Roadmap to a Fair Tax

First, a fair tax on oil and gas will not result from “negotiations” with the producers even though it may be a good idea to meet with them to discuss and hear their concerns with the present fiscal system prior to and during any proposed changes to the current tax system.

Generally the producers will oppose what they don't agree with and aggressively oppose what they really don't agree with. The question is how to get the producers engaged in a way that creates productive exchange. The answer is you open up a public dialogue about oil and gas taxes. In that discussion they will explain what they don't like but not help you draw a line on what would be acceptable to them. Their goal will be to continue to put downward pressure on the system and to achieve the lowest tax they can achieve. That position does not allow them to support any tax changes even if the changes would be better than they are now. Their answer will be "that is not good enough." They will also not commit to additional exploration or additional investment based on a tax change.

With that in mind what is required is to get as analysis through models you can trust and try to develop a fair tax. During that analysis you will need to filter the comments made by the producers and figure out if what you are doing is fair based on their negative input. Here is how I would go about the analysis. First, separate analysis should occur for oil and for gas. The pipeline tariff on gas and the substantial volumes of gas that need to be transported to make a reasonable profit makes gas economics substantially different than oil economics.

A fair tax on gas includes an understanding of the possible range of tariffs for a gas pipeline. But the actual cost of the pipeline is not the critical element. The gas tax, like the oil tax should be fair at a range of prices from a marginal net value to a value of gas that is “wildly economic” as some used to say.

Once you distinguish the differences in economics between gas and oil, then break down the discussion between the different economic types of production and exploration, i.e., major know oil fields like Prudhoe and Kuparuk, extension exploration that extends the limits of the fields or that finds puddles near infrastructure, heavy oil production in those fields, known fields like Point Thomson which are large and have economic potential under the right circumstances, smaller marginal fields, exploration on state lands, exploration in NPRA, exploration offshore - state lands and fed lands. On offshore prospects distinguish prospects that can be explored from onshore and from bottom-founded rigs from exploration that must be conducted in the summertime from floating structures. Distinguish the Chukchi from the Beaufort. Recognize that we get no revenue from the Chukchi or Beaufort OCS but we should continue to pursue it (exploration and revenue). Next a comparative economic analysis should be done with other oil and gas provinces to determine the competitiveness of Alaska exploration and development from those in other provinces. Once you understand the relative economics of each of the above variables you can then begin to discuss deductions and credits vs reduction in tax.

Regarding progressivity - I still like some form of progressivity, but we need to remember that progressivity was based on a contractor spreadsheet that modeled Prudhoe Bay development, the most economic of all oil and gas development in Alaska. We knew at the time that there was a possibility that the tax might be too high. The bellwether areas for negative impact due to the tax would be heavy oil and exploration. We now have enough data to begin to see the impacts of the tax on exploration and heavy oil production. BUT we must always remember GEOLOGY IS KING. If the prospects aren't there, the producers won't explore no matter how low the tax. What we can't determine is if the producers aren't exploring because they think the taxes are too high or because the prospects are poor.

What we do know is that there is plenty of heavy oil and the producers aren't pursuing it aggressively. So there is a strong likelihood that economics are affecting the producers' desire to develop heavy oil on the North Slope. A discussion regarding the economics of heavy oil would be a productive discussion for the governor and the legislature to have with the producers.

If the legislature conducts the above analysis, it will have sufficient basis and understanding to make good decisions regarding one of the most important issues facing the state this year.