Alaska's loose definition of 'new' oil is bad public fiscal policy
Pictured: BP's Parker Rig 272, which is drilling into the Lisburne Reservoir at drill site L3 in Prudhoe Bay on Friday, May 22, 2015.
Spanish oil corporation Repsol in partnership with Armstrong Oil of Denver has announced a “significant” discovery of “good quality” crude oil on Alaska's North Slope. Testing from 16 vertical and directionally drilled wells projects a structure covering 25,000 acres. It would appear as though SB 21, rebranded as the "More Alaska Production Act," is working like the Alaska Legislature’s oil caucus said it would.
During the 2014 initiative to repeal SB 21, the oil caucus argued that significantly reducing Alaska oil taxes from the windfall-based ACES system would change the corporate bottom line resulting in more exploration and production. Unless you worry about hydrocarbon emission-caused global climate change, or the health and subsistence impact on the nearby villages, in this case Nuiqsut, what’s not to like about the Repsol/Armstrong announcement?
Well, it reflects what is wrong with our current oil tax system.
During the debate over SB 21, UAA economics Professor Emeritus Scott Goldsmith caused a stir by pointing out that when oil prices are low, SB 21 would actually bring in more production taxes than the previous ACES system. That, of course, has become reality, with average oil prices dropping from over $100 per barrel a year ago to just over $50 in January, and now climbing to over $60 per barrel. However, few seem to have read Goldsmith’s complete report. Toward the end he asks: Why would oil corporations be in favor of a tax system that may actually raise taxes at the low per-barrel-price end?
The answer is "new" oil.
Compared to ACES, SB 21's maximum base production tax rate is higher for old oil (35%), but it removed the progressive windfall profits tax of ACES, and added incentives for new production. That, coupled with low prices, has given us the financial options of today. But new oil is taxed in a scheme that could lead to low, even negative rates (i.e. the giveaway).
The issue is what is new and what is old oil. New oil should be from a brand-new, never-before-tapped, underground reservoir. But the Legislature also considers the many smaller untapped reservoirs within existing oil fields to be a form of new oil. Moreover fracking, a permitted technique on the North Slope and Cook Inlet, is designed to create movement of hydrocarbons into recoverable pockets within known fields. Directional drilling also blurs the boundary between old and new oil. It is possible to directionally or slant drill from a well head to a reservoir 6 miles away and a mile deep. When the oil comes bubbling up is it new oil or just a new well into an existing reservoir?
Current tax policy has a clever way to transform old oil from a known reservoir into new oil. A fracked or directionally-drilled pocket in an existing field can be given a tax credit of as much as $8 per barrel in existing fields when oil prices are low, as they are now. In effect we have to trust the corporations to report net profits tax liabilities on the basis of old oil (35% maximum base rate) or new oil (approaching 0%).
No wonder the oil companies spent $20 million dollars in advertising and who knows how much in Internet trolling to convince Alaskans that it is not in their best interest to transform oil wealth through taxes into education, basic services, public infrastructure, police and fire protection, and alternative energy infrastructure.
A key part of the strategy is to keep state spending low because the need for services creates public demand for higher oil taxes and/or other forms of revenue. The Republican petroleum caucus debacle of 2015 is predictable given the broader context of corporate strategy. Surely everyone in the Legislature knew at the start of the session in January that they would have to utilize the Constitutional Budget Reserve to keep the government intact and negotiate in good faith for a fundable budget. Instead the Republican caucus has shamefully but predictably rejected initiatives like Erin’s Law to provide K-12 public education dealing with child sexual assault, federally funded Medicaid expansion, and education funding. (Of these, the bullying tactics of Sen. Mike Dunleavy regarding Erin’s Law is the most despicable.)
The oil tax system needs to be overhauled. Make it a straight severance tax: the oil and gas that leaves the state is taxed at a rate set around the middle of that of comparable nations and states. No new oil, old oil, production credits, legacy fields or any other incredibly complex scheme that can be manipulated by multinational corporations to the detriment of Alaskans.
And the voters of the state of Alaska need to have long, long memories in the next several elections.