, but differ in base tax rates, rate adjustments and credits available.

 

PPT relies on a pair of formulas to work: Tax = (base tax rate x rate adjustment x PTV) - credits; PTV = wellhead production value - (operating expenses + capital expenses).

An investigation into political corruption and several resulting indictments tarnished PPT as a tax regime, however.

In 2007, under Gov. Sarah Palin, the tax regime was altered to increase government take and progressivity. With PPT turned toxic by political scandal, the new adjusted progressive tax regime was named Alaska’s Clear and Equitable Share.

Under ACES, the base tax rate went from 22.5 percent to 25 percent, and the progressivity rate went up if oil prices rose — and they soon did.

Under ACES, progressivity rose by 0.4 percent for each dollar over $30 PTV, and 0.1 percent on each dollar over $92.50 per barrel. It was 0.25 percent on each dollar over $30 under PPT.

Credits could be deducted from the rate for 20 percent of qualified capital expenditures under both regimes, reducing the minimum tax.

The Alaska Journal of Commerce reported in “The evolution of Alaska’s oil taxes,” published July 10, that ACES’ progressivity formula earned net revenues for ConocoPhillips of $22 per barrel in 2007, while the state earned about $27 per barrel (combining taxes and royalties), with oil at $70 a barrel. In 2011, with oil prices at $106 a barrel, those numbers were $27 a barrel for ConocoPhillips and $51 a barrel for the state (again, taxes and royalties combined).

The journal reported a decrease in drilling activity and exploration in the years after ACES began.

Under Gov. Sean Parnell, the Alaska Legislature enacted another new tax regime, called the More Alaska Production Act, bust most commonly referred to by the bill that created it: Senate Bill 21.

MAPA reduces progressivity and introduces lower tax rates for “new” fields, according to a publication of the University of Alaska Anchorage’s Institute of Social and Economic Research, “Comparing Alaska’s Oil Production Taxes: Incentives and Assumptions” by Matthew Berman.

MAPA was presented to Alaskans as an answer for declining drilling and exploration, though Berman wrote, “independent empirical studies of the effects on how the tax change from ACES to MAPA might affect North Slope oil production do not exist.”

MAPA has been a controversial issue, with SB 21 passing the Senate 11-9 in March 2013. A repeal referendum petition received enough signatures to get us where we are today, deciding whether to vote yes on Proposition 1, an act that would repeal SB 21 and revert Alaska to ACES, or vote no and keep SB 21.

With more rhetoric than facts bombarding voters, the decision may be a difficult one.

Based on Department of Revenue projections for fiscal years 2015 through 2019, Berman graphed out the revenue over those five years: MAPA would earn the state $10.7 billion, ACES would earn $12 billion, and PPT would have earned the state $10.2 billion.

“The difference between ACES and MAPA would have been much greater under the conditions prevailing during the historical period 2008-2013,” Berman wrote.

Under MAPA, the base tax rate is 35 percent, with a rate adjustment for “new” oil of less 20 percent gross revenue. Credits are $5 per barrel on “new” oil, $8 per barrel, declining to $0 when oil prices hit $150.

“Both MAPA and ACES are progressive,” Berman wrote. “Progressivity in MAPA, however, is limited to changes in the per-barrel production credit, rather than the tax rate on PTV. Consequently, MAPA progressivity is greater with respect to changes in oil prices than it is with respect to changes in costs.”

Projecting oil prices is difficult, but Berman said one thing is certain — they will fluctuate.

“The only thing we know for certain about future oil prices is that they will fluctuate, even if the average price is similar to the average wellhead price projected for FY2013-2015. The progressivity feature of ACES causes it to collect somewhat more revenue relative to MAPA when oil prices exhibit greater volatility. If lease capital and operating costs are assumed to be the Department of Revenue average projected values for FY2013-2015, ACES would collect 6 percent more revenue if the oil price averaged $100 per barrel but fluctuated between $80 and $120, than if it stayed constant at $100. The older PPT, with somewhat less aggressive progressivity, would generate 4 percent more revenue, while MAPA revenues would be essentially unchanged,” he wrote.

He also went into potential administrative costs and discussed the drawbacks of MAPA’s investment incentives compared to ACES.

Berman concludes that MAPA “suffers from a number of significant drawbacks” while ACES has many fewer problems, but one major one — the high effective tax rates, which could hamper new investment despite “efficient” incentives for new investment.

He frames the question Alaskans must decide at the polls as being “between keeping a flawed tax or reverting to a tax with different but considerable flaws.”

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Art Petersen
3415
Points
Art Petersen 08/15/14 - 08:15 am
4
0
So the question is

do Alaskans want "considerable flaws" that generate considerably less revenue from their oil, or to go back to ACES with its "many fewer problems but one major one," a high progressivity tax? The best choice is clear: go back and fix the "fewer problems" and the inequitable progressivity. Voting Yes on Ballot Measure 1 focuses on the right fixes for the long term.

Haily George
1212
Points
Haily George 08/15/14 - 10:13 am
4
2
How best to spread that

How best to spread that wealth between the state and oil industry? Below is an example of the kind of wealth the oil industry is generating from public resources.

Today in North Dakota, Harold Hamm is going through a divorce. Harold Hamm is a 68 percent stake holder in Continental a leading driller in that state.

Continental's return on investment was at least 44,271 percent during the Hamm marriage, Button wrote. The average return among peers - extrapolated over the same period - was a relatively modest 691 percent, the report says. (The analysis is from Kenneth Button, an expert witness hired by wife Sue Ann Hamm)

All told, Button's analysis suggests that the marital capital subject to division could add up to some $17.6 billion.

Something is very very wrong here. There is no good reason on earth people should be making that kind of money off of public resources. These oil companies CEO's are destroying this planet, and living like kings and queens as they do it. Rather than raking in billions they should pay more taxes and pick up the tab for all the damage they are causing from storms, floods, droughts, pollution,...... after all these resources belong to the public.

Karl Ashenbrenner
2873
Points
Karl Ashenbrenner 08/16/14 - 09:03 pm
1
0
Part of the problem

with MAPA is the lower rates that "new" oil will receive...with incentives the rate of taxation will drop to between 9 and 11 percent with some saying only as low as 21 percent. But the problem is that the oil companies will be able to reclassify oil from even older legacy fields as "new" oil because it will be pumped from "new" wells. That is a problem as even old fields will be able to be classified as new and the taxation rate dropped dramatically thereby cutting state revenue to practically nothing. Need examples...see how much of an increase the investment credits have skyrocketed since MAPA has been enacted to cut the taxation rate just in the last year.

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