Huffington Post Canada/CP. Joe Oliver pressed a room of business people in Vancouver on Wednesday to recognize their companies must play a key role in convincing the public their projects are advantageous not just to them, but to everyone. He said future development of resources relies on public confidence, so business must make its case using messaging that is believable.
Decision Makers Should Listen to Keithley and Marks
Commentary by
Dave Harbour
Brad Keithley (NGP Photo-L) recently described in his blog, five recommended characteristics of oil tax reform. We’ll focus on the first one today. 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 additional issues we raise below, we would repeat and rephrase them from our earlier editorial pieces, here and here.
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If effective Alaska oil tax reform is to come, we believe it should ha
ve 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 competing 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. Norway has a high government ‘take’ but offers much more regulatory, judicial and tax certainty (i.e. "A deal is a deal").
Not to single him out, we once asked this of one of the State’s oil and gas consultants: "Have your studies or others put much effort in discounting Alaska’s investment climate based on proximity to markets, labor rates, climate, logistics and Alaska’s track record of instability and unpredictability." He said his own studies did not include that calculus and neither did he believe other studies devoted much if any attention to those cost factors. "Do you think studies should include those factors," we asked. He said, "Yes, I do."
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 (i.e. Alaska’s Clear and Equitable Share) production tax we address today, the State Oil & Gas Income Tax, the State Oil and Gas Property Tax and the Royalty payment. That burden might reasonably 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. Alaska’s rapid production decline and the years required to remobilize investment enthusiasm for Alaska require quick action.
One could logically argue that Alaska’s tax/royalty burden should be further discounted to ‘low median’ based on the above factors and 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 finally suggest to the Administration and Legislature that while Alaska studied the effect of ACES (Alaska’s 2007, retroactive production tax) hardly at all before putting it into effect, it has spent far too many years avoiding reform. It has avoided decisive action by skillfully creating study after study to consider and further consider the infinite economic impacts that unexpectedly erupt when politicians seek to manipulate the private sector, too much.
As tax reform delay continues, someday the window of opportunity for change will pass by and it will be too late.
Ref. KPMG ACES Analysis; Governor’s Review of the Effects of Depleting Production
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