Arguments Falling on Deaf Ears

This evening I listened to the House Finance Committee debate amendments to SB21, the Oil and Gas Production Tax. I heard Joe Balash, Deputy Commissioner for the Department of Natural Resources state, ”We are taking less in order to get more.” This is a variation of the Reagan Tax cut philosophy. Reduce taxes and grow the economy. Since it worked for President Reagan, why wouldn’t it work for the State of Alaska. Cutting taxes to grow the economy works when you have a potentially expanding pie. The U.S. economy wasn’t a limited resource, and the U.S. economy grew and generated more wealth for individuals and businesses and additional revenue for the U.S. government.

Alaska oil production potential, on the other hand, is a limited resource. State lands on Alaska's North Slope between the Colville and Canning Rivers is a mature region as it relates to oil potential. There is only a minor potential to expand production. You might consider it a marginally expanding pie. The state can encourage new production, but it will only affect production on the margin. In other words, at best, the oil industry will only produce marginally more oil based on a change in the tax. If the Alaska legislature reduces the tax substantially, there is simply not enough oil on state lands to make up the difference. The numbers just don’t work.

I also heard that lower taxes will result in higher bids at lease sales on state lands. There is a failure of logic in this assumption as well. Lower bids at lease sales on state lands are not because of the tax structure, either high taxes or low taxes. Lower bids at state lease sales are because there are no longer any potentially large hydrocarbon structures that might hold significant new reserves on state lands. All the major oil structures on state lands on the Alaska North Slope have already been drilled and explored. The geologic potential on state lands is limited. Any geologist, whether from DNR or the industry, will tell you there are no more “elephants” on state lands on Alaska’s North Slope.

So how will this reality play out at the next lease sale? If the legislature passes a reduction in tax, the lease sale will occur and the bids per acre will continue to remain small, and the higher bids per acre that the administration suggested would occur if the tax is reduced, will not materialize.

Lease bids per acre will not increase substantially at the next lease sale or any sale thereafter if the legislature decreases the tax, but you will not find the administration acknowledging their error or apologizing for their mistake. In fact they will conveniently ignore that they suggested substantially more revenue at the new lease sales based on the reduction in tax. Their failure in logic is they don’t understand that lease sale bids are based on geology, not taxes. They don’t understand that you can’t make up for a substantial revenue shift from the state to the industry based on the potential of new production in an already mature region. They don't understand the financial implications of a significant revenue shift from the State of Alaska to the oil industry. They don't understand that there is not enough oil to make up for the revenue shift. They merely provide scenarios of the new production that is required to make their proposal work. I have already written about the standard upon which the proposal will be reviewed. I wish the numbers were there to make their proposal work, but the numbers simply don't pencil out.

 

It may be appropriate to modify the tax. It may be appropriate to create a better balance between the industry and the state so far as sharing revenue at low and high oil prices, but the argument that the state can transfer a significant amount of revenue from the state to the industry and make it up in revenue from increased production just simply doesn't pencil out.

As I listened to the discussion at the House Finance Committee, I wished the parties could put down their political affiliations. I wished for an engaged discussion of the finances of proposal. I wished for an evaluation of the likelihood of success of the proposal. I also wish that this article would stimulate additional discussion and evaluation of the proposal, but I am afraid my efforts at encouraging debate will fall on deaf ears.

Bummer for good decision-making. Bummer for the people of Alaska.