A major tax break for oil companies signed into law in May is now the heart of a battle between industry-friendly politicians who say the tax break will boost sluggish production and citizens who are demanding a refund.
A citizen group has gathered 50,000 signatures to repeal the May tax break—enough to place a repeal of Senate Bill 21 on the August 2014 primary ballot.
Republicans in Alaska have long argued that only a massive tax break would give oil companies the certainty necessary to ramp up production to bolster the state economy. That’s one side of the story. The other side is that of citizens backed by Democrats who feel this was a simple giveaway of the state’s oil wealth and that they won’t see much in return.
Here’s the backstory. In May, Alaska Governor Sean Parnell signed the tax break legislation, which passed in an 11-9 Senate vote. The legislation reversed the progressive tax system that raised taxes along with rising oil profits, which had been put into effect under Parnell’s predecessor, Sarah Palin. (According to Forbes, two of the majority yes voters work for ConocoPhillips.)
The general consensus now is that the oil lobbyists might have taken things a bit too far—and might have benefited from some more subtlety. Now the legislation is in danger of being overturned, so the major victory big oil has won in Alaska may indeed be short-lived.
“Too much was given up in that bill in exchange for too little, Alaska Senator Hollis French, a Democrat, wrote in an op-ed piece in the Anchorage Daily News. “Alaskans simply saw about $4.5 billion of money that would have been used to build roads and educate our children over the next five years given over to three of the richest corporations in the world.” French has been calling for Alaskans to appeal the legislation since May.
“What has happened now with the new law, to the best of my knowledge, is, number one, the credits that were incentives to have small companies explore have been eliminated, and that turns basic control back over to the three majors again. And that’s not the way to get more oil production underway,” Alaska Dispatch quoted Dick Waisanen, one of those who volunteered to gather signatures to have the issue put on the next state election ballot.
By. Charles Kennedy of Oilprice.com
First up, folks need some idea of scale; Alaska is 20% (technically 17 point something - so I am rounding up for the pedantic) of the surface area of the US and it has less than 1 million people. 90% of "state government revenue" (last I checked/sourced) was from oil royalty. Other tax models just don't work; there isn't enough industry/people/assets to tax. Government can't pay for roads, infrastructure, police, fire, social benefits, etc without going back to the "territory model" that existed before the 70s WITHOUT oil revenues; City/Burroughs are not set up for that.
With that back drop, state unions are a huge part of the ongoing state budget, health care being the biggest. Healthcare costs in AK are among the HIGHEST in the nation (do you want to be a doctor/nurse here?) and government plans are very generous - and costly, creating a huge transfer of state revenue to medical practitioners. Pensions take a second place, but are not insignificant by any measure given the demographics.
The state is in a vice; increasing health care costs, which is a function of generous pensions plus health care costs and declining Prudhoe Bay production (forget tax rates and oil prices for the argument - let us focus on production). The state doesn't have any other lands that will come close to rivaling **the biggest oil field in North America** and the Fed owns everything around it! As I like to joke, Prudhoe Bay is like a silver doller between Dolly Parton's breasts; ANWR on the right and the Naval Petroleum Reserve on the left.
ASIDE: Check a map on that, its a curious oddity that can't have happened by chance given the remoteness and scale of North Alaska.
In related news, Point Thompson was a deal cut a year ago or so (?2011?), which will add condensate inputs to TAPS (going on memory about 10k or 15k barrels a day of very light fractions) before too long. I think it was a 10k PSI NatGas re-injection scheme, but there are otherwise no meaningful new developments. Pt Thompson will provide a bump, but the ride down continues shortly there after at 5 to 7 percent per annum while state costs are going up by a significant percentage per annum (don't have numbers/sources - just know its up YoY).
Shale plays and heavy plays, down south where there are roads, infrastructure, skilled labor, rigs, and such, are fine. How does anyone think these plays make sense 1000's of miles from a million person population center? Get a map, check the roads, then it makes more sense; the cost of "heavy/shale" oils in AK is much higher than Dakota or Texas and therefore is marginal. Oil in AK has to be "premium" or other plays in other places make more sense, even with TAPS and the existing infrastructure.
As best I can see it, given the rest of the oil plays north of the Brooks Range are Federal or offshore, Alaska has trouble on the horizon; it is broke. If the unions pull of a roll back of taxes, nothing changes.
Our current tax system, ACES - Alaska's Clear and Equitable Share, was well conceived by a bi-partisan working group under a Republican governor. When oil prices are high, the state receives additional revenue through progressive taxes that offset the increased state costs during high oil prices that affect all levels of state operations and logistics. Oil companies have continued to receive record profits in Alaska under the current tax system, and, at least according to their reports to shareholders and the SEC, the major oil producers have done very well.
We did need to do something to stem declining production. SB 21 will not accomplish that. Giving away money does not stimulate investment. Incentives stimulate investment. ACES has provisions to give tax credits for reinvestment, but does not do enough to reward production. As the quantity supplied increases the tax rate should decrease proportionately. It could add to ACES and keep an otherwise sound program sustainable and mutually beneficial to Alaska and its Industry Partners. This is simple economics and much smarter than SB 21. When we overturn the giveaway, and rebuke the Governor who lobbied for it, we can create a system that does stimulate production to the maximum benefit of the resource as mandated in our State constitution.
No one is, or will, talk about that. We should be planning, now, about what industry will replace oil royalties and get working to make that industry happen over the next ten to fifteen years. Otherwise we piss it away and its gone.
That the tax cuts are going to flatten the decline, or result in increasing production, I just can't explain (nor have I seen a credible explanation). In that regard, I didn't support them because they are not tied to production metrics/goals, something I would have gladly accepted. In this sense, I do see it as a give away.
I knocked the unions because I see them as the primary organizer tackling the recent tax cut legislation. If it sticks, they are one of the biggest losers. I have no doubt a wide cast of characters will fall behind them. If it reverses, the can gets kicked some years.
Politics is a factor because each side can use these situations to build bases and undermine the opposition. If Democrats can champion a popular issue with the people, the state can end up leaning left as a result. A consummate politician will run to the front of an angry crowd and pretend to be the leader and usually the crowd will follow.
For quite a while, I thought Alaska would avoid this fate, the Gleason opinion being one of the biggest factors:
http://aws.state.ak.us/officeofadminhearings/Documents/TAX/PROP/TAX06SARB Amended Sup Ct decision.pdf
But, what I am realizing is that while TAPS may have respectable flow rates for decades to come, if that oil is not coming from state lands then the state has a revenue problem.
The gentleman who posted the book link up thread has a very interesting vimeo on his site and I have put his book in my wishlist. I will pick up a copy the next time I buy essentials from Amazon.
Anyway, best of luck to all. Not sure how this has a happy ending for those involved in 20 years.