Technology or Tax, Week 7 in Review

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.