Voices from the Flats – Orwellian Juneau and Sean Parnell’s $2B Oil Tax Rollback
By Rep. Les Gara (D-Anchorage)
The slick oil tax ads are starting. And when political ads begin, you start to wonder whether telling a fib is cheaper than telling the truth. Well, because political ads cost lots of money, and they tend to be more fib than truth. So, fibbing must be cheaper than telling the truth, right? Or, maybe in politics it’s just more effective to mislead people. Nah. No one would ever do that. Not when billions in state oil revenue are at stake.
As you know, the governor has proposed the biggest oil company tax rollback in state history. To support his effort, the major oil companies have said that if the bill passes they. . . . . um . . . . won’t guarantee any new investment, won’t guarantee any new development, and, basically, what they have to say is proprietary information. Basically they’ve said, “Gosh, we don’t want to commit to anything, but give us some huge tax breaks and let’s see what happens.”
How’s that for proof the governor’s plan will work? A bunch of companies that won’t tell you whether they’ll produce any more oil if we give them $1.5 billion a year. Would you cut a deal with a “partner” who wouldn’t tell you whether they’d hold their end of the bargain? Wait. There’s no bargain here. The deal is we give the money away, and just cross our fingers.
If Governor Parnell succeeds at passing his legislation, the state will receive roughly $1.5 billion less in oil revenue a year than it does today. That’s $250 million a year over what the governor conceded until this week. We’ll see if the number keeps growing.
In a year when the governor is proposing a budget with a $150 million deficit, his oil tax rollback proposal threatens to run through the state’s $12 billion in savings in five to eight years (depending on whether his trend of budget growth continues.) That’s a recipe for an income tax. But instead of conceding that the proposal might run through the state’s savings absent a hefty income tax, supporters of the governor have started to take out political ads. And the ads threaten the “Orwellian truth” that if we don’t pass the Governor’s bill, well, he’ll have to impose an income tax.
So, who’s being Orwellian, and who’s not? Let’s let history be our guide.
If vastly reducing the state’s oil revenue will lead to new production, then that’s a good thing. But in 2006, when developers were told that virtually any new field on the North Slope would pay a 0% production tax, there was 20% less investment on the North Slope, 20% fewer jobs, and oil production was declining just as it is today. Low taxes didn’t reverse the decline in Alaska oil production. If the governor gets his way, and history repeats itself, the governor’s plan will burn through our savings accounts – and he’ll have to start pushing an income tax. Or he’ll have to cut the Permanent Fund Dividend. I’d rather do neither of those things.
We have better ways out than rolling back oil taxes at a rate that will burn through our savings accounts in eight years.
The state needs to be more aggressive about promoting our substantial tax incentives to new companies. Instead, we’re scaring away new investment by telling the world not to do business here – or to wait for a promised day when our taxes are lower (why would a new developer invest in Alaska today if the governor is telling them to wait while we debate lowering our oil tax rate?) Two weeks ago Senator Hollis French and I wrote the governor to ask him to do that, and have met with him since.
It’s worth reminding folks how “abusive” Alaska’s oil tax system has been to our producers. Eni and Pioneer have recently started production at two new fields, Ooogaruk and Nikaitchuq.
ConocoPhillips has earned over $7.5 billion in Alaska profits under the current tax system in the past four years.
British Petroleum earned $7.2 billion in Alaska profits between 2007-2009 (their 2010 annual report isn’t yet available.)
And Exxon, well, never reveals their Alaska profits. They just tell us to trust them that they don’t make enough money here.
And, though it’s out of our control, I have to believe the most lucrative new area for oil development on the North Slope will be opened soon. The National Petroleum Reserve-Alaska holds what many believe to be large stores of crude oil. The Army Corps of Engineers denied Conoco a permit to build an access bridge there over the Colville River. The inside scoop is that the decision will be reversed. It should be. And, notably, Conoco has proposed development there under our existing tax system. Hard to argue that the current system deterred that development.
There’s no easy way to reverse the decline in oil production. One option, though, is to demand that the major oil companies allow fair access to their oil, gas and water separating production facilities on the North Slope at a fair price. A truism in Alaska production is that small fields are not economic when the owner has to build their own processing facility, and I’ve co-sponsored legislation to require fair access. I’ll also keep my mind open to ideas that might work. But the Governor’s plan isn’t one of them.
Walker’s playbook:
Step one: Cut taxes on the rich, to the extent that state operations are impacted.
Step two: Point to the “budget crisis”
Step three: Blame the “crisis” on the public employee unions. Make everyone mad at the union members.
Step four: Get rid of the unions
Parnell is passing step one, about to move on to step two.
This is all too much. I feel overwhelmed.
I’m probably standing alone on this, but I feel that we should never have eliminated the state income tax. Like the bush rat I feel it would have brought revenue from the working tourists and minimally affected working Alaskans, and added to the states coffers. What our elected representatives would do with the funds is another chapter.
Nope, you’re not alone. I posted my opinion on 5.2. Working tourists, nice description.
But, the price of oil is WAY UP so how hard up are these oil companies?
digusting
Crossing your fingers and hoping is an effective form of birth-control,isn’t it? Oil companies have figured out it is much cheaper to buy politicians ,as an investment, and the Scotus gave them the blueprint and a large magnifying glass to find their way to state capitols. I thought the eight years of dubya’s unelected presidency was a really,really bad installment of Dallas,the nighttime soap. I think we must be doing reruns of that nightmare..Is Hollis French still left-handed?
Now I’m going for the last couple of paragraphs.
This huge vision of Walter Hickle nearly overwhelms my computer screen. “We are the owner state.” Then there are the seven sisters who took over Alaska, now it’s down to some old maids, still control. Won’t let the neices and nephews in because that will expose how badly they have managed/maintained uncle sam’s (insert any and all power system) trust and generosity, in spite of extremely fair warning.
Leesa projected the necessary fear to the legislature last week. You have to go along to get along. Just think for a moment of the 40,000 Alaskans who were told Exxon would make the people whole.
I’m with Rep. Gara. Alaskans do not need to bow down to anything, except maybe a Musk Ox, Bull Moose, Brown or Polar Bear. Notice I don’t reference the caribou. They live because The People demanded and no one has blown oil onto their feeding/calving grounds.
I listened today to some very smart men: Joint Chiefs of Staff, Secretary of Defense, US Government. Yes for the duration we need oil. Remember those old seven sisters, the three old maids? They are sitting on a crumbling empire (infrastructure). As long as the girls can produce they survive by manipulation of …
Mano, what a concept. The old maids cannot afford the maintenance requirements of the infrastructure. And remember they do not care at all about the enviroment. So one of the questions being asked of them this legislative session is how have the old maids used the tax credits available to them. Exploration or maintenance?
I know I am lucky that Les Gara, Mike Doogan, Hollis French represent me in the Alaska legislature. Gentlemen, thank you.
nem
Para 3: We already gave away Billions to Oil Companies. Why in the world would we want to give them more? Oh, yah, promises, promises, promises!
I have only read the first paragraph and need to remind all readers advertising in Alaska is the cheapest in the Country. It would seem that ‘other expenses’ of the advertising campaign would be worth looking at.
He’ll give them more money than Sarah, so they’ll finance his next campaign…I bet he supports Gov. Walker too.
Dear Representative Gara,
While it is apparent you tried to be thorough your missive here did not do a particularly god job of stating either your own position on the issues raised, or of defining what those issues actually are.
In fact your exposition was so ambiguous that on a single reading I am not sure what you are in favor of doing and what you are not in favor of doing. But the larger issue is did you actually make a case on the basis of reality for one policy or another? I don’t quite think so.
Any natural resource such as oil or copper or coal or diamonds is a wasting asset. Over time it will approach the asymptotic limit of unprofitable production and will be abandoned. At some distant future time the residual reserves left may become economic to produce and a rejuvination will occur, but that depends on many factors. Those are the fundamental economic variables.
Ultimately the oil resources of Alaska will be depleted to a degree where no further profits can be made from producing them. According to the religion of profit the determining factors with respect to that drop dead date are the ROI and the IROT, two utterly artificial economic formulae. You seem to be a devotee of those dogmas as opposed to a pragmatist who looks at the long term. The fact is neither of those functions takes into account the change in value over time of the asset being considered. Less than 12 years ago oil was valued at around $10 per bbl. It is now worth ten times that amount. What will it be worth in another ten years?
So it seems to me you are overlooking a very important aspect of resource development and that is taking into consideration what the resource will accure in value with time. I would suggest that since Alaska has no plan in place or economic foundation on which to predicate its future, deferring the ultimate wastage of her oil resources by inhibiting production through taxation might actually work out to be a good strategy.
To the right honorable gentleman and all other mudflatters, no, that does not mean that I think Palin was foresightful in taxing big oil. She could no more sort out these issues than work a Rubic’s cube while riding a unicycle.
Alaska has to find a way to transition from its present total dependence on oil revenues to a more sustainable and hopefully well reasoned economy. In that context it only makes sense to stretch the oil revenue as far into the future as you can even though it will be declining the entire time. Anyone competent would have realized this scenario 30 years ago.
And yes, it would be worth looking at the relative profits that go to the state versus those that go to the enterprises. Is there really any reason they should be equal?
KN – shouldn’t the ‘equation’ in dealing specifically with the current ‘players’ on the current contract, include information about how many AK bbls are extracted by said players, where those bbls go (what countries get AK oil), and what % of said player’s profits are a direct result of AKs oil? How can you negotiate with an entity if you don’t have any leverage — and how can you have any leverage if you don’t ‘fight’ their threats/promises [by anticipating what they might do if you don’t (do whatever you think they might do…in this case, lower their taxes)]? Sounds to me like Parnell is ‘negotiating’ all backasswards — he’s offering before they’ve asked. Sure, they’re going to ask for lower taxes (who wouldn’t?) and all sorts of concessions, but to just give them as a starting point? Not very good, imho.
I agree with you that AK has to look at her long-term revenue from oil and how to extend that bounty as long as possible, but I agree totally with Les that to negotiate any terms on ‘promises’/non-disclosure from big oil is absurd. It’s even more absurd to give them greater tax breaks when you know darned well A) they are making huge profits off of you, already, and B) any money you ‘save’ them they’ll use to develop/exploit fields in other countries/areas…IOW, the money AK’ll be ‘saving’ them will just go directly into finding *other* oil outside of AK.
And, I’m not too sure it’s wise to think AK ought to factor in what “value the commodity will accrue”, either. Although, *at the moment*, there might be a model to make that calculation, I’m mindful of the whale-oil industry at the advent of electricity; the carbon paper, white-out, and typewriter ribbon industries at the advent of pcs; the vcr industry at the advent of DVDs, to name just a few. beth.
All good points Beth and all answerable. This is a complex issue.
I’ll take them in reverse order more or less.
Oil is the life blood of the world economy. Yes eventually that will have to change, the available oil is not infinite. There is a robust argument in progress now that we have either a) already passed “peak” oil, or b) we are very near to passing it. Once we do pass it speculation and supply/demand will start to drive the cost of oil higher. I have not seen a reaction in the oil markets to price historically. What is the cap? I have no idea but I think it is reasonable to assume that as along as the alternatives are limited people will pay substantially higher prices. Already in most of the rest of the world gasoline is considerably more expensive than it is in the US. That gap is narrowing but as it does demand is also increasing. What is the lifetime of oil as a part of the economy? Probably forever except as a much more limited factor but only after a long and painful transition. Off hand I would make a WAG that the global economy will not be significantly oil independent for at least another 50 years.
As to your second to last paragraph I think we are talking at cross purposes. As I understand the situation now in AK production is declining, part of this is due to the fact that producing known reservoirs follows a skewed bell curve and most of those reservoirs are past peak. In addition the claim is being made (see Halcro) that with the higher taxes on production, the incentive to develop new fields has been taken away so as you say the oil companies are doing their development elsewhere. What I am advocating is that there be no reduction in current taxes, but AK must bite the bullet and realize that as production declines other forms of revenue will have to be found to sustain the state government. The time to start looking for those alternatives is now. One short term measure that would make some sense both environmentally and economically would be to change AK laws so that royalties from mining were on par with royalties from petroleum, it would slow down Pebble for instance, not stop it, but slow it down, and it would yield significantly greater return to the state from the eventual and probably inevitable development of Pebble. That mine alone is worth half a trillion dollars. But most significant of all is the fact that AK needs to think in terms of making a transition from a resource economy to something else. The most obvious alternative to me appears to be an eco-tourism type of thing. That makes environmental conservation an asset that is sustainable. I don’t want to start a new discussion, but it goes against my nature to say something must be done without making any suggestions.
I don’t claim to be an energy expert on a par with your former governor, but it is my vague understanding that AK gets a percentage of the value of the oil shipped through the pipeline presumably based on the market price of that oil at the time it is shipped. No doubt it is more complicated than that but I think that captures the gist of it. So it doesn’t matter where the oil ultimately goes. (That is not to say that it doesn’t matter where the oil AK uses comes from.) After that, frankly you lost me, just as Mr. Gara’s piece left me uncertain as to what exactly he was saying should be done. Obviously, if Mr. Parnell is talking about giving back the tax increase unilateraly he is either a fool, or corrupt or both. You begin negotiations by making demands not concessions. Unless of course your position is utterly hopeless. In that case there won’t be any negotiations anyway.
Perhaps my scornful statements about economics incited you, I am just guessing. But too often the non-science of economics is invoked as a kind of holy grail that lights the way to a prosperous future. Well, the present is pretty prosperous, record profits for a wide spectrum of corporations, commodity prices breaking records, mega banks borrowing money from the treasury (who owns the US treasury?) at almost no interest and instead of loaning it back out to the economy at anemic rates of only 6% to 30%, they are arbitraging that money through a cycle of commodity bets. And they have already rigged the system. Do you own any stocks? Have you ever wondered why it was so important that your stock quotes be delayed 15 minutes? Take into consideration that huge investment banks who can trade shares at the rate of hundreds of millions per second are not operating under any such constraint. Economics is not science. It is professional gambling.
I hope you will understand that I reply thusly not out of petulance but pedantry.
A story on NPR this evening said the oil industry made $950 billion in profit world wide in the last decade. The oil industry will invest where it makes sense in the global market. The decision to invest here will not be highly influenced by a tax cut IMHO, and they won’t reinvest. Oh yeah, I almost forgot- looks like another huge windfall in on the way for Big Oil. The price closed today a bit over $102.00 per bbl and I saw gasoline went to $3.76 here in Anchorage. It always amazes me how quickly they can respond to an increase and how slowly to a decrease.
Gas gouging is appalling here in Chicago. I can’t wait for the electric cars to be rolling out. Windfarms, solar panels goes without saying.
Premium over 4 here in CA.
CA is also the only major oil state that does not have a depletion tax except for some old wells that originally financed the once great university and college system. The Tideland Trust has long since been diverted to other uses. I’ve heard that if we had a depletion tax we could get rid of our deficit.
The one thing that R’s really hate is savings. Any time they get elected and find a surplus they always spend it, usually via tax cuts or credits. Republicans have never met a “rainy” day fund they would protect. Sure wish more voters understood how fiscally irresponsible Con economics truly are.
The Alaskan refinery, the only one in the state, called Flint Hills, I believe is owned by the Koch brothers. That should explain things.
As soon as the golden goose is taxed out of Alaska, then let’s see how long it takes Les Gara to start supporting those two items he says he’s against: a State Income Tax and raiding of the PFD.
I feel pretty confident that it will not be the Democrats who try to raid the bank or initiate taxes. If there is no oil ‘action’ (gas also), there is no work, no income tax of workers, no revenue sharing (pork), the federal dollars really dry up. Best case scenario, PFD five year slump pisses people off, people leave the state.
Gara is against a state income tax? Too bad, that is an area that he and I would disagree on. I think abolishing the mechanism to institute an income tax all those many years ago was short sighted. I think we should have an income tax. That way, those workers that take the money and run back to another state to spend it there would contribute to the needed infrastructure, roads, airports, public safety – little things like that. Gov Hammond’s book said something like 20% of workers in the state didn’t reside here and therefore what did they contribute to the state? That recollected number might be wrong, that might not be the percentage now, but the issue is still there. If the community you live in doesn’t have sales tax (Anchorage, Fairbanks among them), revenues for the municipalities comes from property tax. If the workers don’t live in the state, just go to the slope to work, what financial contributions do they make to the state? I don’t know of any. Ah, I quit here.
Bush cuts taxes for the wealthy- result? Huge deficit. Obama allows renewal of tax cuts for the wealthy because the middle class gets them too. Result? Bigger huge deficit and cuts in programs, cuts of untold number of good jobs.
Wisconsin Gov gives away money to big business. Guess what— Huge deficit. Cutting of programs and untold number of good jobs in state and attack on unions.
AK governor supports tax cuts for big oil companies. Guess what will happen to our state? Huge deficit. Cutting of programs and untold number of good jobs in state and attack on unions.
This is the page from the Republican play book to make government smaller or in other words stop taxing rich people and big business. This country will suffer and be thrown back into the dark ages. Who but the wealthy will be able to afford to pay to educate their children? This will be a bleak picture if all this pans out the way it is with the federal government.
What is your first clue?
Ak Raven gave all the true correct answers to these situations. The ultra right and now the tea party political people have the theory it trickles down..look at the word..trickle..This theory of those two political party people..has never worked in any place in history..it only gushes up to the ultra rich then it leaves only the very ultra rich and the poor…ie the middle class becomes the poor as well.
You have that right Walker plans to take money from public schools and give it to private ones and guess who benefits? Not the Majority of Americans
“We the American people are enormously wealthy, you know that?… Who owns all of those trees in the national forests? This is not a rhetorical question… We do… Who owns all of that off-shore oil you read about in the newspaper? We do… Who owns all of those minerals under the federal lands? We do… It’s public property, you know… But we elect people to go to Washington… Who are those assholes?
What have we gotten ourselves into now? They go to Washington, they lease off what we own, public property, to private companies to sell us back our own stuff for the sake of a greasy buck… That’s dumb…”
Utah Phillips
Maybe in addition to bookclubs, tennis or cooking classes, some of us need to create ethics-clubs and vote. Finding the dirt and the impetus for political decisions that will ultimately affect us, some way somehow, is the burden we share. Let’s do our best.
What a concept. Vote
Everybody, repeat after me, Big oil needs more money, let give em ours! — chant , chant chant.
god bless big oil and America’s “free market”.
I would rather shut down the whole north slope than give it away. Parnell is not the person to be working this.
Who exactly is advising him? Just so we know in the future.
Gov Parnell works for ConocoPhillips or may BP/ExxonMobil. It is extremely difficult to distingish. Parnell comes to the Governorship very well versed in Big Oil Law In Alaska. (BOLIN). Ironically, Gob Parnell is a man of short stature. Couple of years ago Parnell challenged Congressman Don Young.
The significant factor here is that Don Young is a big guy. 6’3′ maybe, 6′. Way taller than I had expected. I stand 5’8″ . Pretty sure that Don Young is NOT advising anyone in the State of Alaska.
Hopefully there will be some flash actions out there in DC. If all those governors are hosted at the new resort down there by the bridge, hold onto your hat, Hattie!!!