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Alaska’s Colonial Tax History   Leave a comment

GC-2I’ve said before that Alaska is a colony in all ways except the federals call us a state. Statehood changed nothing. We are as beholden to the federal government and the large resource extraction corporations as we ever were … not because we’re required to be by law any longer, but because we’ve been an abused colony for so long, we don’t know how to act like an owner state.

Alaska is about to vote on oil tax reform in two weeks and it’s important for us to understand why. So I’m going to look at some history of Alaska oil taxation, because I believe we are still suffering from abused colony syndrome and we need an intervention.

Prior to Prudhoe Bay, Alaska taxed on a well basis.

  • First 300 barrels per day taxed at 5% of gross value  or 17 cents a barrel).
  • Next 700 barrels per day taxed at 6% of gross value  or 20 cents a barrel.
  • Anything over 1000 barrels per day taxed at 8% of gross value or 27 cents a barrel.

Note that if a well didn’t produce that day, they were still taxed on the gross value of the well.

Alaska has operated under five tax regimes since production on the North Slope began.

Economic Limit Fact (“ELF) 1 (1977-1989)

The theory was that there is an economic limit where the cost of producing a barrel of oil exceeds revenue. When a field is at its economic limit, the burden of the tax should not cause the field to shut down. Scale down production taxes as production declines toward economic limit so tax is zero at the economic limit.

The original proposal was that company should not pay tax on the barrels that generate the revenue to cover operating costs at economic limit. Each well got 300 barrels per day tax-free to cover operating costs at the economic limit.

ELF 1 applies to a nominal tax rate of 12.25% of gross for the first five years of a field, then 15% of gross thereafter.

The problems with ELF 1 were that 300 barrels was an arbitrary choice as far as revenue to cover operating costs, drilling wells reduces the tax rate and field decline reduce the tax rate as well.

The Alaskan colony bowed before its corporate masters and licked their boots.

Then came a catastrophe. OPEC decided they wanted to corner the market in oil, so they dropped their prices to almost nothing in 1986. At $9 a barrel, the State of Alaska’s royalty share of oil wasn’t meeting the needs of the state. The oil companies were disincentivized to produce because of the low per-barrel prices, so production was declining and that meant revenues from ELF were declining.

ELF II (1989-2006) came in to correct the problems, but it really was an oil industry giveaway. It was meant to spur production in Prudhoe Bay, so the oil companies moved into satellite fields to avoid having to pay a bit higher taxes in Prudhoe. Field size declined, well production continued to decline and the tax rate declined regardless of price.

In 2005, the State of Alaska decided to aggregate Prudhoe Bay and the satellite fields because we saw them all as the North Slope, not as separate fields. They were interdependent upon one another, sharing common facilities, for example.

When oil was discovered in Prudhoe Bay in 1968, the oil companies also found an estimated 26 trillion cubic feet of natural gas, which is more gas than the entire United States consumes in a year. There was actually more discussion of building a gas line in the early days of North Slope development than there was discussion of oil development. Then, for a variety of reasons, primarily discoveries of significant amounts of natural gas in the Lower 48, the gas line idea was tabled after the Trans-Alaska Pipeline was built. In the early 2000s, the price of natural gas began to rise and the 2001 National Energy Plan recommended an expedited construction of an Alaska natural gas pipeline to the Lower 48. In 2004, Congress passed the Alaska Natural Gas Pipeline Act that was meant to put us on the fast-track to a pipeline In 2006, 16 federal agencies with roles and responsibilities related to the pipeline signed a memorandum of understanding (MOA)  to establish a framework of cooperation on the project management.

Every Alaska governor since completion of the TAPS has tried to spur construction of a natural gas pipeline. In 1998, the Alaska Legislature passed the Alaska Stranded Gas Development Act to encourage North Slope producers to bring the natural gas to market by allow the state and producers to negotiate tax, royalty and other fiscal terms for a liquified natural gas export project. A new version in 2003 applied to any North Slope gas project. Under the new law, the State was not authorized to provide fiscal stability to the oil producers. Then-governor Frank Murkowski negotiated a new oil tax system and sought to amend SGDA. The Legislature took the negotiated product as a starting point for amending the severance tax statute. The oil industry began bribing Alaska legislators to vote their way. That led to several convictions of fraud and the eventual election of Mark Begich, but it also led to an interim taxation ttructure called Petroleum Profits Tax (PPT).

PPT (2006-2007) deducted all costs of production before applying a base rate of 22.5% of net value. There was a progressivity element to the taxation when net value per barrel exceeded $40 a barrel.

At $90 a barrel, net value was $61 a barrel, which would result in a 7.75% progressivity rate. Total tax rate on a $90 barrel of oil would be $16.93 a barrel.

The problem was that the costs always seemed to be higher than estimated, which made revenues lower than expected. What can you expect from a law that was written by legislators who, if they were not taking bribes themselves, knew their fellow legislators were accused of taking bribes? Thus the law only was in place for two years.

The bribery scandal and Murkowski’s clear favoritism of the oil industry resulted in the election of Sarah Palin who had been one of the first to point out the wide-spread corruption in the Murkowski administration when she was on the Oil and Gas Development Authority board. The Alaska’s Clear and Equitable Share (ACES) tax structure was really her brain child.

ACES provided a 25% base rate of net value after deducting all costs. For the first time, Alaska was drawing on the example of other oil-producing countries like Iraq, who “pay” the producers a base rate for the production of the oil, but then charge a tax on what is produced. ACES also had a progressivity element when net value per barrel exceeded $30 a barrel. Again, we took our example from elsewhere.

At $90 a barrel, net value was $61 a barrel, progressivity was 12.4%, total tax rate was $37.4% for a tax of $22.81 per $90 barrel of oil.

That’s an increase of about 25% over PPT and about 50% over ELF, but it is on-par with tax regimes in the Middle East and far below what is charged by countries like Russia.

ACES offered credits for production:

  • Capital credit of 20%
  • Well lease expenditure credit (excl. North Slope) of 40%
  • Exploration credit of 20-40% (depending on location) **Expires 2016***
  • Small company credit of $12 million if sufficient offsetting income – **expires 2016***

Alaska made a lot of revenue off ACES. During that same time period Conoco Phillips (the only American company producing on the North Slope and thus the only one required to publicize its PL report) reported record earnings after taxes and Prudhoe was its highest grossing field WORLDWIDE.

Now if Conoco Phillips was doing so well under ACES, how do you suppose BP and Exxon were doing?

Is there a way out for the North Pole refinery? – Fairbanks Daily News-Miner: Community Perspectives   2 comments

Is there a way out for the North Pole refinery? – Fairbanks Daily News-Miner: Community Perspectives.

I share this because it is a major question for my town. It might be easier to just blame Koch Industries for closing the refinery, but they have stated the costs of the sulfolane cleanup as only one reason they’re closing it. The larger issue is that the State of Alaska sells them state royalty oil at an inflated rate – 2 1/2 times what they sell royalty oil to the Kenai Refinery. Why? Nobody seems able to answer the question, probably because they keep shifting the question over to the sulfolane cleanup issue.

The Flint Hills Refinery is the 2nd newest refinery in the United States, by the way. The newest is the referenced Kenai Refinery. Both were built more than 30 years ago. That should matter to Lower 48ers too, because the impossibility of permitting new refineries is one of the issues driving the high cost of energy in this country.

I go back on forth on this. I don’t like the government being involved in much of anything, but Alaska is all about state government because of the way we were forced to structure our mineral resource ownership at statehood. By federal law, no individual Alaskan may own the subsurface minerals under their property. It all belongs to the federal government, the State of Alaska, or a Native corporation. Individuals who find commercial-quanity minerals on their land are compensated for the loss of use of the surface, but the revenues derived from sale of the subsurface resources go into the state coffers. Alaskans are not allowed to directly benefit from what is under their property. Thanks to governors like Jay Hammond and Wally Hickle, the people receive some return on our investment through the Permanent Fund dividend, but most of the money is used to fund state government.

Hence, we cannot grow a private economy that is sustainable without government investment because the government owns the resources collectively for the people. Like it or not, the people’s corporation of Alaska is the reality created and sustained by the Alaska Statehood Compact. While I think that’s a mistake, I also think that — since we’re stuck with it for now — we can work with it if the feds get out of our way. One of the beauties of having 50 seperate states that have sovereignty (if we would claim it) is that Alaska could do things our way and that could be very different from other states … and that would be fine because it would allow many different versions of republican government throughout the nation.

If we can ever get back to federalism ….

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