You Gotta Have Faith

What the industry wants

In case you’ve been doing other things, like having a life, you should know that what the oil companies want is no change in the Petroleum Production Tax rates, the tax credits – in short, the money issues. Except the Borg – er, I mean Exxon – which thinks even the PPT tax rate is too high.

A whiff of fear

The committee held a public hearing the other night. Nineteen people testified. Nine of them want the current law changed. Ten don’t. The 10 who don’t all made their livings from the oil industry one way or another. They all said they’re afraid that if we tax more the industry will spend less and their businesses or jobs will suffer.

It must be tough to be in a situation like that, where every time there’s a political change that big oil doesn’t like you’ve got to roll out and toe their line at a public hearing. If the fear is real – no way for me to tell that, just listening to the testimony – it must be tough to be so easily scared. I feel sorry for them, but I don’t agree with them and I can’t let their fears guide my decision. Legislating out of fear is as bad as legislating out of anger or greed or any other emotion.

One-handed consultants

Back when I was a much younger man, I worked as the aide to the House Special Committee on the Permanent Fund. That committee wrote the bill that finally became the permanent fund law we’ve got now. As you might imagine, the committee hired some consultants: economists, investment bankers, economic development specialists, mixologists. (Okay, I made that one up. After the hearings and work sessions, the committee members employed the services of Alaskan mixologists.)

The committee members learned a lot from the consultants, but the process could be frustrating. At one point, after a consultant had given an “on the one hand … on the other hand” answer, Committee Chairman Clark Gruening leaned into the microphone and said, “You know, once in my life I’d like to meet a one-handed consultant.” Brought down the house.

(Then-Rep. Bill Miles was so impressed by all the consulting that he wrote a song about “subordinated debentures,” but that’s another story.)

Well, we have what looks like one-handed consultants here. They all like a net profits tax. Not the same net profits tax, mind you, but a net tax. Of course, they were all hired, and are all being paid by, people who like a net profits tax.

Think there’s any connection?

A matter of faith

The consultants like the net profits tax because it works so well in their computer models. In other words, it looks good on paper. But the more the powerful House Special Committee on Oil & Gas, of which I am a powerful member, has drilled down into the claims for the net tax approach, the more I’ve found that support for it is a matter not of facts but of faith: You just have to believe a lot of things, some of which clearly aren’t true and the rest of which may or may not be true. Here’s my first cut at a list of those things.

To support a net profits tax, the current PPT or the governor’s ACES proposal, you have to believe that:

1. State tax policy should be designed to give the oil companies more money, and the state treasury less, because the companies will reinvest that revenue in Alaska.

Well, no. Last year, the oil companies spent $1.7 billion exploring and developing oil in Alaska, according to figures I’ve received from the state Department of Revenue. They shipped at least $6 billion in profits out of the state. That means that for every $1 our tax law allows a company to keep, it will invest 28 cents or less.

2. Reinvestment will result in more money to the state at some point than we let the companies keep.

We don’t know that, for two reasons.

First, there’s risk. Some oil industry activity, like exploration, is very risky. A dry hole doesn’t get you anything. And in the time between the investment and the time more oil is pumped, the price could drop enough that the state gets less value than it would have gotten by taking the money in the first place.

Second, a dollar is worth more today than it is tomorrow. If you give a company $10 today, and it gives you back $11 five years later, you lose.

3. If it doesn’t, the economic benefits to Alaskans will make up the difference.

We don’t know that, either. There’s no doubt that if the companies invest more, there will be more economic activity. But, there’s no telling who benefits. For example, there’s a lot of talk about creating jobs for Alaskans. Given the oil companies’ crumby record on Alaska hire, we’re more likely to be creating jobs for Texans.

4. You know how each of the oil companies operating in Alaska makes its investment decisions.

Nope, sorry. PPT and ACES imagine a world in which all decisions are the result of economic models. But for all we know, the decisions are made by guys wearing beer-can hats and throwing darts at a map. Actually, the truth probably lies somewhere between those theories. Where, exactly? We don’t know.

5. Our tax policy is a deciding factor in that decision-making process.

This is just plain wrong. The single most important factor in oil industry decision making is how likely an investment is to produce more oil that’s worth more than it takes to produce. In fact, this is so important it trumps everything else. Companies will invest in places where the government takes 90 cents of every $1 if the “rocks” are good.

The second-most important factor is how much that oil is worth. At today’s prices, almost anything short of drilling on the moon makes sense. The third, surprisingly, is whether your company has the people to do the job.

Is our tax policy the fourth-most important factor? I don’t really know, and the people who do aren’t saying.

6. Those decision-making procedures are congruent enough that you can manipulate all of them with a single tax law.

A dozen investment committees in a dozen different places, working for a dozen different companies with different goals, all make the same decisions based on what is, at best, the fourth-most important factor in their decision. Good luck.

7. You can write a tax law that will do that.

Again, good luck. All we know for sure about the most recent attempt to do that, the PPT, is that it’s bringing in quite a bit less revenue than the state expected. Is it stimulating investment? Check back in a few years. Is that investment resulting in more oil production? Check back a few years after that. In plain words, both the PPT and ACES are a seven-year leap of faith.

8. Your tax policy is so good that it will run by itself for some period of time.

That’s what all this talk about “tax stability” is. You have to like your law a lot to say we’ll just let it run until 2011 before we re-evaluate it. Why? Because by 2011, we’ll be pumping about 25 percent less oil. And if our tax policy was wrong, that oil’s gone. There’s no way to try to capture more of its value.

9. If your tax policy doesn’t do what you expected it to do, it’s not the tax policy’s fault.

That’s what people are saying now. The PPT brought in $800 million less than we expected? That’s not a problem with the law. Costs were higher. Well, if the law didn’t work in the real world, it’s not a good law, is it?

10. If your tax policy results in the companies keeping more money than you wanted them to, you can claw that money back.

History doesn’t support this idea at all. The state and the oil companies disagreed on royalty rates and, years later, the state settled the cases for pennies on the dollar. Same thing happened on the severance tax and the corporate income tax. And we’re disputing pipeline tariffs with the industry all the time. What makes anyone think this is going to be any different?

So to believe in a net tax, you have to be like the Red Queen in Through the Looking Glass, who could believe six impossible things before breakfast. Except you’ve gotta believe in 10.

More later,