Tuesday, March 3, 2009

Obama's Oil & Gas Tax Plan: Alaska's precarious position

(3/03/09) On Saturday, President Barack Obama detailed his fy2011 federal budget proposal by saying he would eliminate $30 billion in oil & gas company tax credits and use the money to pay for government services.

Lets face it; oil & gas companies are an easy target with the profits they've been reporting. But unlike other industries that have decimated wealth such as insurance (think AIG) and finance (think Lehman Brothers), the profits from oil and gas companies have actually helped buffer the dramatic liquidation of wealth in Americans retirement accounts.

SEC data on the ownership of U.S. Oil and natural gas companies shows that 70% of the shares of these companies are held by institutional investors (Ak Perm Fund Corp eg.) especially asset management companies, and predominantly on behalf of middle-class American households who on shares through mutual funds, pension funds and retirement accounts.

Individual investors who manage their own portfolios and are not company insiders account for almost 30% of all industry ownership, which again includes significant numbers of middle-cass households holding IRA and other personal retirement accounts.

A recent report on the subject found, “The data strongly suggest that most of those profits go to the industry’s majority shareholders, who are middle-class U.S. Households with mutual fund investments, pension accounts, other personal retirement accounts, and small personal portfolios.”

But still, it's seems politically fashionable to go after one of the only industries in the country that is making a profit.

Seems ironic in a day and age where government is spending hundreds of billions in taxpayer money to bail out failing companies who have managed themselves into the ground.

Today AGI announced the largest single quarter loss in corporate history at $67 billion and what happened? Uncle Sam rushed in with $30 billion in taxpayer money to help them out. I'd wager that if Exxon or BP were to lose that much, Uncle Sam would be as absent as mink stoll at a PETA function.

The problem closer to home for Alaskans is that President Obama's proposed tax changes represent a threat to Alaska's financial life line; oil & gas development on the North Slope.

In November of 2007, Governor Sarah Palin and the Alaska State Legislature increased taxes significantly on the oil & gas industry. The one saving grace for many producers was that in some cases, they could deduct their state taxes from their federal taxes.

President Obama's plan calls for eliminating these credits and if they become law, producers will take their capital and flee to more tax friendly countries who will be begging for investment given the global economic meltdown.

Already there are growing signs of concern on the North Slope.

In January of 2008, the governor put out a press release announcing a major new project on the North Slope:

"Governor Sarah Palin today commended the major investment announced by Italian oil giant Eni. The company will invest $1.45 billion developing the Nikaitchuq oil field. Eni expects to drill 70 wells to recover 180 million barrels of oil."

In December of 2008, Department of Natural Resources Commissioner Tom Irwin, used the Eni project in a column in the Anchorage Daily News to support his contention that activity up on the North Slope was humming along.

"Our commitment to development is further demonstrated through the royalty modification program and has resulted in major activity. Through a cooperative cost- and risk-sharing effort between the state and industry, this world-class field is being developed. Likewise, Italian energy giant Eni has sanctioned some $2 billion in project capital for the development of the Nikiatchuq field, neighboring Oooguruk."

Last week however, Eni notified sub-contractors that it is suspending all work until further notice.

According to one oil company executive, this is a significant loss of jobs.

To add insult to injury, Conoco Phillips announced they were cutting their capital budget in Alaska. Conoco has announced a $12.5 billion capital spending program for 2009, which pencils out to a 20 percent reduction in capital spending in Alaska for the coming year.

Capital spending covers exploration and oil field development costs, which have always been viewed as the marker for determining the economic health on the North Slope.

According to Eric Lidji at the Petroleum News, Conoco earned $2.3 billion in profit on $9.2 billion in revenue in Alaska last year and paid $3.4 billion in non-income taxes. Conoco paid $1.7 billion in non-income taxes in Alaska in 2007.

Conoco paid $33.83 in non-income taxes on each oil-equivalent barrel produced in Alaska last year, up from $15.27 in 2007. The figure is significantly higher than all other areas listed in the report, except for the $50.14 reported for a region marked "other areas." The company paid $4.20 in non-income taxes per barrel in the Lower 48 last year.

The dramatic increase in non-income tax per barrel is due to the state's dramatic increase in productions taxes adopted in 2007.

In fact, the news from the North Slope of late has made one thing perfectly clear; a continued refusal by DNR Commissioner Tom Irwin to delay Point Thomson development even more than he already had, would have caused an even wider spread of pain on Alaska's economy.

The global economic recession will continue to present challenges for Alaska's resource development, but the combination of Alaska's high tax structure and Obama's proposal to end federal tax breaks for producers of domestic sources of oil & gas will have tremendous consequences on Alaska's North Slope development.

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