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Stones & Bones / energy / volume 13 number 7, September/October 2011 DOSE OF REALITY When you are trying to promote something distasteful or potentially damaging to the Alaska public, it often pays to do as Richard Gere sang in “Razzle Dazzle” from the musical Chicago:
That seems to be the course taken in Governor Parnell’s House Bill 110, introduced into the 27th Legislature and subsequently passed by the House—and its companion SB 49, not as yet passed by the Senate. The fake and finagle contained in the companion bills is sort of a double-whammy, involving first a distracting fake punch and then a solid whammy blow. The fake punch is introduction into the discussion of the term Marginal Tax Rate, or Marginal Government Take, examined in detail in Part 2 of this series. By substituting in the marginal rate concept Governor Parnell and other proponents of modifying our current legislation known as ACES (Alaska’s Clear and Equitable Share) have tried to convince us that our oil taxes are way out of line and are in danger of hampering further investment by the oil companies. This is a deceptive argument because Marginal Rate has no bearing on actual Government Take—the portion of net profit that goes to government. Actually, the government take for Alaska oil is about average, not among the highest in the world, as some claim. But hoping that this distracting Marginal Rate fake diverts our attention away from the reality that Alaska is now inviting to oil producers, proponents of changing ACES then deliver the whammy punch. It comes in the form of a finagling scheme called bracketing. Bracketing is just a semi-subtle way of reducing Alaska’s share of oil income. Of course, the acknowledged purpose of the companion bills HB 110 and SB 49 is to lower Alaska’s take of oil profits, supposedly to encourage oil companies to invest more in Alaska. If the proposed reduction were truly called for it could be easily accomplished by a simple, straightforward lowering of the tax rates in our current ACES legislation. Governor Parnell’s proposed legislation does this in part (for new fields) but then also throws in bracketing to create more reduction in a rather obscure fashion. As it now stands, the nominal ACES production tax is progressive with a smooth increase in tax rate starting out at 25 percent when the net value of oil is below $30/bbl. At that point the tax rate gradually increases at a rate of four-tenths of one percent per dollar rise in net value up to net value $92.50/bbl where the tax rate reaches 50 percent. Above that value the rate of increase drops to one-tenth of one percent. If the price of oil were to reach $200/bbl the ACES tax would approach 60 percent of net value and the tax would be near $100/bbl. Whatever the price per barrel, the tax amount is found by multiplying the tax rate by that price—a simple calculation. However, the proposed legislation requires a more intricate computation involving discrete steps in the tax rate, ranges referred to as brackets. Whereas the current ACES tax rate at any price is applied to the entire net value at that price, the proposed legislation dictates that the tax rate be applied only to that portion of the net value within the defined brackets. At first glance this procedure seems innocuous, but after you think about it a bit and look at the consequences you see what it really means: a huge reduction in Alaska’s income from its oil resources.
I almost hate to admit that it took me many hours of pondering over the logic (or illogic) of the idea and going through a number of computations to come up with the accompanying table that shows in detail the radical impact of bracketing on Alaska’s income from its owned petroleum resources. This is a complex table that requires some minutes of examination to absorb, so I try to make it a little easier by presenting a summary in the accompanying graph. But for those game enough to battle with the numbers I proceed with a little walk through the table. The first column gives the price of North Slope oil delivered to the West Coast, and the second column shows the widths of the brackets employed in the proposed legislation, each generally $12.50 wide above net value $30/bbl (West Coast price $55/bbl). As we see in the first row of the table, both the current ACES, the new legislation call for a tax rate of 25 percent from oil fields now producing when prices are such that the net value is below $30/bbl. However, for new fields not yet in production the proposed rate is lowered to 15 percent. Note in Column 3 that each bracket has a progressively higher tax rate then the brackets below. Column 4 presents for new fields the tax for the oil price within each bracket, and Column 5 gives the total tax at the top of the bracket. Note that the total tax given here is the sum of the tax in bracket plus the total tax shown in the entry immediately above. Column 5 also gives the actual tax rate on total net value at the bracket top. Columns 6 and 7 are the same as Columns 4 and 5 except that they pertain to currently producing fields rather than new ones. So what does all this tell us? Focus for the moment on the last two columns in the table. There we see that when the price of oil is less than $55/bbl the proposed legislation makes no changes. Then, as the price rises, the actual tax rates under current ACES and the proposal diverge until at price $100/bbl (roughly the 2011 average price) the actual rate under bracketing has fallen to almost one-third less than current ACES rate. Instead of earning $32.25/bbl under current ACES at that price, Alaska will earn only $22.88/bbl from currently producing fields when the West Coast price is $100/bbl. That is a difference of $9.37 per barrel. This difference amounts to a significant reduction in Alaska’s income from its owned oil resources. Current North Slope production is near 600,000 barrels per day, which amounts to about 220 million barrels per year, so multiplying that figure by $9.37 corresponds to a reduction of roughly $2 billion per year. From the table we can see that if the price of delivered oil is as much as $5 higher ($105/bbl) then the proposed legislation creates an $11.00/bbl reduction in income, and the difference in annual income rises to $2.4 billion. Should the price of oil go up to $120/bbl the reduction in Alaska income is $15.56/bbl, and then the total loss called for in the proposed legislation is $3.4 billion per year.
Thus we see that while the loss to Alaska created by the proposed legislation depends very much on the exact price of oil, the suggestion we have heard that the proposed legislation would result in a $2 billion annual loss for Alaska is essentially correct at current oil prices. Since reports indicate that 5 billion barrels of oil remain to be extracted in the Prudhoe Bay area, the approximately $10/bbl reduction called for at current price means a total loss to Alaska of $50 billion if that price were to pertain over the life of the field. That is more money than is now contained in the Alaska Permanent Fund. Remember that the reduction discussed immediately above is only for fields currently producing. If new fields could be brought in to produce as much as the Prudhoe Bay area does now, then the additional potential loss would be much greater, about $19/bbl, or roughly $4 billion per year at current prices. Clearly, Governor Parnell’s proposal changes ACES in radical fashion to create major reduction to Alaska’s future income. Changing ACES in the proposed fashion will do serious damage to the Permanent Fund. It’s hard to understand all the other possible consequences of the proposed changes, but it might be easier without all the razzle-dazzle to which we are being subjected. And so back to Chicago and a paraphrase of Richard Gere’s song:
Neil Davis is a retired geophysicist and author of several fiction and nonfiction books. His most recent book is The Painting on the Window Blind: The Story of an Unknown Artist and a Daring Union Spy. Neil can be contacted at neildavs@mosquitonet.com. Dr. Davis recently gave a talk and PowerPoint slide show on oil taxation for the John Trigg Ester Library. A copy of the slide show and links to the previous articles in this series are on line at: | ||
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