Lowering taxes didn't increase oil output
By Sen. Hollis French & Rep. Les Gara
December 07, 2010
As we enter this next legislative session, it's important to have a fair discussion of the merits of Alaska's current oil tax investment incentives and the tax oil companies pay now, which they only pay when fields are profitable.
In 2009, under Alaska’s current rules, ConocoPhillips earned $1.5 billion in Alaska after-tax profits. It’s earned over $6 billion in profits in Alaska since 2007. In 2009 Conoco’s Alaska profits comprised 1/3 of its profits worldwide. British Petroleum and Exxon don’t report their Alaska profits, but as co-owners at Prudhoe Bay they likely have done well too.
Oil industry campaign ads this fall claimed that if we lowered Alaska's tax on their profits, they’d produce more oil. Unfortunately, history hasn't borne claim that out.
Until 2006 Alaska had a very weak, loophole-ridden oil tax. That system sent far too much of the value of Alaska's oil out of state to Exxon, Conoco and British Petroleum's shareholders.
Here's how it worked. Apart from Alaska's 12.5% royalty, and property and business tax, we taxed oil under an Oil Production Tax called the "Economic Limit Factor", or ELF. Under that tax, 16 of 19 North Slope fields paid less than a 1% tax on their production. They paid almost nothing in Production Taxes whether oil was a slim $9/barrel, or a handsomely profitable $140/barrel.
According to the Department of Labor, in 2006 roughly 10,000 people were employed in Alaska’s oil and gas industry. With a stronger profits tax today, they estimate jobs have increased to roughly 12,000. And according to an estimate from the Department of Revenue in July, North Slope oil and gas investment went from roughly $4 billion three years ago, to roughly $4.9 billion this past year.
A lower tax simply didn’t lead to more jobs or more investment. And we’ve seen more investment and work under our current rules – rules that led Conoco to attempt needed new oil production in the National Petroleum Reserve – something we hope the Army Corps will allow to move forward.
So, what can we do? First, we have to ask for smarter proposals than just lowering the share Alaskans receive for our oil. We should focus on tax incentives that lead directly to Alaska investment, and should craft tax breaks that don’t just let companies take more Alaska profits outside.
For example, under a provision called “Royalty Relief”, we already reduce company royalty payments if they prove the tax break is needed to bring a new field, or field enhancement, on line. Two North Slope fields have moved forward recently under that provision, Oogaruk and Nikiachuk. It’s also telling that few applications beyond these have come in for Royalty Relief – a fair indication that tax breaks aren’t what would lead to more North Slope development.
Smart provisions that bring long term investment - and long term revenue that exceeds the cost of the credits we grant - will help us stem the decline in production, and hopefully reverse it. And we shouldn’t take our eye off the prize. A large diameter gas pipeline will lead to gas field development, and make co-mingled, marginal oil fields more economic to produce.
In the next part of this column we’ll talk more about Alaska’s current rules. In the end, we’d like you to be part of the debate as we work to encourage more North Slope oil and gas employment and production.
About: Sen. Hollis French (Anchorage) and Rep. Les Gara (Anchorage) are Democratic Members of the Alaska Legislature.
Received December 06, 2010 - Published December 07, 2010
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