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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2014

Vol. 19, No. 19 Week of May 11, 2014

Economist discusses new production tax

Goldsmith says no $2.1 billion ‘giveaway’; based on market conditions, production, MAPA or ACES could result in more state tax

Kristen Nelson

Petroleum News

There was no $2.1 billion “giveaway.” Either ACES or MAPA could produce more state revenue depending on market conditions and production levels.

Those were the conclusions economist Scott Goldsmith presented to the Resource Development Council May 1. A 42-page paper explaining his conclusions was posted the same day on the Institute of Social and Economic Research website.

Goldsmith, professor emeritus at ISER at the University of Alaska Anchorage, studied changes in oil and gas production tax in Alaska between the old tax, Alaska’s Clear and Equitable Share or ACES, and the new tax, the More Alaska Product Act or MAPA, enacted by the Alaska Legislature last year as Senate Bill 21.

The $2.1 billion figure is the difference, Goldsmith said, between the $7.2 billion the Alaska Department of Revenue forecast for 2014 fiscal year oil revenues in fall 2012 and the department’s fall 2013 forecast of $5.1 billion.

That difference, Goldsmith told RDC, took everyone by surprise.

Opponents of SB 21 blamed the difference on passage of the tax change.

Goldsmith compared that to concluding that your rooster crowing causes the sunrise, and said he found that only 4 percent of the amount, some $90 million, was due to the shift, effective Jan. 1, from ACES to MAPA, while 96 percent was due to other factors such as updated price forecast and costs.

Majority due to market

More than half of the $2.1 billion difference, $1.29 billion, was due to a revision of market assumptions between the 2012 and 2013 fall forecasts, Goldsmith said.

That includes $304 million in higher lease expenses, 14 percent higher than projected in 2012; $242 million in a lower market price for crude oil, down 4 percent from that projected in 2012; $198 million due to 6 percent fewer barrels than projected; $80 million due to a 15 percent higher cost for transporting the oil; $361 million due to a 16 percent drop in rate of progressivity in ACES, reflecting lower oil prices; and $105 million, 14 percent, in higher credits.

Of the remainder, $320 million was due to a reduction in royalty payments the state received, $140 million to reduction in corporate income tax and $300 million to payment of expiring ACES credits.

The future

Goldsmith said future revenues depend on the price of oil and production costs per barrel. Under current conditions, fiscal year 2015 revenues would likely be $74 million more with ACES, he said. And looking at the last three fiscal years, ACES had an advantage exceeding $1 billion a year.

That advantage disappears in 2014 with price moderation and lease cost increases, Goldsmith said, noting that price is stable and analysts don’t see much upward movement, while production costs have risen, more than doubling in the last decade, and are expected to continue to rise.

One notable cost at Prudhoe Bay, the North Slope’s largest field, is water handling, Goldsmith said the field now produces more water than oil, and could be called a giant water field with oil as a byproduct, with barrels of water per barrels of oil now at 4 to 1 water to oil.

Manpower costs have also risen, tripling since 2005 to $10 per barrel, Goldsmith said.

Summarizing his results, he said that without enhanced production, future tax revenues could be higher under SB 21 than under ACES if recent price and cost trends continue, and under reasonable future market conditions, with a modest increase in oil investment, more state revenues would be created under SB 21 than under ACES.

The jobs factor

Goldsmith also said that new money coming into the oil patch creates long lasting jobs and increased consumer purchasing power.

While the Legislature spends money trying to create new jobs, he said, new activity in the oil patch creates new jobs at no cost to the state — and each oil industry job generates a lot of other jobs.

On the issue of why the producers favor SB 21, Goldsmith said producers are not in business to minimize taxes, but to maximize profits, and the best way to do that is to expand. Producers may be encouraged through SB 21 to expand, Goldsmith said, and while they may pay more taxes as a result, the pie is bigger. He characterized the difference as between a pie of fixed size and a pie that can expand.

Cook Inlet example

Goldsmith noted that in Cook Inlet, which has had production tax incentives, there has been a dramatic uptick in production, demonstrating that production is sensitive to incentives.

He said he was not suggesting that there would be such a dramatic turnaround in North Slope production, but said while North Slope production has been down in recent years, Cook Inlet has seen increased production.

Goldsmith also said that while companies might pay more tax under SB 21, it provides stability — not fluctuating monthly ACES did; allows the companies upside potential because it lacks ACES’ progressivity on price; and because it provides more opportunity for development of marginal fields due to the SB 21 incentive for new oil.






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