11-29-12 Alaska Oil Tax Reform

Brad Keithley (NGP Photo-L) recently described in his blog, five recommended characteristics of oil tax reform.  He liberally quoted from the good works of Alaska oil and gas economist, Roger Marks (NGP Photo).  We commend the combined thinking of these analysts to our readers.  While both have put thought into the issues we raise below, we would repeat and rephrase them from our earlier editorial pieces, here and here.

If effective Alaska oil tax reform is to come, we believe it should have Keithley’s first recommended characteristic of competitiveness, as further described by Marks.  But we also believe that decision makers should further discount Alaska’s investment climate by quantifying to the extent it can be done, other critical yet often ignored liabilities of America’s 49th State.  While oil and gas competiting regimes may offer lower marginal rates, most are also located at tidewater, not needing 800 mile pipelines to move crude oil to a shipping point.  Most are located in temperate zones where climate related costs are lower.  Most are not as remote, providing lower costs of logistical support.  Most are closer to their markets, providing an array of lower costs.  Most competitors offer lower labor costs than Alaska.

We agree that for Alaska to be competitive it must quickly reform its oil tax/royalty burden.  That burden consists of the highly predatory ACES production tax we address today, the State Oil & Gas Income Tax, the State Oil and Gas Property Tax and the Royalty payment.  That burden should be found somewhere in the median of tax/royalty burdens imposed by our competitors.  To the extent that decision makers maintain a tax/royalty regime that is higher than median will investment decisions be deflected to more competitive areas.   One could logically argue that Alaska’s tax/royalty burden should be ‘low median’ based on Alaska’s track record as a producing province that, 1) changes the rules of the game after investments are made, and 2) is not the least bit embarrassed about doing so retroactively.

We therefore suggest to the Administration and Legislature that while Alaska, studied the effect of ACES (Alaska’s 2007 oil tax, retroactive to 2996) hardly at all before putting it into effect, it has spent far too much time and effort avoiding reform partly by creating study after study to consider and consider further.