Author: Roger Marks
The largest mineral demand growth in the 21st century is for lithium for electric car batteries. The greatest reserves of lithium ore in the world are in Bolivia. However, not much lithium mining occurs in Bolivia. They have a very exaggerated sense of what they are entitled to. So mining happily goes to Argentina, Brazil and Chile. And Bolivia remains one of the poorest countries in the Western hemisphere.
Like Bolivia, Alaska has tried more than once to have excessive taxes, and the results were not pretty. The Fair Share Act, Ballot Measure 1, the initiative to raise oil taxes, is the latest episode.
The 1989 oil tax change, just like the Fair Share Act, targeted large fields for high tax rates. Within months, producers were switching investments from high-tax to low-tax fields. And in existing fields, once you stop investing, production goes into freefall. The tax became anemic and production and revenue fell.
The ACES tax regime, in place from 2007-2013, had one of the highest tax rates in the world at high prices. Producers could make much more everywhere else. The rate of investment here was a fraction of what occurred worldwide, and production dropped 200,000 barrels per day.
As measured by the percentage of pre-tax profits going to government, Alaska producers currently pay more than most Lower 48 oil states. Under the initiative it would be much more. It would impose taxes higher than ACES.
Producers have plenty of opportunities outside Alaska, with lower production costs and taxes, and will easily invest elsewhere.https://2832cd3a7bab503fb87fbe62ee756f02.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html
The initiative would adversely affect every development decision on the North Slope. You cannot yank hundreds of millions of dollars out of investor cash flow every year without them modifying their behavior.
Producers would have less money to invest. Alaska projects would become less viable. Projects elsewhere would become more profitable. They would shift investments from the high-tax fields to the low-tax fields. They would keep fields small to circumvent the provisions of the initiative.
They would enter “harvest mode” on the legacy fields, like they did under ACES. They would produce without re-capitalizing the fields. Production would deteriorate. Despite the high taxes, the state would make less money.
The Pikka and Willow fields have yet to be sanctioned. They were deferred because of ACES. If developed, they could add 300,000 barrels per day to the trans-Alaska oil pipeline and thousands of jobs, but will require $10 billion in investment. However, after ACES, the state does not have another opportunity to play “bait and switch” with the producers, enticing them with one tax rate and then jacking it up once the fields are operating. After sinking all that money, nothing would prevent the next ballot measure. This is one reason a North Slope natural gas pipeline was never built.
The international consulting firm IHS recently made a presentation to Commonwealth North on the competitiveness of Alaska. IHS is run by Pulitzer economist Daniel Yergin. They concluded:“Alaska has one of the most unstable oil and gas fiscal systems in the world.”“Most of the jurisdictions in the peer group improved fiscal terms since the 2014 oil price crash.”“Alaska’s current fiscal system is one of the least competitive ones within U.S. and international peer groups in terms of dollars per barrel present value accruing to investors.”“Alaska’s fiscal system becomes one of the least competitive oil and gas fiscal systems in the U.S. under Ballot Measure 1.”
Places become Bolivia slowly. The U.S. Geological Survey estimates there are 4 billion barrels of undiscovered oil on the North Slope. There is a reason only two major companies are looking for them.
Roger Marks is an economist in private practice in Anchorage. From 1983-2008, he was a petroleum economist with the Alaska Department of Revenue.
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