Posts
At times in Alaska’s history individuals saw a vision of what Alaska could be and committed themselves to the success of that vision. The purchase of Alaska from Russia, the discovery of gas in Cook Inlet, Alaska Statehood, the discovery of oil at Prudhoe Bay, the creation of the Permanent Fund; each took vision, each took commitment, each took leadership, each took work, each carried a substantial amount of risk of success, and each resulted in a significant change to Alaska’s future. Each was a decided break with the past. Sometimes in history choices need to be made. Sometimes a specific direction needs to be taken. Sometimes decisions need to be made. If those decisions are not made, opportunities escape. Sometimes life really is an either/or world.
It is time to either develop a strategic plan to develop and produce Alaska’s resources or muddle along and see Alaska’s future dwindle away.
It is time to either choose a direction and develop a plan for an Alaska Gas Pipeline or allow the opportunity to pass Alaska by.
It is time to either address Alaska’s long term fiscal needs or inherit the results of indecision 20 years from now.
If Alaska wants a gasline; if Alaska wants to see continued production; if Alaska wants continued oil and gas exploration and development in its future; if Alaska wants future generations to inherit a strong stable economy, it is time for action.
But merely taking action without evaluating what action should be taken is irresponsible. Those who want do something because it is better than doing nothing at all are misguided. Change must be based on rational analysis. A good strategic plan will analyze the State’s resources and strengths. It will analyze the impediments to success, and it will develop a plan to move forward that hopefully increases the likelihood of success and reduces the likelihood of failure. So what are Alaska’s resources and strengths? What are its weaknesses? And what would a viable strategic plan look like?
Alaska’s strategic resources
1) Prudhoe Bay/Kuparuk – North Slope oil production has provided Alaska with substantial wealth in the past and can continue to be the base upon which Alaska builds its future. The goal regarding Prudhoe should be to create a fiscal environment where the producers have incentive to:
a. Maximize the production from currently discovered reservoirs
b. Encourage exploration for satellite fields close to development
c. Encourage development of heavy and viscous oil
2) Alpine/Colville River/Eastern NPRA Development – Discoveries have been made here but development of additional reserves has been stalled due to permitting delays. The goal for this development region should be to:
a. Work with producers and state and federal agencies to bring these known resources to market and to develop the infrastructure to encourage additional exploration.
b. Northeastern NPRA is one of the few areas onshore North Slope where there is still potential for finding significant oil reserves. Work with the various stakeholders, including the North Slope Borough, the village of Nuiqsut, and the federal and state agencies to develop an environment where cultural values are protected and development can still occur.
3) NPRA in general – encouraging exploration of the rest of NPRA is somewhat a waste of time until and unless the gas pipeline issues are resolved. A recent report by the USGS titled “2010 Updated Assessment of Undiscovered Oil and Gas Resources of the National Petroleum Reserve in Alaska (NPRA) makes it clear that the largest potential for undiscovered oil lies in northeastern NPRA and the largest potential for nonassociated gas resources is in structural plays in southern NPRA. If the gas pipeline issues are resolved, NPRA exploration will once again become viable.
4) OCS Beaufort Sea/Chukchi Sea – OCS development will not add much to the State general fund because the state receives no royalty from OCS development and it does not have the power to tax that development, but oil discoveries from the OCS will extend the life of the TAPS oil pipeline. And if a gas pipeline is built, exploration for gas in the OCS will also increase. The North Slope Borough is currently opposed to all exploratory drilling that cannot be done in the winter from an ice island or from a bottom-founded drillship. They oppose all summer exploration that must be done from a floating drillship because of concerns about oil spills and how those spills might affect the bowhead whale and other marine mammals. The state needs to work with the North Slope Borough to see if there is a way that exploration can move forward in open water without their opposition. If a way cannot be found to resolve the North Slope Borough’s concerns, OCS exploration and development will probably not occur in the near term. And if it does occur, it will happen only after costly and time consuming litigation.
5) Point Thomson – enough has been said about Point Thomson in previous posts. It is time for the State and ExxonMobil to resolve their differences and move ahead with this project.
Alaska’s strengths
1) Alaska has the ability, given the proper leadership, to respond to circumstances and change course quickly. This is one strength that most other states are incapable of. Most other states take years to make minor changes to the direction they have taken, but Alaska is unique in that it can recognize circumstances that require a change in course, and it can respond quickly to take advantage of opportunities that may present themselves.
2) Alaska has funds in reserve. Alaska has its Permanent Fund and billions of dollars in savings. Revenue in reserve always provides options.
Impediments to Success
Alaska currently has no vision regarding an Alaska Gas Pipeline. Some want an instate line, some want a trunk-line to Fairbanks, some want to export the gas to the Pacific Rim, some want to stick with AGIA, others are rooting for large diameter line through Canada but don’t believe in AGIA. What is clear is that a State divided over this issue will not succeed.
Proposed solution
So how do Alaskans wade through all the options to come up with the optimum outcome. The first question to ask is what does Alaska really want? If Alaskans could choose from all the above outcomes, which one would they choose? Which one would have the greatest benefit to the people of Alaska? Actually, the answer is clear. A large diameter pipeline, if it can be built, would have the greatest benefit for the people of Alaska.
Then what about an AGIA line vs a pipeline to tidewater for an LNG project vs a non-AGIA line? These are actually questions that don’t need to be answered today. A line to tidewater vs a line through Canada are commercial questions that the owners of the gas will decide at the open season. They are questions that don’t need to be decided by the legislature.
Well what about an AGIA pipeline vs a non-AGIA gasline? Are the remaining benefits of AGIA worth $500 million?
First, the 20 “must-haves” of AGIA have either been accomplished or created no additional value when the Act was passed. See the previous article on this blog titled “Analysis of the Twenty “Must Haves” of AGIA” posted September 15, 2010. It is clear that the only remaining value of AGIA is the $500 million in exchange for TransCanada continuing to move the project forward through the filing of the FERC certificate.
Some have argued that the data collected and the documentation created, if the state allows it to be used by the new consolidated group of TransCanada, ExxonMobil, ConocoPhillips and BP, may save the project up to a year in getting to a project sanction decision. Others have said it is just wasted money that should not be spent on useless paper. If there is value to the $500 million reimbursement, this is where you would find it.
With all that said, AGIA doesn’t really matter. Currently there are two competing projects. Ultimately there will only be one project and AGIA will be immaterial to the successful outcome of that project. The key question for the state is what can the state do now to increase the likelihood of success of that large diameter gas pipeline project.
Elements of a successful large diameter pipeline strategic plan
This is the area where the need for a strategic plan is greatest. A disjointed, non-directional plan here will result in failure. A strategic plan for success requires leadership. It requires broad support from affected stakeholders. And it requires specific actions to address specific problems and concerns.
1) A fair gas tax – the issue of a gas tax must be addressed. It is interesting that the oil tax has garnered a substantial amount of energy and effort, but discussion of the tax on gas is non-existent. The idea seems to be that the State will wait for the producers to come to them and tell them what is needed. This apparently will come in the form of conditions for committing gas to the pipeline. This thinking is not logical, and the state will eventually find that the information obtained from a failed open season will not result in a specific proposal from the producers. The producers will only reiterate what they have stated in the past – that the state needs to provide them with fiscal certainty/stability and a fair gas tax. It is time for the state to start the discussion regarding a fair gas tax. Do the research. Acquire the information necessary to make a reasoned decision, and pass a fair gas tax.
2) Fiscal Certainty/Stability – the producers say they need fiscal certainty because they are concerned that if the state is running short on revenue to balance its budget, the legislature will change the tax on gas once the gas pipeline is built, thus changing the economics upon which the producers committed to ship their gas.
Fiscal certainty can take many forms. Certainty can be created by contract; it can be created by an amendment to the State Constitution; it can be created by statute, although the producers have said they are not comfortable with certainty created by statute because the legislature in the next legislative session can change the certainty provided for in the last legislative session. Another form of certainty can be created by making sure that the legislature cannot change the tax on gas in order to resolve its short term financial problems. If the gas tax was not available to the general fund, a certain level of fiscal certainty would be provided to the producers. The producers have not taken a position on this form of certainty and whether it would suffice to meet their concerns, but it is one option that should be considered.
3) Risk Sharing – If the state is truly committed to a large diameter pipeline project, it might consider sharing some additional risk in the construction of the project. The two easiest means for sharing risk are 1) participation in the ownership of the pipeline, and 2) committing to ship the state’s royalty gas on the pipeline. Both of these options have been considered by prior administrations, and there is a significant amount of analysis available to the legislature if it would like to pursue either one of these options.
Summary
In summary, a great opportunity lies before the state. The state can either commit the effort and resources necessary to make a large diameter gas pipeline project a success or the state can prepare for the gradual decline of its resource base followed by a dependence on the Permanent Fund to finance governmental services in addition to whatever taxes the people of Alaska agree to pay. It’s an either/or world, and it’s time to choose.
Thursday, February 10, 2011
Wednesday, January 26, 2011
THE REAL COST OF THE GOVERNOR’S PROPOSED OIL TAX CHANGE
Recently Governor Parnell addressed the Alaska Legislature in his State of the State address. In that address he mentioned his proposal to lower taxes on oil but did not go into any great detail regarding the proposal. For perspective I have included herein the entire paragraph from the governor’s speech regarding the need to lower oil taxes:
“So the question tonight is, how do we continue growing an even more vigorous and diverse economy? And how do we create that gravitational pull for private-sector investment and job growth? It takes four things: keep taxes low, gain access to our resources, invest in Alaska energy, and strategically expand undeveloped resources. That's why this year I'm asking that we work together to lower taxes on oil, and create more jobs in Alaska. Let's build off the success of last year's tourism head tax reduction that pulled more investment to Alaska. Let's pass legislation to make our oil tax regime more globally competitive. Lower taxes lead to more resource development, and that leads to more jobs for Alaskans.” – Governor Parnell
House Bill 110 was submitted to the legislature at the request of the governor to address his recommended changes to the oil tax. According to the Department of Revenue fiscal note, the tax change could cost the people of Alaska approximately $5 billion over the next five years. But the tax is not just a five year tax. It affects all existing and future producing properties in the State of Alaska for the life of the leases. So why has the impact been projected to cost $5 billion? A quick look at the nature of fiscal notes gives us the answer. The impact of the tax change was projected to be $5 billion merely because of the relatively arbitrary reason that fiscal notes are only required to identify impacts for five years. The real question someone should ask is, “What happens in year six and every year thereafter?” The answer they will find is that this is not a $5 billion tax. It is a tax change that will cost the people of Alaska in excess of $10 billion over the life of the leases.
So what does the governor propose the people of Alaska get for their $10 billion? The answer is more jobs and hopefully more oil and gas exploration and development. But how do we know if this is a good deal?
Alaska jobs makes a good emotional appeal but certainly cannot justify the price tag of $10 billion. The only way to justify a tax change of this magnitude is through exploration and new production. The following examines the value of the proposed tax change to bring about new exploration and production.
Impact of the tax change on exploration and production
To determine the impact of the proposed oil tax change on production and on production from successful exploration it is important to first determine the projected production based on the current tax system. The best source for that information is the recent Department of Revenue, Oil and Gas Production Tax Status Report to the Legislature dated January 18, 2011. On page 10 of that report the department displays a chart showing production from all existing and discovered fields that the department expects will be produced between now and 2030. This is the Department of Revenue’s projection of present and future production based on the current oil tax without the proposed changes.
Impact of the tax change on production
Changes to the tax should see significant increases in production in addition to what has been identified in the chart. The problem is that state land, from the Colville to the Canning Rivers, is a mature province for oil production. We should not expect to see nor project discoveries in this area of anything greater than what we have seen over the last ten years, basically incremental satellite production which will, at best, reduce the production decline curve but should not be expected to increase production substantially over the next 20 years. The state will not capture a lot of incremental value here.
In terms of the legislation, the section that amends Alaska Statutes 43.55.011(e)(1) and (g)(1) reduces the oil tax by over $10 billion over the term of the life of the leases on the currently producing units with the hope that this change will increase exploration and development to sufficiently offset the tax change. The likelihood of this occurring on state lands is almost nonexistent. The only hope of significant additional production on state lands comes from increased production of viscous and heavy oil which will be addressed later in this article.
Changing the tax structure on existing production will only incentivize the producers to increase production in the existing fields which, as I have said above, will not occur to any major extent because of the maturity of the existing fields. In addition a tax change of this magnitude will have a significant impact on the future revenue of the state.
The Department of Revenue on January 25, 2011, made a presentation to the Senate Finance Committee regarding the Fall 2010 Revenue Forecast and a 10 year Revenue/Spending projection. On slide 9 of that presentation the department showed their projection of the potential revenue surplus over the next 10 years based on estimated revenue and spending projections. The tax change as proposed in HB 110 would all but wipe out this projected surplus and by the year 2021 would probably result in a deficit. The legislature should assure itself of the value it expects to receive in exchange for such an extreme change in the future revenue picture of the state.
Impact of the tax change on exploration
Changes to the tax structure on existing production will not incentivize exploration. Only changes to taxes on production discovered through exploration will incentivize exploration and the only place where significant oil exploration can still occur is in NPRA. The OCS still has significant potential for oil exploration, but the state has no power to tax the OCS oil; so I have not included it in this discussion.
The changes to the tax structure to incentivize exploration is a good idea because the geology of the NPRA is not all that impressive. Analysis by the Department of Energy, National Energy Technology Laboratory suggests that we can expect to find a few fields similar in size to Alpine and a number of smaller fields but nothing the size of Prudhoe Bay. And the most prospective area around Teshekpuk Lake near the Barrow Arch is currently off limits because of cultural and environmental concerns. The proposed changes to the tax structure for exploration do not cost the state any revenue from current production. It only provides that if oil companies will explore for oil in Alaska, they will pay less tax on that oil. The tax incentive may not be enough, but it is a step in the right direction.
You cannot incentivize an oil company to explore for oil where they believe none exists, but you can incentivize an oil company to explore for oil where they believe oil might exist, even if their belief is that the chance of finding that oil is low.
If changes are made to the oil tax and additional exploration tax credits are added this year, the state may see renewed interest in exploration for oil in NPRA. In a few years, if there still seems to be a lack of interest in exploring for oil in NPRA, the legislature may need to revisit this area to see if additional incentives are appropriate.
Impact of the tax change on heavy and viscous oil
Production of heavy and viscous oil is technically challenging and costly to produce. The tax change reducing the oil tax on existing producing fields will certainly help, but it may not be enough. Plus the tax is overbroad in its application. The producers do not need a tax reduction to produce most of the current oil that remains in the existing fields, but they may need a tax reduction to produce the viscous and heavy oil. A tax reduction that is targeted to oil that is technically challenging and costly to produce makes a lot more sense than a tax change that provides reductions where none are necessary, especially to the tune of $10 billion. Plus a tax reduction that is targeted to areas where the need has been identified can be much greater than was proposed for the existing fields and the negative impact will be much less. If a change in the tax can incentivize the oil companies to produce the heavy and viscous oil, the potential revenue from this production could be substantial since there are billions of barrels of viscous and heavy oil waiting to be produced.
Summary
Tax changes should be targeted to where there is an identified need to encourage action from the producers. Tax reductions and credits that encourage production of technically challenging and costly oil make sense. Tax reductions that encourage exploration of NPRA make sense. Any other tax reductions that are directed at addressing a specific identified need make sense. Tax reductions where a need cannot be identified is a gift to those who receive the reduction.
“So the question tonight is, how do we continue growing an even more vigorous and diverse economy? And how do we create that gravitational pull for private-sector investment and job growth? It takes four things: keep taxes low, gain access to our resources, invest in Alaska energy, and strategically expand undeveloped resources. That's why this year I'm asking that we work together to lower taxes on oil, and create more jobs in Alaska. Let's build off the success of last year's tourism head tax reduction that pulled more investment to Alaska. Let's pass legislation to make our oil tax regime more globally competitive. Lower taxes lead to more resource development, and that leads to more jobs for Alaskans.” – Governor Parnell
House Bill 110 was submitted to the legislature at the request of the governor to address his recommended changes to the oil tax. According to the Department of Revenue fiscal note, the tax change could cost the people of Alaska approximately $5 billion over the next five years. But the tax is not just a five year tax. It affects all existing and future producing properties in the State of Alaska for the life of the leases. So why has the impact been projected to cost $5 billion? A quick look at the nature of fiscal notes gives us the answer. The impact of the tax change was projected to be $5 billion merely because of the relatively arbitrary reason that fiscal notes are only required to identify impacts for five years. The real question someone should ask is, “What happens in year six and every year thereafter?” The answer they will find is that this is not a $5 billion tax. It is a tax change that will cost the people of Alaska in excess of $10 billion over the life of the leases.
So what does the governor propose the people of Alaska get for their $10 billion? The answer is more jobs and hopefully more oil and gas exploration and development. But how do we know if this is a good deal?
Alaska jobs makes a good emotional appeal but certainly cannot justify the price tag of $10 billion. The only way to justify a tax change of this magnitude is through exploration and new production. The following examines the value of the proposed tax change to bring about new exploration and production.
Impact of the tax change on exploration and production
To determine the impact of the proposed oil tax change on production and on production from successful exploration it is important to first determine the projected production based on the current tax system. The best source for that information is the recent Department of Revenue, Oil and Gas Production Tax Status Report to the Legislature dated January 18, 2011. On page 10 of that report the department displays a chart showing production from all existing and discovered fields that the department expects will be produced between now and 2030. This is the Department of Revenue’s projection of present and future production based on the current oil tax without the proposed changes.
Impact of the tax change on production
Changes to the tax should see significant increases in production in addition to what has been identified in the chart. The problem is that state land, from the Colville to the Canning Rivers, is a mature province for oil production. We should not expect to see nor project discoveries in this area of anything greater than what we have seen over the last ten years, basically incremental satellite production which will, at best, reduce the production decline curve but should not be expected to increase production substantially over the next 20 years. The state will not capture a lot of incremental value here.
In terms of the legislation, the section that amends Alaska Statutes 43.55.011(e)(1) and (g)(1) reduces the oil tax by over $10 billion over the term of the life of the leases on the currently producing units with the hope that this change will increase exploration and development to sufficiently offset the tax change. The likelihood of this occurring on state lands is almost nonexistent. The only hope of significant additional production on state lands comes from increased production of viscous and heavy oil which will be addressed later in this article.
Changing the tax structure on existing production will only incentivize the producers to increase production in the existing fields which, as I have said above, will not occur to any major extent because of the maturity of the existing fields. In addition a tax change of this magnitude will have a significant impact on the future revenue of the state.
The Department of Revenue on January 25, 2011, made a presentation to the Senate Finance Committee regarding the Fall 2010 Revenue Forecast and a 10 year Revenue/Spending projection. On slide 9 of that presentation the department showed their projection of the potential revenue surplus over the next 10 years based on estimated revenue and spending projections. The tax change as proposed in HB 110 would all but wipe out this projected surplus and by the year 2021 would probably result in a deficit. The legislature should assure itself of the value it expects to receive in exchange for such an extreme change in the future revenue picture of the state.
Impact of the tax change on exploration
Changes to the tax structure on existing production will not incentivize exploration. Only changes to taxes on production discovered through exploration will incentivize exploration and the only place where significant oil exploration can still occur is in NPRA. The OCS still has significant potential for oil exploration, but the state has no power to tax the OCS oil; so I have not included it in this discussion.
The changes to the tax structure to incentivize exploration is a good idea because the geology of the NPRA is not all that impressive. Analysis by the Department of Energy, National Energy Technology Laboratory suggests that we can expect to find a few fields similar in size to Alpine and a number of smaller fields but nothing the size of Prudhoe Bay. And the most prospective area around Teshekpuk Lake near the Barrow Arch is currently off limits because of cultural and environmental concerns. The proposed changes to the tax structure for exploration do not cost the state any revenue from current production. It only provides that if oil companies will explore for oil in Alaska, they will pay less tax on that oil. The tax incentive may not be enough, but it is a step in the right direction.
You cannot incentivize an oil company to explore for oil where they believe none exists, but you can incentivize an oil company to explore for oil where they believe oil might exist, even if their belief is that the chance of finding that oil is low.
If changes are made to the oil tax and additional exploration tax credits are added this year, the state may see renewed interest in exploration for oil in NPRA. In a few years, if there still seems to be a lack of interest in exploring for oil in NPRA, the legislature may need to revisit this area to see if additional incentives are appropriate.
Impact of the tax change on heavy and viscous oil
Production of heavy and viscous oil is technically challenging and costly to produce. The tax change reducing the oil tax on existing producing fields will certainly help, but it may not be enough. Plus the tax is overbroad in its application. The producers do not need a tax reduction to produce most of the current oil that remains in the existing fields, but they may need a tax reduction to produce the viscous and heavy oil. A tax reduction that is targeted to oil that is technically challenging and costly to produce makes a lot more sense than a tax change that provides reductions where none are necessary, especially to the tune of $10 billion. Plus a tax reduction that is targeted to areas where the need has been identified can be much greater than was proposed for the existing fields and the negative impact will be much less. If a change in the tax can incentivize the oil companies to produce the heavy and viscous oil, the potential revenue from this production could be substantial since there are billions of barrels of viscous and heavy oil waiting to be produced.
Summary
Tax changes should be targeted to where there is an identified need to encourage action from the producers. Tax reductions and credits that encourage production of technically challenging and costly oil make sense. Tax reductions that encourage exploration of NPRA make sense. Any other tax reductions that are directed at addressing a specific identified need make sense. Tax reductions where a need cannot be identified is a gift to those who receive the reduction.
Monday, November 15, 2010
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.
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.
Tuesday, November 2, 2010
Legislative Agenda Proposal
Responsible Annual Budgeting, Budget Surplus, Budget Transition Period, Long-term Fiscal Plan, Permanent Fund, Nonrenewable Resources, Reserves Potential, Fiscal Stability, Fiscal Certainty, Fair Oil Tax, Fair Gas Tax, Alaska Large Diameter Gas Pipeline, Alternatives to a Large Diameter Gas Pipeline, Cook Inlet Gas Requirements, Interior Alaska Gas Requirements, Southeast Energy Requirements, Rural Energy Requirements, Alaska’s Gas for Alaskans, Point Thomson, what do all the items in the above list have in common? They, along with many other issues, must be considered in the context of each other to arrive at a comprehensive strategy to move the State of Alaska forward in the coming years.
A stable long-term fiscal strategy that does not require short-term changes to oil and gas taxes to balance the budget goes a long way to create the fiscal stability the oil and gas industry requires to invest in Alaska.
A fair tax on oil and gas that is fair at low prices and high prices, that is fair for marginal prospects robust prospects, that is fair for remote prospects as well as close-in prospects creates an investment climate that encourages explorers to test Alaska waters.
An annual budget that shows fiscal restraint and forethought about the future encourages business to invest because they are not concerned that they will be the ones called upon to supply the funds necessary to balance the budget now or in the future.
Examining those actions the state can take to encourage a large diameter gas pipeline may result in identifying certain steps that actually helps the pipeline move forward.
Getting existing development back on track encourages a business climate where industry can once again believe in fair treatment in the regulatory process.
Understanding the difference between meeting Alaska’s energy needs with “Alaska’s Gas” and meeting Alaska’s energy needs with the most economic energy alternative, for the short-term and the long-term is essential prior to making major funding decisions regarding energy projects.
Understanding and encouraging exploration to capture Alaska’s reserves potential while basing budgets on known resources is essential to sound decision-making.
Understanding that the Permanent Fund must play some part in the future of Alaska, more than just paying Permanent Fund dividends, is essential in developing a viable long-term financial plan.
The State’s obligation is to create a fiscal environment whereby business is secure and willing to take the investment risk necessary to succeed. It’s time to create that fiscal environment.
The above list is long and many complex issues are included, but it is one that can be accomplished. It’s time to get started. It is time to establish a plan. It’s time to lead. My hope is that the governor and the newly elected legislature are up to the task.
A stable long-term fiscal strategy that does not require short-term changes to oil and gas taxes to balance the budget goes a long way to create the fiscal stability the oil and gas industry requires to invest in Alaska.
A fair tax on oil and gas that is fair at low prices and high prices, that is fair for marginal prospects robust prospects, that is fair for remote prospects as well as close-in prospects creates an investment climate that encourages explorers to test Alaska waters.
An annual budget that shows fiscal restraint and forethought about the future encourages business to invest because they are not concerned that they will be the ones called upon to supply the funds necessary to balance the budget now or in the future.
Examining those actions the state can take to encourage a large diameter gas pipeline may result in identifying certain steps that actually helps the pipeline move forward.
Getting existing development back on track encourages a business climate where industry can once again believe in fair treatment in the regulatory process.
Understanding the difference between meeting Alaska’s energy needs with “Alaska’s Gas” and meeting Alaska’s energy needs with the most economic energy alternative, for the short-term and the long-term is essential prior to making major funding decisions regarding energy projects.
Understanding and encouraging exploration to capture Alaska’s reserves potential while basing budgets on known resources is essential to sound decision-making.
Understanding that the Permanent Fund must play some part in the future of Alaska, more than just paying Permanent Fund dividends, is essential in developing a viable long-term financial plan.
The State’s obligation is to create a fiscal environment whereby business is secure and willing to take the investment risk necessary to succeed. It’s time to create that fiscal environment.
The above list is long and many complex issues are included, but it is one that can be accomplished. It’s time to get started. It is time to establish a plan. It’s time to lead. My hope is that the governor and the newly elected legislature are up to the task.
Monday, November 1, 2010
Consider the Candidate
My son made an interesting comment to me this morning after watching a few minutes of TV. He said, “I wish they would outlaw negative campaigning so that we could understand the views of the candidates.” His comment is important to remember. When we vote tomorrow, we should try to ignore all the negative campaigning that has occurred and try to remember what we know about the candidate.
Are they people of integrity; are they people we can trust?
Are they respected by their contemporaries? Will others respect and listen to them if they are elected?
What about their positions; have they held them a long time? Can they express them in a way that will influence others to agree with them? Will they make a difference if they are elected; is the difference they are going to make one that we want?
Consider what you know about the candidate as you go to the polls tomorrow, not merely what others have said about them. Vote for someone you think might do the best job, not against someone based on what others have said about them.
Subscribe to:
Posts (Atom)