Senator Hollis French: Myth Buster
Our thanks to Senator Hollis French allowing us to reprint his ADN opinion piece.
THE TRUTH ABOUT ACES
An advertising campaign is under way to persuade the Legislature and the public to go along with the governor’s plan to reduce taxes on some of the richest corporations in the world. The campaign is founded upon several myths that do not stand up to close examination. Let’s take a look at some of them.
Myth: Oil company investment is down on the North Slope since ACES passed.
Fact: Oil industry capital investment on the North Slope is up 35 percent since ACES passed. This data comes from the oil industry itself. This year capital spending on the Slope will be $2.76 billion.
Myth: Oil companies are leaving Alaska.
Fact: Repsol, an oil company with 40,000 employees and operations in 29 countries, announced plans a month ago to invest at least $768 million in oil exploration and development on the North Slope. This is new money coming to the state. One thing that attracted Repsol to Alaska was our stable political climate.
Myth: Wells are not being drilled on the Slope.
Fact: 164 development wells were drilled on the North Slope in 2010, an increase of 24 percent over 2009. That’s right: Drilling was up last year, not down as some would have you believe.
Myth: The pipeline is going to be shut down soon.
Fact: This is highly unlikely. OCS development could add 1 million barrels of production into the pipeline. And just this month BP launched a $100 million “heavy oil” pilot project at Milne Point. BP is under time pressure to get its heavy oil reserves out of the ground as it needs to blend that oil with lighter crude to render it shippable in the pipeline. Heavy oil could, according to BP, amount to 250,000 barrels per day in a few years.
Myth: The oil industry is unanimously opposed to ACES.
Fact: Most industry business people think ACES is OK. The Fraser Institute Global Petroleum Survey asked 364 companies with exploration and development budgets totaling $161 billion about whether ACES was working or not. These are industry insiders, and fully 70 percent of them said that ACES either encouraged investment or was no deterrent to investment.
Myth: Progressivity takes too much when oil prices are high.
Fact: Progressivity is the feature in ACES that raises the tax rate once profits climb. What you don’t hear about are the credits the state grants for investment in Alaska. The credits reduce an oil company’s taxes dollar for dollar. And according to the Department of Revenue, the credits granted in 2010 were nearly equal to the amount collected under progressivity. In other words, what the state takes in under progressivity goes back as credits to the companies that are actually investing in Alaska.
These facts are inconvenient for those who believe that giving $2 billion per year to the oil industry, which the governor’s bill would do, will somehow lead to a full pipeline. Keep in mind that oil production has been declining on the North Slope since 1988. It has declined about 6 percent on average every year since then. Oil taxes were lower during much of that time. Why did production rates decline during a period of low oil taxes? The answer is simple. Because that’s what the vast majority of oil reservoirs do. They decline.
Alaska does need new oil in the pipeline. The problem is that the governor’s bill does not bring any assurances of more production. Don’t take my word for it. This headline ran in this newspaper recently: “Parnell’s oil tax gets BP’s praise but no promises. Spokesman stops short of saying jobs or investment would result.” The unfortunate truth is that we could pass the governor’s bill and not see another dollar of investment.
A bill that actually stimulates new exploration and production without giving away the farm will get support in the Legislature. For example, we are considering a bill that focuses on granting credits for drilling in unexplored areas of the state. But the debate must be based on facts and not the myths and half-truths that some are peddling.
Does ‘we are considering a bill that focuses on granting credits for drilling in unexplored areas of the state” wilderness land?
oops – does —— mean wilderness land?
When one refers to a “Wilderness” designation it usually means wilderness as defined by the Federal Department of Interior’s National Park Service categorization.
The Alaska legislature has no authority over the 65% of Alaska which is in federal ownership. Regardless the federal land status designation.
So, the answer to your question is no. Unless you are referring to state owned land in conservation status. Then I’m not certain, but I don’t believe there has been any suggestion of drilling in those areas, but I could be wrong on that.
Thank you for clarifying the term. I appreciate that.
Actually, Wilderness is designated by Congress, and some of our national designated wilderness is on National Forest, which falls under the Dept. of Agriculture (National Park Service is Dept. of Interior). BLM and the Fish and Wildlife Service also have designated wilderness lands.
See the Wilderness Act of 1964 for more information: http://www.wilderness.net/index.cfm?fuse=NWPS&sec=legisAct
AKM, feel free to delete this comment if you want, but Wickersham’s Conscience recently made a similar point, supported by the Department of Natural Resource’s own data.
http://wickershamsconscience.wordpress.com/2011/03/20/dont-discard-aces/
The Alaska public is being sold a bill of goods. Props to Senator French for calling it out.
Thanks – always appreciate more information on these issues –
All very good, clear and concise points reinforcing the simple fact that since oil production is so astoundingly profitable that Alaska should really be thinking in terms of raising its taxes and royalties not lowering them. I agree 100% with both WC and Sen. French but the thing that immediately springs to mind so far not mentioned – if it makes no logical sense to give away money to the oil companies, then why is it being promoted? What do those promoting it stand to gain? Who exactly are they?
Anyone who knows much at all about the expensive process of resource extraction is also aware that planning is a key feature. Any oil company still in business has its budgets (best case/worst case) planned five and probably ten years in advance, revised annually. Next we can consider how the consideration of stable conditions in the business environment might interact with portions of the budget related to exploration and development of newly discovered resource. Taxes don’t play any part at all – projections on based on price projections. The exploration and development end of the oil business is very well understood as a cost center. When the margin drops to a certain threshold you stop exploring and/or developing because the margin is not large enough to justify it.
So that brings us to the ultimate variable, the keystone in the arch so to speak – price. I don’t keep careful track of the oil business but I have a slightly higher awareness than the average citizen perhaps. That said, I noticed four or five months ago that oil inventories were near the limits of storage capacity in the US. Yet the price of oil was on the rise. Demand was on the rise *slightly* but was still well below the levels of 2007/2008 when oil had hit record prices. So why were oil prices rising? Unrest in the Arab world was still over the horizon in Nov. 2010, China was growing economically but their oil demand is still only a fraction of that of the US and Europe. The answer to this arcane mystery is very simple indeed. Speculation. Speculation in the commodities market is naturally constrained by one simple rule, if you buy a futures contract on say 100,000 bbls. or oil, when the contract matures, you have to take delivery. There are other subtleties to futures markets that I will passover for the moment but that one is the gist. Back in I think 1999 that was changed by congress such that futures contracts could be freely traded back and forth with no regulation and no constraints on taking delivery. Thus in the case of oil for example, whereas pre 1999 if you bought futures on 100,000 bbls of oil for July delivery you had to make sure you had 100,000 bbls storage capacity available on the delivery date. Sure you could turn around and sell that same oil the next day but just logistically, it would take a bit of time, so there were costs, and overall this system tended to limit participation in the commodities market to serious players and preclude much speculation. After all, one would assume that a wall street investment bank might not have the storage capacity to take delievery of 100,000 bbls of west Texas intermediate crude.
So the biggest single constraint on speculation in the commodities markets was removed enabling not average middle class workers, but shall we say well heeled but constrained moneyed interests by the hundreds and thousands to find a home for their *excess capital* that had a much higher return than treasury bills. How much has the price of oil increased in the last four months? Eight months? Year? Better still, google a bit and look at the change in the price of oil since 1999. To add to your incentive to do so I will mention that the lowest price on that curve was $10/bbl.
The lack of natural constraints in commodities trading has resulted in the decoupling of the fundamental principle of supply and demand from price which is one of the factors determining supply.
Just to put some perspective on this whole interesting discussion, can anyone here find, let alone cite a source for what the industry average cost to produce a barrel of oil is?
I really enjoyed reading this. Imagine how much gas prices would have increased after the Gulf oil spill if dumbya had been Potus. Prices barely moved even though millions of barrels of oil were lost. Now look at the unrest in Libya,which has been cited as the reason for oil increases although Libya’s output is just a tiny fraction of the oil we consume in one day. There is no justification for these increases unless it is speculation. And that it what was cited as the main reason gas cost four to five bucks a gallon under dubya. Thank you KN for your expertise.
Excellent post–Thank you for sharing.
You can try Gibson consulting Online by Richard Gibson for some possible answers to oil and gas production costs. I don’t know how much is bull or baloney and how much might actually be truth. It is interesting.
Matt Taibbi has a chapter on exactly this sort of commodities index speculation in Griftopia.
And just last week:
http://news.firedoglake.com/2011/03/18/cantwell-senate-democrats-urge-cftc-to-stop-oil-speculation/
And I forgot to mention, Alaska’s Mark Begich is one of the signers of the letter.
Mike from Iowa – thanks for the reference, I took a look at it. Although I might want to take exception to some of the assertions I see there the ones relevant to the price of oil seem pretty clear. One thing that is obvious and disturbing is that there is some ambiguity about what a barrel is. The general concensus is that a barrel of oil is 44 gallons. Weight would be a better metric because it can’t be faked.
So the upshot of all that palaver is that the cost to produce is about $38 per bbl. Given also that the mix of end products from the refinement of a barrel of crude can be varied to suit the optimal advantage of the refinery, IOW gasoline is not a fixed percentage of end product but can be varied by altering refining processes.
Thanks for finding a baseline for me, I do appreciate it. CTP of $38/bbl seems pretty reasonable to me but if it was even a little bit higher, say $48/bbl it would still leave a profit margin of around 100% for primary producers. Not a bad deal. In hard rock mining a margin of 10% looks good.
Thank you Hollis and Shannyn. Seems to me the oil corporations would like Alaska to be stable and prosperous. We know there is much yet to be found in this state. If the corps pay less in taxes then the state becomes less functional for resource extraction.Changing the state tax structure may get a low veep a big bonus. But it wont build the infrastructure we need to progress. OOOh there is that ugly word Progress. As in progressive. What a misnomer. To have the best environment for future extraction the populace must be educated. That means the state needs taxes. I know some will be smarter than others and be “Progressive” Get a grip and live with it. You know if i were the CEO of a big oil corporation i would be looking real hard at not needing oil. Just sayin.
Not much has changed since 2006. The oil patch still owns the majority of the legislature. So what if they were caught on tape taking bribes? The prosecutor didn’t tell the defense Bill Allen was a sex offender, so the convictions get thrown out. Unbelievable.
Why wouldn’t they just buy the latest bunch? As the saying goes, in politics you can get away with anything but getting caught with a dead girl, or a live boy. The oil patch lobbyists have snuggled up with most of the GOP, and have Capt. Zero dancing like a marionette.
Agitators are always standing in the way of progress,their’s. I’m sure they will gladly let you know through the use of scare tactics how un-nice it is of you to try to deprive them of that extra nickel they were raised believing belongs to them. BTW you are not entitled to a slice of their pie. They did all the bribery and underhanded dealings with BAPF government officials. We do luck out if they get caught and slapped on the wrist because they pass the cost onto all of us. There’s our share of the pie.Way off topic,has anybody seen or heard from Mag the Mick lately? I’m getting uncomfortably lonesome without all her wit and charm.
Yes, mfi, mag has been around lately, commenting on an open thread.
Try the excersize of thinking all that 2 billion dollars can contribute to our economy…like 200,000, $10,000 scholarships, or small business grants, or money towards appropriate alternative bioregional energy sources(local solar, wind, geothermal, etc.) or basic health care or our schools needs, and on and on… that can keep giving back to the economy indefinitely. This rush to bribe the big industries seems more like assurance money for the people behind this for their own future jobs as lobbyists or recipients of campaign funds…Unfortunately, it’s a ‘pay to play government’ now(always was, but now so obvious)..but we have to keep trying to get the needs of the people considered and met. And again, it’s that pesky Citizens/United SCOTUS decision that is quickly turning us into a goose-stepping country to do the will of the corporations…keep calling and writing those decision makers for your own sanity, and descriminate to find truth…for your own conscience.
Gov. Parnell sent me the link to the Resources Committee and asked that I let the Senators on the Committee know how I felt about his (not-so-well-thought-out) proposal to grant new big tax breaks giveaways to the oil companies.
Here’s the link:
http://www.legis.state.ak.us/basis/get_com_info.asp?comm=SRES&session=27
Please let these Senators know that Alaska has better ways to spend its money. An individual E-mail to each Senator on the resources committee pops right up for you to send your message.
Another page from the republican playbook. The Governor will reduce revenue to the state. Then he will announce a fiscal crisis. his solution will be to decimate collective bargaining for state and municipal employees because they cost too much and “we’re broke”.
As Rachel maddow says, — “IT’S NOT ABOUT THE BUDGET!!!”
….it’s why i, affectionately, of course, refer to them as “republi-CONS”……
Thank you for the article. We wrote ,and encourage others, to write their Senators to “thank them” for not taking time to explore the Governor’s tax bill and not allowing the passage of the bill without further data and proof it would bring true benefit for the State. Just saying so and having TV commercials doesn’t do it.