Posts
In the
governor’s Week 7 Oil Tax Message, the governor posts a chart of Oil Production
Trends in four areas: Alberta, Texas, North Dakota, and Alaska. Alberta, Texas,
and North Dakota show increases in production. Alaska shows a decline. The implication
is clear. Alaska is not competitive because of its oil tax structure. This
article will examine that premise.
Alberta
Alberta’s production chart shows progressively increasing
production since 2001. In order for the
governor’s premise to hold true, Alberta’s tax structure should show consistency
since 2001 and certainly should not show any substantial increases in tax
during that time. The problem with the premise is that Alberta passed a New
Royalty Framework in October 2007 that became effective January 1, 2009 during
the time that Alberta saw a constant and substantial increase in production. Alberta’s
government analysts projected that royalties would increase approximately $1.4
billion in 2010 based on the change. In essence the opposite conclusion from
the governor’s premise could be suggested. But the real answer is not the increase or
the decrease in taxes. It is in the Alberta Oil Sands and the technology to
produce oil from the sands.
Texas
The chart representing Texas oil production shows
substantial increases in production starting in 2010. For the governor’s
premise to be validated, Texas would have had to change its tax structure prior to 2010 leading to the increases in production. Once again taxes had nothing to do with
the increases in production. Dr. Mark J. Perry, professor of Economics at the
University of Michigan explained it best when he stated, “The exponential increases in Texas crude oil over the last two
years have been largely the result of the dramatic increases in oil being
produced in the state’s 400-mile long Eagle Ford shale formation in south
central Texas, which was only recently discovered in 2008. Eagle Ford crude
production has more than doubled over the last year, from 120,532 barrels per
day in July 2011 to more than 310,000 barrels per day in July of this year,
according to a recent Reuters report, and now accounts for about 16% of the
state’s monthly oil output. Advanced drilling technologies like hydraulic
fracturing and horizontal drilling have also contributed to an almost doubling
of the Lone Star State’s oil production over the last three years.”
Once again the
change in oil production was a result of advanced drilling technologies, not
taxes.
North Dakota
The North Dakota chart
shows a substantial increase in production starting in 2006. The governor’s
premise would suggest a possible change in oil taxes prior to 2006 created the North
Dakota boom. But the tax structure did not change. The culprit was the Bakken
Formation which now produces 91% of North Dakota’s oil production. Horizontal
drilling and hydraulic fracturing is the reason for the change, not taxes.
Alaska
Much has been written about the decline in oil production in Alaska. But the bottom line is that we have changed the tax structure several times and regardless of the tax structure, the developed fields in Alaska have followed a standard decline curve as they should. The region of state lands between the Colville and the Canning Rivers is a mature region so far as oil is concerned. We can expect that the decline curve will not change substantially based on any tax change.
The bottom line is that
most increases in production anywhere in the world is based on new reservoir
discoveries or changes in technology. I could not find a single region where
substantial increases production was the result of anything other than successful exploration of a new area or
advances in technology.
The governor's premise that the tax structure is the reason for the increase in production in other regions and reason for the decline in production in Alaska is not substantiated by the facts.
