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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?

My Turn: Be careful what you vote for | JE   1 comment

My Turn: Be careful what you vote for | Juneau Empire – Alaska’s Capital City Online Newspaper.

I guess this is as good as time as any to announce that I’ve changed my own position on Proposition 1. I was going to vote “No” because I support reduced taxes as a rule.

Sometimes a second look at things makes us question our presuppositions.

I’ve explained before that Alaska is an owner-state. The people of Alaska own their resources in common and the State of Alaska administers them for maximum benefit to the citizens of Alaska. At least, that’s what our constitution says. Think of Alaska as a corporation, the Legislature as the Board of Directors, the Governor as the CEO and the people as the shareholders.

If this were North Dakota, the oil companies would be negotiating with the landowners over a payment scheme. If this were Kuwait, the oil companies would be negotiating with the emirs over a payment scheme. Under ACES, the oil companies were paying about about the same revenues to the State of Alaska as they were paying to other landowners around the world, but they were making considerably higher profits. British Petroleum is not required to publish its profits statements because they are a multinational corporation, but Conoco Phillips is. We know from their statements that Alaska is considerably more profitable for them than their other American fields and somewhat more profitable than their overseas fields.

In other words, Alaska is still the golden goose that laid the golden egg, but we are told by Sean Parnell, a former oil company executive, that we are not and we believe it.

In 2009, BP won the right to produce Iraq’s largest oil field — Rumalila. The field was producing a little more than 900,000 barrels a day. Iraq pays BP for actual costs for managing the original production. The contract requires BP to raise daily production to make a profit. BP was the original developer of the Rumalia field. Iraq booted them in 1953 for taking too much of the profit. BP returned in 2003, asking to resume pumping for $4 a barrel and Iraq said no. Iraq was unwilling to pay BP $4 a barrel to produce the field. BP then counter-offered  for $2 a barrel (half the price) and Iraq agreed, but only on condition of increased production.

Under ACES, Alaska paid BP $28 a barrel. Under SB21, net profits are expected to be around $40 a barrel. But BP will not give us a promise of increased production. They claim that the North Slope is just too expensive to operate, but in fact, BP hasn’t spent a dime on Prudhoe Bay since 1977. Proceeds from BP’s then-52 percent ownership of leases repaid 100% of BP’s Prudhoe Bay investments by 1982. It’s been all profits since then.

BP Exploration Alaska collects the profits from Prudhoe Bay, reinvests as necessary to keep the field productive, pays Alaska a tiny fraction of the taxes it would pay for the same opportunity in any other country, and sends the rest to London.

In 2006, then-Governor Frank Murkowski pushed a tax-reduction plan through the Legislature, with VECO and other entities greasing the skids with bribes. We fired him as Governor and replaced him with Sarah Palin, who gave us ACES, instead. It was a fair taxation system lacking only a demand for new exploration and increased production. Now Sean Parnell comes through with SB21, that is essentially a carbon-copy of Murkowski’s plan. It will bankrupt the state within eight years and does not hold any demand for new exploration and increased production.

I’m voting yes on Prop 1. There is already a plan in place to replace SB21 with an ACES-like structure with that missing demand for new production.

Sometimes, a principle — like, lower taxes are good — is not always true in every situation. Alaska is a landowner, not just a government and as such, we should be treated with the respect due a landowner.

They’re our resources, and BP et al needs to pay us a fair price for them … like they do in Iraq and North Dakota.

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