Download View Abstract

EVOLUTION OF ALASKA’S STATE PETROLEUM FISCAL REGIME:
FROM ARCTIC FRONTIER TO MATURITY
Matthew Berman, Institute of Social and Economic Research, University of Alaska Anchorage
Phone 907 786 5426, E-mail: [email protected]
Overview
Alaska has been an oil and gas producing state since admission to the union in 1959, and the industry has been
the dominant source of state revenues for nearly the entire history of statehood. During the past two years, the
Alaska Legislature has been debating making a change in the oil production tax. While public discussion of
Alaska oil taxes and the potential effects of taxes on development has focused almost exclusively on the
government take as a percentage of total revenues or profits, two other important aspects of the petroleum fiscal
regime may play as big a role in company development decisions. One is the degree to which the fiscal system
shares risk between the government and industry. The other aspect is the nature of the relationship between
government and industry: specifically the degree to which the government sets fiscal terms unilaterally, versus
working cooperatively or negotiating with developers. Governments around the world differ dramatically in the
approach they take to building a relationship with the oil industry. One measure of the relationship between
industry and government is administrative distance: the degree to which industry and government participate in
setting the terms of the fiscal regime.
The paper puts the recent oil tax debate in the context of how the government take, risk sharing, administrative
distance have changed over the five decades since statehood. During this period, Alaska has gradually
transitioned from a frontier province to a mature producing area. The analysis both reviews changes over time
and compares the current Alaska system to those of other similar jurisdictions such as Norway and Alberta and
other U.S. producing states. The analysis addresses how the recent tax proposals change risk sharing and
administrative distance, as well as the government take. It then examines the implications -- advantages and
disadvantages -- of changes (in either direction) in the risk sharing and administrative distance, and how they fit
into a broad pattern of maturing state government coevolving with the state’s maturing oil industry.
Methods
Trends in government take are examined by analyzing recurring and non-recurring revenues as a percentage of
wellhead oil and gas value. Recurring revenues include all revenues except bonus and rental payments, a
temporary tax in effect only during construction of the Trans-Alaska Pipeline, and tax and royalty settlements,
which tend to come sporadically and unpredictably. Non-recurring revenues are converted to the constant real
dollar amount per barrel, adjusted for remaining reserves in currently known fields, that has the same value, with
interest, as would a stream of recurring revenues invested at the same interest rate. Comparing trends in state
revenues as a percentage of wellhead value ignores the effect of trends in costs and federal taxes on industry
profits. It also overstates the true percentage take from the wellhead somewhat because income and property
taxes collected on the Trans-Alaska Pipeline are included in the numerator but not in the denominator. Taxes
collected on pipelines -- especially income taxes -- vary over the years and would be difficult to separate out from
taxes collected at the wellhead. Comparisons take into account U.S. federal taxes as well as state taxes and lease
payments and are based on a literature review.
The progressivity of the fiscal regime measures to the degree to which the government shares business risks with
the developer. I create categories of progressivity of different types of fiscal instruments and place proportion of
state revenues in each category over time since 1961.
I categorize common lease terms and taxes by degree of administrative distance, specifically taking into account
the degree to which they are subject to negotiation or revision by statute or regulation. Oil and gas taxes as well
as lease terms have been the subject of litigation, as well as negotiated revisions. The analysis of trends in
administrative distance incorporates the method of resolution of outstanding legal issues. Legislated statutory
changes in oil and gas taxes under various forms of industry pressure is also considered in the context of
administrative distance.
Results
Despite a number of statutory changes to tax and lease policy, the percentage government take was remarkably
stable for the first 45 years of statehood, averaging around 40 percent of wellhead value. The state’s main
instruments for collecting revenue -- percentage royalties and production taxes -- were quite regressive. The
change from a production tax based on a percentage of wellhead value to one based on net operating income in
2006 dramatically increased progressivity. They also greatly increased government take when oil prices
unexpected rose to record high levels shortly after the tax rates were revised upward a year later. The recent
proposals return the government take and progressivity to near the 2006 levels, still higher than historical levels
before 2006 at current oil prices.
Administrative distance has generally declined over these past three decades. The relationship between the state
and the oil industry has gradually moved from a more confrontational stance to one of accommodation and
negotiation.
Conclusions
When North Slope oil was first being developed, the state had few financial assets and lots of debt obligations.
The state could not afford to gamble on the oil business. Regressive taxes may have made sense for Alaska forty
years ago. Today, however, with a mature oil industry and tens of billions of dollars of assets in the Permanent
Fund and Constitutional Budget Reserve, the state can much better afford to share some of the risks with the
industry.
Over the past 50 years, Alaska state agencies have developed a much stronger institutional capacity for
negotiating with the oil industry. However, starting with the large tax and royalty settlements in the 1980s, and
continuing today with the negotiations over North Slope gas pipeline financing, there has been a significant loss
of transparency.
References
Dickenson, Dan E., David A. Wood (2009): Alaska tax reform: Intent met with oil. Oil and Gas Jounal, 107(20)
(May 25, 2009): 20-26.
Dickenson, Dan E., David A. Wood (2009): Alaska tax reform: Gas raises questions. Oil and Gas Jounal,
107(21) (June 1, 2009): 20-24.
Egan, Jim, Joshua Wilson, eds. (2011): Alaska's Oil Investment Tax Structure Establishing a Competitive Alaska.
Anchorage: Commonwealth North (March).
Marks, Roger (2009): Why America May Not See Alaska Natural Gas Soon. Journal of Economic Issues, 43(3)
(September): 1-15.
McBeath, Jerry, Matthew Berman, Jonathan Rosenberg, Mary Ehrlander (2008): The Political Economy of Oil in
Alaska: Multinationals vs. the State. Boulder, CO: Lynn Rienner.