Getting a share of petroleum pie

Posted: Wednesday, November 07, 2007

Juneau has been fortunate to welcome the Alaska Legislature back to the capital since Gov. Sarah Palin called it into special session. While oil-tax issues may seem arcane to some Alaskans, there's good reason for all to care what happens during this special session, for the tax regime it sets or leaves in place will determine our fiscal well-being until such time as the law may again be updated.

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Almost every Alaskan is cognizant of the extreme importance of petroleum revenues to the state's treasury. Annual Alaska Permanent Fund dividend checks mean that Alaskans expect money from hydrocarbon production to flow their way. The portion of royalty money that goes into the permanent fund is actually easily dwarfed by the tax and royalty revenues that flow into the general fund, paying for operating costs and capital expenditures of state government. The funds for roads we drive, the money that pays teachers' salaries and most funds to build schools are oil dollars, the lifeblood of the government that provides a tremendous array of services.

Because we're fortunate to be blessed with an abundance of natural resources, there's a risk we'll take our good fortune for granted. Some of the rhetoric in opposition to increased oil taxes asks, "Why should the greedy state of Alaska get any more money, because it will just get spent?" This is a red herring - the state is as entitled to a fair share of the lucre generated by oil and gas development as any private firm. The firm's right to drill and sell oil is granted by the state, on behalf of each Alaskan.

The fundamental terms of the debate during this special session are how high or low the tax rate on oil development should be in percentage terms, and whether the quantity being taxed is gross revenue earned, or net profit after the costs of exploration and development are deducted.

The former method appeals because of its simplicity - it's not hard to ascertain the actual market value of oil sold to buyers for cash payments, then take a percentage as the state's taxation share. The problem is this creates no additional incentive for oil companies to spend money trying to find more oil that can help prolong the pipeline's useful life, above the inherent incentive of wanting to make money.

But if new oil is harder and more expensive to get out of the ground, then private firms must do cost-benefit analyses and decide whether to plow corporate profits back into Alaska operations, invest them elsewhere or just take them to the bank.

The net profits tax is heralded as a fair means to create an incentive for oil companies to spend more of their earnings on Alaska investments. The problem is the state is largely in the position of accepting at face value what oil firms claim they're spending on reinvestment. I question if the honor system is a wise means to this end, but the alternative is for the state to compel disclosure of detailed proprietary information and then review it rigorously. This effort costs money too, an investment on the state's part in a cooperative relationship with big oil.

Other issues on the table this special session are how to get a fair share for Alaska when the oil prices are really high, like right now. It is only just that the state share in the windfall generated by per-barrel prices approaching $100. At the same time, it is prudent not to impose taxes so burdensome at lower prices that Alaska exploration and development run the risk of becoming economically infeasible. Progressivity is the term that describes this sliding-scale taxation; it may be one of the best things to emerge from the current legislative debate.

Alaskans are lucky to have in Palin a leader with the courage to ask whether we're getting enough in one-time compensation for our bountiful but finite hydrocarbon resources. The Legislature has the duty to review, analyze and amend her suggestions.

I don't believe this debate will for one moment deter big oil from conducting business in Alaska, a far more stable and predictable oil province than most. Our natural resource wealth belongs to us all, now and in the future. I'm confident our elected leaders will successfully strike a fair and reasonable balance between the industry's concerns about stability and the stated need for incentives to continue investing here, as well as our unarguable right to a decent and deserved slice of the petroleum pie.

• Benjamin Brown is a lifelong Alaskan who lives in Juneau.

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