Analysis: initiative would ‘erode’ Slope competitiveness

Alaska Journal of Commerce

Post date: Wed, 09/09/2020 – 9:20 am

The leaders of Vote Yes for Alaska’s Fair Share insist their oil tax increase will provide upwards of $1 billion per year to the state when it’s needed most but an independent economic analysis of the measure concluded it would take an already marginally competitive regime to near the bottom of the heap.

Irena Agalliu, the vice president of upstream energy at the London-based financial research and consulting firm IHS Markit emphasized that the oil production tax changes in the Fair Share Act initiative would be enacted at a time when the industry is facing two crises — the pandemic and an oil price collapse exacerbated by a dispute between Saudi Arabia and Russia.

It’s a point industry advocates and other opponents of the tax increase have also highlighted in recent months.

The sponsors of Ballot Measure 1 for the November general election counter that few, if any, oil projects are profitable at the very low prices seen while the most strict pandemic response measures were in place earlier this year.

Agalliu discussed the IHS Markit comparisons of Alaska’s current and potential oil tax systems against other oil provinces domestically and worldwide during a Sept. 2 videoconferenced presentation hosted by the Alaska policy think tank Commonwealth North.Advertisement
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According to the IHS Markit analysis of Alaska’s current and proposed oil taxes against Lower 48 and offshore international oil developments, the large North Slope oil fields the measure would apply to are currently more competitive based on average cash flow than many Lower 48 shale oil plays in the $35 per barrel price range because of higher private royalties across the rest of the country and the ballot measure would change that only slightly.

However, Agalliu noted that investments in new projects simply would not be made in most places, including Alaska, based on those market prices.

“At $35 per barrel a majority of the jurisdictions have a negative NPV per barrel,” Agalliu said of Alaska, Lower 48 shale and large offshore oil fields worldwide.

NPV, or net present value, is a calculation of the cash outflows and inflows resulting from an investment, in this case in an oil field.

IHS Markit analysts expect oil prices to eventually return to the pre-pandemic average of roughly $60 per barrel, according to Agalliu, but that may take two to three years, she said.

In the $60 per barrel range, both the current tax, commonly referred to by its bill title Senate Bill 21, and the ballot measure begin to make large Alaska projects fade in terms of investment competitiveness both domestically and against comparable investments worldwide, Agalliu said. That’s because North Slope oil projects have relatively high development costs and the state’s tax regime is heavily progressive, meaning the net profits tax increases significantly along with oil prices.

“The government in Alaska tries to capture most of the upside,” Agalliu said.

Under SB 21, the 500 million-barrel North Slope field modeled by IHS Markit analysts has an NPV of $1.16 per produced barrel of oil. That same barrel would have an NPV of $0.25 under the Fair Share Act, according to Agalliu.

“Under Ballot Measure 1 Alaska’s NPV is barely positive and even the current fiscal system yields four to five times lower value per barrel to investors than let’s say Brazil or U.S. Gulf of Mexico (oil projects),” she said.

The Fair Share Act would increase both the current 4 percent gross minimum and the tiered net profits tax rates. Initiative backers stress that SB 21 has resulted in the state receiving less than 20 percent of the gross revenue from North Slope oil in recent years, while historically the state has gotten 28 percent of that pie.

Opponents retort that the ballot measure would give North Slope projects a higher “government take,” or the amount of gross oil revenue captured through royalties and taxes, than nearly all of the Lower 48 unconventional oil plays they are competing for capital against.

However, Agalliu said the government take metric does not always give an accurate comparison of project investments because projects can be uneconomic but have little government take.

At a higher level, she said the frequent amendments and overhauls to Alaska’s production tax code over the last roughly 15 years have indeed impacted investment in one of the state’s primary industries.

“There’s been reports of a loss of confidence in the investor system,” Agalliu said of Alaska, a point frequently noted by ballot measure opponents.

She also said other states and countries — if they are going to change them — generally lower taxes during periods of low oil prices, while the Fair Share Act would do the opposite.

Initiative supporters contend several of the state’s tax changes since the mid-2000s have benefitted industry, most notably SB 21 in 2013, and the price-tax relationships must be analyzed over the long-term, not just at low prices.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.