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Kah: Alaska not participating in boom ConocoPhillips economist says state disadvantaged on investment criteria; location, geology can’t be changed, taxes a policy call Kristen Nelson Petroleum News
Alaska has competitive disadvantages when it comes to attracting investment, ConocoPhillips chief economist Marianne Kah told the Alaska Support Industry Alliance Meet Alaska conference Jan. 6.
And those disadvantages, she said, mean that Alaska is not participating in the current boom in industry activity.
Kah broke Alaska’s disadvantages out by discussing the investment criteria most companies look at when deciding where to invest.
The first is prospectivity, does the region have the hydrocarbon resource and in enough quantity — and in large enough field sizes — to be economic.
While Alaska has resource opportunities, “the field size is smaller and therefore it can’t hold the same order of taxation that other places we might invest in can hold,” she said.
Then there is the cost structure, and not just the finding and development costs, but also the transportation cost to get a resource to market.
There again Alaska doesn’t fare well, because “it’s far from market and it’s expensive to operate in the Arctic” and there is a limited drilling season. “So again, from a cost point of view, it can’t hold the same rate of taxes that other places we operate can,” she said.
Cycle time is another thing companies look at in investing — how long does it take to get from initial investment to marketing a product and seeing a cash return. In Alaska cycle time tends to be longer because of the short drilling season and also because of federal rules and regulations “that really stretch out in time how long it takes to get things permitted.”
The legal regime is an issue in Alaska because of permitting. While the state has been helpful, Kah said, “a lot of federal rules apply to Alaska and it really slows down a lot of projects.”
Comparison to Kazakhstan Kah illustrated the prospectivity point with a chart of average commercial discovery sizes over the last 10 years. She said she had to truncate the illustration for Kazakhstan because it was so much larger than other areas that it didn’t fit on the chart.
Alaska is far less prospective than Kazakhstan and Venezuela, she said, which “can afford to have a higher tax rate than in Alaska.”
For production and transportation costs, “Alaska has the highest cost of any other prospect that we have in our portfolio,” Kah said, but while Alaska has what nature has dealt, “what nature has dealt can be changed by the fiscal regime.”
What tax rate is most significant? When it comes to the impact of taxes on investment, Kah said there is “a whole body of economic literature which points out that the marginal rate is really what determines investment, it’s not the average rate or the effective rate.” Marginal rate is the rate you are taxed on for the last dollar you invest and earn, she said.
Under Alaska’s Clear and Equitable Share, or ACES, the state’s current production tax, Alaska has the highest tax rate of any of the developed countries that ConocoPhillips might operate in. “And of course that tax rate goes up substantially as the oil price goes up,” she said referring to the progressivity factor. “So there is no upside for investment in Alaska.”
On a chart of tax rates in oil and gas producing provinces, “Alaska is near the tax rate of Kazakhstan and Venezuela.” Kah said she would argue that Venezuela isn’t getting enough investment at their current tax rate, but both Kazakhstan and Venezuela “have higher prospectivity and lower costs than Alaska.”
“Alaska cannot be competitive and have the same tax rate as those places that have high prospectivity,” she said.
Revolution in Lower 48 “There is a tight oil and shale gas revolution taking place in the United States today, offering a lot of investment opportunities … (and) changing the U.S. oil production profile,” she said. That revolution will eventually go global, so “industry has a lot of places to invest and Alaska does have to compete.”
Alaska is not participating in the oil production Renaissance taking place in the rest of the United States today, Kah said, and Alaska’s role in supplying energy “is diminishing on a relative basis and on an absolute basis as well, as production is in decline.”
There was a period of 10 or 20 years where oil production in the United States was declining. But now, looking at forecasts for shale crude or tight oil, production is expected to grow. Some forecasts are showing that by 2025 U.S. imports are likely to be half or less than half of what they are today, Kah said.
“Alaska is not participating in this. And there’s really no reason for that — there’s a lot of resources up here. The reasons have to do with aboveground issues such as business climate, investment climate, tax policy,” she said.
While Alaska has competitive disadvantages, “government policies can change what nature has given us here.”
But the state’s fiscal policy is adding to the problem, with the current tax structure “just taking away too much of the upside and the high progressivity is hurting project economics, even in a high-price environment.”
The state’s high tax rate is limiting investment and production in Alaska, she said.
Kah said she agreed with Gov. Sean Parnell’s position, and said “we shouldn’t be talking about slowing down the decline; we should be talking about how to make Alaska part of the growth revolution that we’re seeing in the U.S. today.”
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