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Marks: Progressivity dysfunctional Petroleum economist, contracting for LB&A, tells legislators Alaska not competitive for investment with comparable oil provinces Kristen Nelson Petroleum News
Petroleum economist Roger Marks, under contract to the Alaska Legislature’s Budget and Audit Committee, told the House Finance Committee March 15 that he believes the progressivity structure within ACES is dysfunctional.
He said this has concerned him since progressivity was enacted as part of the Petroleum Production Tax in 2006. ACES, Alaska’s Clear and Equitable Share, enacted in 2007, made progressivity more aggressive, Marks said.
Marks was testifying on House Bill 110, Gov. Sean Parnell’s proposal to reduce oil and gas taxes by changing how progressivity is applied, capping it and establishing a lower base rate for new fields.
There’s nothing wrong with the principle of progressivity, Marks said — you pay less tax when you have less income and more tax when you have more income. But progressivity in Alaska’s tax system is not like the bracketed system in the U.S. tax code for individual taxpayers, where higher tax levels only apply to incremental amounts of income.
With ACES, when progressivity kicks in at net profits above $30 a barrel on crude oil, the highest rate is applied to every dollar of value.
This is reflected in the marginal tax rate, he said: at $90 a barrel the marginal tax rate is 80 percent, so producers get only 20 cents of the marginal dollar from 89 to 90.
Because of the high marginal tax rate, Marks said, producers don’t make that much money as prices go up. That’s a problem because when producers evaluate projects they look to the high side and with that high side suppressed in ACES, a project might not happen.
Alaska v. other jurisdictions Marks compared Alaska to a group of jurisdiction based on comparable tax and royalty regimes (as opposed to jurisdictions with production sharing regimes) and comparable resources. Except for Alaska, he said, none of these have progressivity. And at $100 a barrel, Alaska’s rate is the highest except for Norway, where most of the equity production is owned by Statoil and most of Statoil is owned by Norway.
With higher oil prices, there is a greater schism between Alaska and the rest of the world, he said, so the higher the price of oil gets, the less competitive Alaska is, resulting in less oil being produced.
Companies have made billions of dollars in Alaska, Marks said, but the issue isn’t how much they can make in Alaska, it’s how much more money they could make in other places.
On the issue of ConocoPhillips’ Alaska profits compared to the Lower 48, Marks said it’s about the difference between oil and gas. In Alaska the company’s assets are more than 90 percent oil, compared to about one-third oil in the Lower 48 where the company primarily has natural gas assets and internationally, where the company has about 50-50 oil to gas. ConocoPhillips is relatively more profitable in Alaska because they have relatively more oil, he said, which is much more valuable than gas.
The worldwide competition for investment dollars, Marks said, is oil vs. oil. Lots of money Alaska is making lots of money now, Marks said, so what is the problem?
When ACES passed in 2007 there was a lot of entrenched activity on the North Slope that wasn’t going anywhere. But people haven’t focused on what’s happening to production, he said.
Both the Department of Revenue and the Department of Natural Resources do production forecasts. DNR’s forecast has gone out to 2020 since 2000, and while it isn’t annual, there have been six forecasts since 2002, Marks said.
Marks compared a 2006 DNR forecast, the last prior to passage of PPT, in which production of almost 900,000 barrels per day was projected for 2010, dropping to some 675,000 bpd by 2020, with a November 2009 forecast, the most recent, which had 2010 production at less than 650,000 bpd and 2020 production dropping below 500,000 bpd.
The difference isn’t a matter of fields DNR thought would come online but haven’t, Marks said, because more than 80 percent of the oil in DNR’s forecast comes from core fields.
Is it all due to ACES? Marks said he didn’t think it was all attributable to ACES, but thinks ACES is a major contributor. When DNR estimated 900,000 bpd in 2011 that was based on $50 per barrel oil, he said. With prices much higher than that, you’d think companies would want to produce more oil, but as oil prices go up, Alaska becomes relatively less competitive, Marks said.
He said the drop in DNR’s production forecast reflects a drop in investment, because developing individual fault blocks within core fields and developing heavy oil requires capital investment.
More money better than less Marks said a basic cornerstone of economic theory is that more money is better than less money, so companies will do what makes them more money and ACES has created a structure that causes people to invest elsewhere.
As for fixing ACES, Marks told legislators he doesn’t believe you can fix ACES with more credits: Tax dwarfs credits, he said.
The problem is that taxes are too high, and you can’t fix too-high taxes by tinkering with credits — you need to fix the taxes, he said.
And the problem isn’t progressivity, but with how progressivity is structured.
Marks noted that while the state has made changes in oil and gas taxes in the past, those changes have always increased taxes. He told legislators this is the first time they’ve been faced with decreasing taxes, and said he appreciates it’s a hand-wringing experience.
He said he’s done his best to lay out the rationale for why lowering taxes makes sense — if people can make more money elsewhere they’ll go elsewhere.
But he noted that nationally both presidents Kennedy and Reagan proposed tax reductions which passed and the economy rebounded in both cases.
Alaska’s resource base is good, he said, so the question is do people have reason to come in and develop that oil vs. oil that they can develop in other places.
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