A Citizen’s Guide

EDITOR’S NOTE: This is the second of three stories aimed at getting readers ready for the special session on oil production taxes. The special legislative sessions begins today in Juneau.

When the Legislature convenes in special session today to review whether Alaska is getting a fair share of its oil resources, the first item on the agenda will be a long look at how Alaska stacks up against countries around the world when it comes to taxing the oil and gas industry.

The Legislative Budget and Audit Committee will hear today from Pedro van Meurs and Daniel Johnston. Johnston advised state legislators and van Meurs advised the Murkowski administration last year on the Petroleum Production Tax and now plan to discuss how the PPT compares with tax plans in similar oil-rich regions around the world.

Sounds simple enough. First, figure out how much Alaska takes, and then check if that figure can compete.

But the issue isn’t so simple.

Almost everyone agrees “government take” plays a role in an oil company’s decision to invest in one region over another, but lawmakers, consultants, industry and government disagree over how to calculate government take, how to compare Alaska’s take with the worldwide average and whether or not the tax changes in Alaska’s Clear and Equitable Share, Gov. Sarah Palin’s new tax plan, are even significant.

What is government take?

Defined simply, government take is the percentage of oil company profits paid to government entities for access to reserves. In Alaska, government take includes leases, royalties and state and federal taxes but can still be difficult to measure precisely.

The Legislature last year asked several consultants to predict the government take under the PPT, which it was debating at the time, and received figures ranging from 56 percent to 68 percent.

The inconsistencies come because different analysts often use different methods to get a figure and because changing global conditions mean two similar studies from different years can often reach different conclusions, according to Matthew Berman, professor of economics with the University of Alaska Anchorage’s Institute of Social and Economic Research.

“There is no standard definition of government take,” Berman wrote in an e-mail.

What is Alaska’s take?

You could find out the government take of your income by checking pay stubs at the end of the year, but it isn’t that easy for oil companies and governments.

The state and at least one oil company seem to agree that Alaska’s government take under Palin’s plan would be around 68 percent.

That’s the figure Kevin Mitchell, vice president of finance and administration for ConocoPhillips in Alaska, recently gave to the Alaska Support Industry Alliance. He said the government take under the PPT is around 64 percent.

Depending on the price of oil, that 4 percent could mean hundreds of millions of dollars in additional revenue for the state.

Marcia Davis, deputy revenue commissioner for the state, had a more complicated view for Interior legislators last week, saying government take changes depending on the size, type and age of an oil field. Looking at six hypothetical fields from “cradle to grave,” she estimated the government take for PPT ranged from 65 percent to 72 percent, while under ACES it would range from 68 percent to 74 percent.

Rep. Les Gara, D-Anchorage, believes those state estimates are too high and that Alaska can afford to raise taxes even more.

Determining Alaska’s take is complicated even further because the tax rate changes as the price of oil rises. All the state, legislative and industry figures are based on oil prices of $60 a barrel, but Alaska North Slope oil is currently selling for more than $85 a barrel.

How does it compare?

Legislators want to pinpoint Alaska’s take to see whether the state is collecting more or less than other governments.

The basic logic is that if Alaska is much higher, industry investment might decline and if Alaska is much lower, it could afford to raise taxes and bring in more revenue.

But the comparison can be difficult because not all oil-rich regions are the same, according to Davis.

“The first thing we realized is this whole thing about government take is much richer than you would expect when people start throwing around average numbers,” Davis said. “The first thing you have to do is say ‘What kind of country are you talking about?’ There are essentially two groups of governments around the world.”

Some countries make a deal with oil companies: The company can operate with low or no taxes, but the tax rate will jump well above the worldwide average after the company has recovered its costs.

Other governments, like Alaska, make long-terms deals designed to tax oil companies more evenly over the life of a project. On average, the government take on these arrangements tend to be lower but require more patience.

The Palin administration believes ACES makes Alaska’s take lower than that of Norway but higher than the Gulf of Mexico, the United Kingdom and the total worldwide average.

But the worldwide average is a moving target, as well.

Over the past five years, nearly 30 countries have made tax changes in response to high oil prices, according to a recent report from the international consulting and analysis firm Wood Mackenzie.

These changes have not only impacted the worldwide average but also made some oil-rich areas seem unpredictable when it comes to taxes.

Several oil companies have latched on to a figure from the report saying Alaska is one of the most unstable governments in the world when it comes to taxation because the state has raised taxes twice in recent years and could raise them again this month.

“Uncertainty is going to continue as long as prices stay high as long as revenues are high,” Graham Kellas, vice president of upstream consulting for Wood Mackenzie, said in a video on the firm’s Web site.

How important is it?

Government take is one of many factors oil companies use to decide where they will invest. And while it isn’t seen as the most important factor, it is one of the few state legislators can control, according to both state and industry.

Both the Palin administration and the oil industry seem to agree that taxing oil development is like tilting the pinball machine, but the two sides disagree about how much tilting can occur before it finally stops the game.

Oil companies primarily base investment decisions on the “size of the prize” and the cost of doing business and also consider the political and fiscal stability of a region, according to Marilyn Crockett, executive director of the Alaska Oil and Gas Association.

Crockett said Alaska is one of the more expensive places to work and that the large oil reserves have already been found. But Alaska is politically stable compared to some developing nations.

That leaves government take.

Crockett said a higher government take will hurt the smaller oil companies looking to develop Alaska’s smaller reserves. But, she added, it will be hard for the state to know whether it shot itself in the foot with a tax increase, because “non-investment” can’t be measured.

“If we knew what the tipping point was, gosh that would make life so much easier for everyone,” Crockett said. “The problem is that no one knows where the tipping point is.”

Gara said that as long as the state offers fair tax credits, a few percentage points will have “virtually no impact on investment in the state” and oil companies in Alaska today don’t always reinvest profits back into the state, anyway.

The Palin administration seems to agree. Davis said state consultants reported that oil companies working in the Gulf of Mexico, which has a very low government take, often reinvest the majority of their profits in countries with big oil reserves, politically unstable governments and high takes.

“So maybe government take and politically stability, while important, isn’t the most important. Maybe it’s about the oil and gas. And that’s what our consultants are saying,” Davis said.

Contact staff writer Eric Lidji at 459-7504.