Single Page
Alaska oil tax debate: Playing ACES highTax reform critics are continuing to try and bluff their fellow Alaskans into believing the state's oil tax regime is competitive. For the sake of Alaska's economic well being, they should start being honest about the cards we're playing. The fact is lawmakers are playing ACES high. One of the bedrock arguments proffered by critics who oppose reforming oil taxes is that compared to other oil producing regions, Alaska is right in the middle. This is false. Here is what retired University of Alaska Professor Neil Davis and a member of an anti tax reform group, wrote in defense of the current tax regime.
The diagram Davis is referring to is shown below.
While the simplistic view of the data shows Alaska ranks as the twenty-sixth highest-taxing region in the global marketplace, drawing a conclusion based purely on the state's place on the list isn't accurate. What really matters is the color of the box next to the regions who levy higher taxes. Out of the 25 higher-taxing regions, seventeen of those have production sharing contracts, four have service agreements and only four have a conventional royalty/tax system like Alaska. In short, an apples-to-apples comparison of similar royalty/tax regimes shows Alaska ranks fifth not twenty-sixth, as the highest-taxing oil region in the world. In all, 14 of the top 15 taxing regions in the world have either production sharing contracts or service agreements. Why these numbers matter is because both production sharing contracts and service agreements offer the oil industry a higher degree of return and risk containment that offset their higher tax rates. In countries that offer oil producers production sharing contracts, the company shoulders the financial risk of the initiative and explores, develops and ultimately produces the field as required. When successful, the company is permitted to use the revenue from produced oil to recover capital and operational expenditures, known as "cost oil." The remaining money is known as "profit oil," and is split between the government and the company, typically at a rate of about 80 percent for the government, 20 percent for the company. Production sharing contracts are popular in countries that lack the expertise and finances to develop their resources and wish to attract foreign companies to do so. And while any investment contains risk, the psc allows companies to contain their risk by being assured that if a discovery is found, they will recoup their initial capital investment along with an agreed upon return. It's only after these expenses are recouped by the producers that the high tax rate kicks into play. However that information is never disclosed when tax reform opponents trot out their comparative tax analysis graph. Service agreements are similar to a production sharing agreement in the sense that they limit the companies risk and provide an agreed upon return for investments. Again, it's only after the agreed upon return has been realized that the high rate of taxation is levied. In Nigeria, one of the regions listed as higher than Alaska, exploration and development costs are paid in installments over a period of time and the contractor has no title to the crude oil produced, although they can be allowed the option to accept reimbursement and remuneration in oil. As an incentive for the risk taken, the contractor has the first option to purchase certain fixed quantity of crude oil produced. Again, it's only after the investment costs have been fully recovered that the high rate of taxation is levied. Arguments about the effective tax rate and marginal tax rate of ACES have been confused by many people: some of these people are ignorant and some people are intentionally crooked. The Alaskan Legislature contracted with former State of Alaska Department of Revenue "ECONOMISTS" to do a financial analysis of ACES. These contractors produced a study which should have been done by FINANCIAL ANALYSTS ... NOT ECONOMISTS. These contractors made serious errors in their report and mixed APPLES WITH ORANGES to produce miss leading GARBAGE! How was this over stating of ACES impact done? First, the contractors added Alaska production taxes to (1) Alaskan petroleum property taxes, (2) Alaskan multi-state petroleum corporate income taxes, and finally (3) federal corporate income taxes. This is incorrect financial analysis for many reasons. Alaskan ACES oil production tax rates is ONE ISSUE. Adding all of the other state and FEDERAL INCOME taxes to ACES is a trick to overstate the actual ACES impact (at any market price netted back to Alaska). The contractors try to hide this trickery by inter-changing terminology: ACES marginal tax rates BECOME a magical new term "TOTAL GOVERNMENT TAKE". This gamesmanship is inappropriate to correct financial analysis! Not only is this not correct in study of ACES tax impact ... the contractors misapply Alaskan petroleum corporate income tax rates by overstating them 25%. Even worse, the contractors assume in their gobally-gook "TOTAL GOVERNMENT TAKE" ... FICTION ... that federal corporate income tax rates are effective at 35%. In fact, recent federal corporate income tax EFFECTIVE RATES for EXXON-MOBIL and CHEVRON have ranged between "0" and "2"% in recent tax years. Thus, the analysis presented is GARBAGE. And remember that the ACES tax issue HAS NOTHING: (1) in common with federal tax policy or (2) to do with correct financial analysis, or (3) to do with ROYALTIES. Mixing taxes with royalties is totally improper! Ignorant people are tilting at windmills, i.e., fools are using specious arguments in FINANCE, ACCOUNTING, and TAX CODE issues. The real rate of ACES tax impact varies as market prices change in far away refinery markets. At lower refinery market prices netted back to Alaska, the ACES tax rate is about 16%. This percentage is due to ACES tax credits and ACES cost allowances. At higher refinery market prices, ACES tax rates rise so that Alaska shares in the bounty ... not just the oil producer! At refinery prices in the $140-$160/B range, the ACES tax rate reaches about 50% of what oil producers get at the wellhead. These ranges are hardly what ignorant people shout. ACES tax rates are not the sum total of production taxes, other property taxes in Alaska and elsewhere, Alaskan and federal corporate income taxes, other taxes on service stations, product pipeline and refinery property taxes, and federal and state excise taxes on petroleum products. Adding royalties to the sum of the "TOTAL GOVERNMENT TAKE" is extremely prejudicial to a American state with its own public lands. A jokester would say that this approach was "MIGHTY EAST COAST IN VIEWPOINT OF THE CONTRACTORS BUT THAT IT IGNORES WHAT ALASKA OWNS", but many in the Alaskan public would not get the joke. The joke that the contractors played is not funny. ACES tax rates are correctly analyzed as ONLY ACES taxes. Some one in the State of Alaska legislature has been paying the wrong people to do incorrect an analysis of the ACES tax issue. Economists are not professionally trained, licensed, or qualified to do this kind of study. Alaskan petroleum corporate income tax rates have been applied incorrectly. Federal corporate income tax rates which are effective on companies like XOM, Chevron, and BP HAVE BEEN APPLIED TOTALLY INCORRECTLY. Some one representing the State of Alaska should point by point cross examine the qualifications, assumptions, and findings of those persons arguing that ACES rates are 90%. This is fraudulent and it ought to be examined when witnesses are under oath!!! Some would say that existing Alaskan oil producers would find it better in places like North Dakota where there is a drilling boom. The answer to that specious argument is simple: THEY DO NOT HAVE ANY ACREAGE ON WHICH TO DRILL IN NORTH DAKOTA. Some one should check out who owns the rights to drill on acreage in North Dakota, Montana, and GREENLAND? The real issue is how to increase heavy oil production on the North Slope and how to transport it down the Alyeska Pipeline. When oil producers MAKE INVESTMENT to produce these 35,000,000,000 barrels and how to transport it, they should receive ACES credits for development of that significant, important field. Natural gas and solvents based on natural gas may been necessary to make that valuable production possible. Thus, ACES tax credits would be made for investment in development and transport of that oil. Companies deserve to be rewarded for that effort and the results of that effort. Mr. Halco rightly points out that several types of agreements exist between owner governments and oil producers and that these differ in the amounts of risk involved in investments by the producers. He notes that in most major provinces production sharing agreements are in effect wherein the producers and owners share in the profits earned after all capital investment, production costs, and transportation costs are deducted. The universal measure of that sharing is called Government Take which is defined as the percentage of net profit (or profit oil) going to the owner government, the producer share being 100 percent minus the government take. Mr. Halcro states that the typical government take is about 80 percent, leaving the producers 20 percent. In most cases, the ratio government take/company take is fixed, regardless of the price of oil. The situation for Alaska’s North Slope oil is more complex because the government take has several components that include royalty income to Alaska, Alaska and federal income taxes, local property taxes, and the progressive ACES production tax. The royalty income is fixed at 13 percent of the wellhead price minus transportation cost, but the ACES tax is—as in the standard production sharing agreement—applied only on the net profit (profit oil) and does not apply to the 13 percent royalty oil. Further complication is involved because the ACES tax structure awards additional credit for capital investment, making Alaska an investment partner with the oil companies. Evidently that sharing of risk is having a positive influence on the increasing interest by petroleum companies in exploratory drilling in the state and a factor in the current high petroleum industry employment in Alaska. It’s difficult to determine exactly what the total government take is for North Slope oil operations, in part because of oil company secrecy and in part because Alaska’s Department of Revenue seems unable to process the information it has in order to know how much money we are contributing in tax credits. Only Conoco Phillips is required to provide key data, and based on that information, the total government take for North Slope production since ACES has gone into effect ranges between 54 percent and 69 percent, well below the 80 percent that Mr. Halcro states is typical. I liked Mr. Halcro’s closing statement, “Those who understand the proper context of industry data like comparative tax charts, employment statistics and marginal tax rates, are trying to reason with those who don't.” Makes me wonder if he’s trying to reason with me, or if I’m trying to reason with him. "In short, an apples-to-apples comparison of similar royalty/tax regimes shows Alaska ranks fifth not twenty-sixth, as the highest-taxing oil region in the world." Please..........The oil companies supplied the apples. A quick look at industry sector mutual funds gives you a clear view of who is doing well and who is not. Look at year to date returns. While the majority of funds are in the negative numbers, there are three sectors that have outstanding double digit positive gains. The Oil Industry Healthcare Finance Go figure. A quick gut check concludes that yes I feel like for the last five years we've been screwed by all three more than rest. "Those who understand the proper context of industry data like comparative tax charts, employment statistics and marginal tax rates, are trying to reason with those who don't." -So we should just hitch our wagons to all those lying companies and their media shills because we`re not as educated as you Andy? We`re not smart enough to discern for ourselves when we are being extorted? You would have fit in well with Marie Antoinette`s crowd. Andy.. figures lie and liars figure. Now lets sit down and open the books to public scrutiny as much as possible before we go giving away Alaska`s fair share. These guys are making record profits quarter over quarter under the current system Andy. Quit crying for them. Put Alaska first for a change. Comparing us to Nigeria (the war still going on there Andy?) is ludicrous. Your telling us these companies are flocking to Nigeria because Alaska takes too much of it`s own resources? How is 7 billion out of 24 too much? If that`s not a fair cut for the owner I`ll eat my hat. We basically have a production sharing agreement or similar financial agreement with big oil, Andy. The total cost so far is four billion dollars to the State of Alaska. I would hope that Alaska would not have to give an additional ten billion to induce big oil to continue making a profit. Andy, your graph is impressive and I see a lot of effort. Wish all that effort was done for Alaska instead of big oil. I agree with "common-sense", keep renting those cars. The disclaimer, "The views expressed here by Mr. Halcro are the writers own.......obviously. Mr. Halcro seems to indicate Nigeria while 69th in his tax ranking offers big oil a better tax/production deal than Alaska, wrong! Mr. Halcro forgot one very important factor, the cost of doing business in Nigeria. The Nigeria, in his example has no unions, no minimum wage nor environmental controls to name a few which make it really cheap for big oil to conduct business there without concern or penalty. Here is the BBC report on "Nigeria: World Oil Pollution Capitol" http://www.bbc.co.uk/news/10313107 It is so bad that now even Amnesty International is getting involved in the effects of oil development and uncontrolled pollution. And weren't the big oil company's happy as pigs in you know what when ACES evolved? Now the scale has tipped and like spoiled tots big oil threatens to take their toys and go home. Perhaps Alaska would be better served by a greater number of small oil company's then those of political contribution prowess. So unless you are gunning for a career change Mr. Halcro, my suggestion would be to stay in the rental car business as many economic indicators are leaning to an increase in Alaska travel. My vote is for the oil tax to remain unchanged as like most Alaskans who do not desire a personal income tax to replace it. ..so we`re not in, or in the "middle" Andrew. So what? Do you want us to get in a race to the BOTTOM of the tax barrel with all those other places? No thanks! We know they are making record profits and good for them. Alaska was denied it`s fair share for decades due to corporate finagling and political corruption. I`m glad Sarah Palin cleaned your clock when you ran for governor and got 9% of the vote. If you had won we would be about 15 billion short in the state`s bank account right now! And that`s a fact jack. Alaska made the right call that time thank goodness. The question isn`t whether we are in the middle or not of the tax regimes..that is not the determinant here and you know it. It`s control of the basins and the stream and the spigot, and access to TAPS and the provision for facilities for new explorers and producers. The three musketeers on the slope have control (so they think) and they don`t want to give any of it up. And they will do nothing they were not truthfully planning on doing anyway, regardless of the tax. Taxes are just not the determinant. This is more smoke and mirrors from Mr 9%. Andy`s best side. He must be popular down in Houston and London. This is about greed, and extortion of the good people of Alaska. That`s the way this Alaskan see`s it. That and a buck fifty might get you a cup of coffee. |
Comments