The one “must have” of oil tax reform … and it’s not in the bill now

Econ One Presentation For House Finance (4-06-13) 12After reviewing yesterday the presentations made Saturday in the House Finance Committee on the newest version of SB 21, HCS SB 21 (RES) (the House Resources Committee Substitute), I have become convinced of one thing — at some point some of the provisions included in the CS will produce unintended consequences, portions of the bill will become obsolete and Alaska’s competitiveness will suffer.

That should not be taken as a negative comment on the current CS.  It has been developed in response to significant concerns expressed before House Resources and elsewhere that the previous versions did not reduce the tax rate to levels low enough to make a significant difference in investment levels.  As House Resources Chair Eric Feige said, “[t]he worst nightmare I have is we don’t lower [the tax rate] enough ….  We lower it just enough so we give up tax revenue, but we haven’t lowered it enough to get investment into the state.”

But as the chart above from one of Saturday’s presentations makes clear, in order to respond to those concerns the tax curve applicable to the legacy fields — which is in green on the chart — is beginning to look like a pretzel, starting at 67.5% at $50/bbl, then falling to below 60% at $60 – $70/bbl, then starting back up until it reaches the Senate version between $110 – $120/bbl, and then rising above the Senate version thereafter.

The intention is to provide an incentive for additional production from the legacy fields when oil prices are at relative low levels, something that, in the current price regime, the legacy producers have said is important to incentivizing continued investment in those fields.  But to do that the bill also introduces a sliding scale factor that makes the tax levels on the legacy fields higher than the Senate version at higher prices and also largely preserves the tax levels for new oil, which in my view should be the focus of this effort, at a rate that ultimately may discourage some new investment there.

The result is less simple, less neutral and, as a consequence, less durable than the previous versions and, while responsive to this particular moment in time, does not necessarily stress test well against a broad range of other scenarios.

Which brings me to the point of this particular commentary.  If, as now looks likely, the Legislature enacts something tailored to the moment as this bill is, there is one additional “must have” which should be included — the “Oil & Gas Competitiveness Review Board.”

As readers of these pages know, I have long supported the establishment of such a Board.  I first started talking about it in 2010, first wrote about it in 2011 (see “Alaska’s Future:  Sen. McGuire’s Proposed Competitiveness Review Is Important,” Thoughts on Alaska Oil & Gas (Feb. 10, 2011)) and have continued since to identify it as an important part of any oil reform effort.

This session, it has been in and out of various versions of SB 21.  It was not in the Governor’s original bill, was inserted at the request of its author, Sen. McGuire, in the Senate Resources version, stricken from the original draft of the Senate Finance version, and then reinserted in the final substitute that passed Senate Finance and the Senate floor.

Now, it is back out again, having been stricken in one of the late night amendments (Amendment No. 29) taken up by House Resources.

In my opinion, putting it back in the final House version is critical.  In all fairness, Alaska has lurched from one oil and gas policy to another over the last few years as it has attempted to come to grips with the fact that the Prudhoe and Kuparuk fields — on which Alaska has ridden for so long — are continuing on decline and additional sources of supply — and more importantly, revenue — need to be identified and developed.

One of the reasons for the “lurching” is the fact that, despite depending on oil revenues for 90% of its funding, Alaska has never developed a broad based vehicle for monitoring, evaluating, discussing and formulating oil policy.  Instead, it has relied on periodically retaining consultants to helicopter into the state, attempt to quickly assess Alaska’s competitive and financial position and then provide their view of a way forward relevant to that moment in time.

The significant problem with that approach is that conditions in the oil and gas industry are continually evolving and what may have been good information and advice at one point in time is obsolete the next.  By then, however, the consultants have caught their final plane home to the L48 or elsewhere, have mostly finished telling their friends stories about how “interesting” Alaska is and are on to their next engagement.  In the meantime, Alaska is continuing to operate on the old advice, for example, by continuing to spend money on belated efforts to penetrate the L48 gas market while shale gas overwhelms not only the L48, but world gas markets as well.

The reason given by the sponsor of the late night amendment in House Resources to strike the board  was that he thought the board would add instability into the system.  In short, he thought, by providing a forum for continuing education and discussion on Alaska oil and gas policy, the system emerging from this session would be perceived as less “durable.”

There are two simple responses to that.   First, it is clear from reviewing the chart above and the provisions of the related bill that the policy emerging from this session will not be durable in any event.  The bill is being tailored to this particular moment in time — relatively moderate oil prices and a focus on increasing production from the currently producing regions of the legacy fields. Those conditions will change and Alaska must be prepared to change with them.

Second, the global oil and gas industry is in a period of significant change.  New technologies and changes in the policies of other producing regions are opening up new investment opportunities throughout the world.  Thrusting a standard into the ground and essentially saying “Alaska will stand here” as the world changes around us risks yet more episodes like the five years we spent chasing (and spending money on) a gas pipeline to the L48, while the remainder of the world’s gas players (and investment) moved on to other things.

In short, its not the adoption of an “Oil & Gas Competitiveness Review Board” that makes Alaska’s situation unstable.  That instability already and will continue to exist.  The board simply is an important means of recognizing that and providing Alaska with a piece of “forward looking radar” to avoid the parade passing Alaska by yet again.

As I have written elsewhere, the proposed membership of the Board also has evolved over time.  (See “Alaska Oil Policy| SB 21′s “Oil & Gas Competitiveness Review Board” needs a fix …,” Thoughts on Alaska Oil & Gas (Mar. 22, 2013)).

The problems with its membership should be addressed at the same time the board is resuscitated.

The important point to me always has been that the board be a broad based body, positioned to help build consensus on oil policy among the Executive and Legislative branches and the public, and equally positioned, particularly through its public members, to help educate and discuss those policies broadly with the Alaska public.

As I wrote in March, the original proposal for the board — introduced early in 2011 — accomplished those objectives.   Subsequent versions have strayed further and further from that to the point that the version that passed the Senate earlier this session was virtually unrecognizable.

In another of the late night amendments (Amendment No. 28) that preceded the board being stricken, Rep. Peggy Wilson introduced a change that would have, if the provision had not subsequently been stricken,  changed the membership back closer to the original.

Some members of the Committee were concerned with the unspecified nature of the public members proposed by Rep. Wilson’s amendment.  They believe that the backgrounds of the public members should be limited in order to ensure that they are prepared from the outset to contribute to the board’s work.

As I wrote earlier, I believe that such restrictions end up eliminating important segments of Alaska’s public from consideration, but I somewhat understand the point.   The initial proposal for the board addressed that concern, in part, by proposing five public members, three of which were from specific backgrounds and two of which were not so restricted.  I believe that approach is fair, and should satisfy both objectives.

The most important point, however, is that the current version of SB 21 should be amended once again to reinstate the board.  Alaska has flown blind into the competitive environment long enough.  It is time that, as a state, we develop some forward looking radar to deal with it.

Comments are closed.