One of the things that I’ve heard over and over again, is that there is a lack of transparency in Alaska’s oil taxes. How do we know if the current tax law is “fair” and “equitable” to all parties when we aren’t allowed to see how much money they are making?
This is a valid point. Tax law says that individual taxpayer information must be held confidential. Therefore, the Department of Revenue is not legally allowed to disclose how much money those taxpayers are paying to the State or how much they are keeping for themselves.
But, there is enough information out there to make a pretty good guess. So, that’s what I decided to do. Let’s set the record straight on exactly where the money is flowing. At least, as close as I can get based on publicly available information.
Bottom Line Up Front
I’ll save those of you that just want the bottom-line, the trouble of scrolling to the bottom of the page. Just remember that these are approximations, but should be in the realm of reasonable estimates (I’d say they are in the 90% range).
You’ll have to decide for yourself if this split seems fair, or if you think one side is getting the raw end of the deal.
Here are what I estimate that the 8 companies with meaningful production paid to the State (net of credits) and what they kept for themselves (net of all costs) during FY18.
|FY18 Estimates||Net Cash Flow to Company||Payments to State of Alaska*|
*Includes restricted revenues
**North Slope assets only
***Calculated as though it held interests for the entire fiscal year. These assets have now been sold to ConocoPhillips.
If you want to replicate the work I did here, this is where I got the data:
Unit level production data comes from the AOGCC.
Barrels of production that not sold are assumed to come from Prudhoe Bay, and are estimated by subtracting the Pump Station 1 deliveries (as reported by DOR) from the total production.
Royalties were determined by looking at the Division of Oil and Gas royalty reports.
Working Interest Ownership (to split up production and costs) also comes from the Division of Oil and Gas.
Capital expenditures and operating costs are taken from the Department of Revenue’s annual publication called the “Revenue Sources Book.”
Employee compensation numbers came from the BEA.
I’m reporting these data based on Alaska’s fiscal year. Doing so requires some manual adjustments to some of the data, which could result in errors. It’s also a little strange, since the tax year runs on the calendar year. But, this is the way the Legislature is used to seeing things, so I’ll comply.
These numbers also describe the amount of money that should have been paid by running my estimates through he calculations. Due to technical factors, and company specific information, this will be different from what the companies actually paid.
For these reasons, and because the data I am using is incomplete, these numbers should be viewed as approximations.
By the way. I solemnly swear that all of these numbers are generated from public sources. I do not have access to any data that is confidential and did not rely on any protected information I obtained as a State employee.
By multiplying the working interest ownership rates from DOG by the production reported to AOGCC, here is my estimate of how FY18 North Slope production breaks down to the companies:
A couple of notes. First, Hilcorp has another 12,744 barrels per day in Cook Inlet production. Second, ConocoPhillips will have a much larger share next year as they acquired Anadarko’s portion of the western North Slope units and BP’s share of Kuparuk.
Total Value of Production
By multiplying the distributed production by the average price during FY18 of $63.62, we arrive to the total revenue generated during the fiscal year by company.
I allocated transportation costs based on which pipelines each barrel of production must flow through in order to get to market. Production that occurs further from TAPS incurs a higher cost of transportation.
When I add up all the transportation cost, and divide them by the total production, I get an average netback cost of $9.94. The Department of Revenue estimated that number to be $9.80 at a higher production rate, so we are in the ballpark.
Gross Value at Point of Production
Subtracting the transportation costs from the total revenues provides what we call the GVPP. This is the number that determines how much money each royalty and taxable barrel is worth to the State.
Costs of Production
The best source of information we have to estimate the cost of production comes from the Department of Revenue. This allows us to break down the costs to the unit level a little better.
|OPEX (pg. 118)||$329,000,000||$2,417,000,000|
|CAPEX (pg. 118)||$488,000,000||$1,323,000,000|
|Daily Production (pg. 39)||30,543||502,887|
*Gross Value Reduction (explained later)
I don’t know how the costs should be allocated between the fields (that is confidential data). So, I’ll have to assume that each barrel is an average barrel (within it’s category of GVR eligible or not).
Capital costs are tricky. It is most likely the case that the GVR CAPEX is being spent by Oil Search in support of Pikka and ConocoPhillips in support of GMT. So it doesn’t makes sense to allocate these capital costs by production.
However, the non-GVR capital costs imply that the spending is occurring within producing fields. This is most likely what we call “maintenance capital.” In this case, it does make sense to allocated them by barrel.
So, first I am going to allocate the operating and maintenance capital costs to the non-GVR units.
I’ll allocate GVR operating costs to Nikaitchuq, Oooguruk, and Point Thomson (these are the only units that meet the definition of AS 43.55.160(f))*.
Then I’ll allocate those unit level costs to the companies according to their working interests.
For the GVR capital costs, I’ll assume that one-half of those costs are related to the development of GMT and allocate the rest to the “others” group.
*Note that CD-5 production seems like it may qualify as GVR oil. However, given DOR’s GVR estimate of 30,543 bbls/day, it must not be. The three units I am including add up to 35,620 in actual production in FY18 on their own. CD-5 is producing another 36,000 bbls/day.
Thinking About Costs
It is tempting to think that the cost of production is just going into the pocket of the companies. However, this is fundamentally false.
The money that an oil company pays in order to produce and transport the oil are paychecks to Alaskans and purchases from Alaskan businesses.
When I look at the data from the Bureau of Economic Analysis, I find that about $2 billion per year are paid out in compensation to oil employees. These aren’t rich guys in Texas stealing money from Alaska; these are Alaskans working their tails off in some of the most dangerous and difficult conditions you can imagine.
The rest of the money is spent to pay contractors, to purchase equipment, and to pay for the fuel, materials, and pipelines that are required to keep the oil flowing. A majority of those purchases benefit Alaskans.
So, it wouldn’t make sense to count expenses as part of the company take. That’s just the cost of doing business. And those costs represent money that supports Alaska’s economy.
“Are they really Alaskans?”
I can hear some of you saying “but those guys aren’t really Alaskans. They just work 2 weeks in Alaska and live in Hawaii.”
Actually, the BEA has a metric they use to try to adjust for out-of-state workers. It’s called an “adjustment for place of residence.”
The number isn’t broken down to each industry. But when you look at the total adjustment for all employees across the state, it adds up to $208,176,000. That’s a little less than 1% of the total state compensation.
If you assume these are all oil field workers (ignore the tourism and other industries that attract people to work in Alaska for a few months each year), that would mean that about 90% of the compensation earned from the oil patch goes to “real Alaskans.”
Net Revenues before Taxes and Royalties
We now have the number that represents potential positive cash flows. This is the number that the producers and the owners must split in some equitable way.
The producers must keep enough of this money to earn a sufficient return on their investments (or else they won’t invest further). The owner (the State) wants to keep as much of this money as possible.
DNR publishes the amount of royalties that are paid by each company from each unit. This data is not confidential.
However, I had to do some rearranging to get an estimate of FY18 numbers. In the end, I come up with $1.27 billion in total state royalty payments (about 30% of that goes to the Permanent Fund).
I estimate there are another $100 million or so dollars in royalty payments that went to ASRC and the Federal government for production that came from their lands. These were mostly paid by ConocoPhillips for production at Alpine.
Understanding State Production Taxes
By subtracting the royalty payments from the net revenues before taxes and royalties, we end up with what we call the “production tax value” or PTV.
It is this number by which we multiply the tax rate to determine the company’s net tax liability.
The current law has a tax rate of 35%. So, I’ll multiply the net revenues before taxes by that rate to get the estimated tax liability. But, if the tax liability is less than 4% of the GVPP (minus royalties), we will use that number instead (this is the “minimum tax”).
Tax Credits and Reductions
Alaska’s oil tax law allows for certain reductions to that top line number when companies do certain things. We call them tax credits. They are value we give to the companies to credit against their tax liability.
Prior to SB21 passing in 2013, there were a suite of credits that could be earned by making certain expenditures (like drilling wells, shooting seismic, or fixing the roof on the dining facility).
SB21 repealed those credits, with a two-year transition period. In the last legislative session, HB111 and HB247 finished the process of eliminating tax credits.
SB21 introduced a new credit found in AS 43.55.024(i) and (j). However, this tax credit is not like the ones from before SB21.
These credits are actually better described as part of the tax calculation, designed to give the system some “progressivity”. Effectively, a company can reduce their tax liability by up to $8 per taxable barrel they produce. scaling down as price increases.
These credits cannot be transferred or carried-forward. And they are not eligible to be exchanged for cash from the State treasury.
They are also limited so that a company cannot earn enough credits to reduce their tax liability below a minimum amount (4% of the gross value in most cases, zero if the company only has production from a GVR eligible field).
Gross Value Reduction (GVR)
Under SB21, some fields are allowed to reduce their production tax value by 20% of the GVPP. This was intended to create a lower tax rate for new investment, thus encouraging more exploration and development activity.
There are currently three units that are eligible for this reduction (it’s not called a tax credit because it is applied as you calculate your tax, rather than crediting against the calculated liability).
If a company loses money in a tax year, their tax liability is zero. This means that they do not get the benefit of reducing their gross revenues by the expenditures the made that year.
In order to ensure that there is no perverse incentive to delay spending, our tax laws allow companies to carry those unused expenditures into a future tax year in which they have a liability.
Before last year, this was accomplished by issuing a credit against a future tax bill. Since HB247 passed, companies will now just carry their losses forward.
So, a company’s tax liability might be less than I calculated here, due to prior year tax calculations.
Leftover Credit Certificates
Another way that the company might end up paying less in taxes than I am calculating here is that they may own tax credit certificates from prior years. These would have been earned several years ago, but have not been used.
Right now, there are roughly $1 billion worth of these ACES credits that have not be applied against a tax or been purchased by the State. These credits will reduce the payments the State receives each year until they are used up (or purchased by the State).
Bottom Line Numbers
I calculated all of those numbers to reach what we have here. I’ll put it all together for you.
Here is an estimated breakdown of company cash flows, based on publicly available data:
|Net Revenues before Government Payments||$2,462,679,169||$1,479,850,208|
|Production Tax Liability||$587,265,400||$407,351,738|
|Production Tax Credits||$446,319,151||$317,122,155|
|Payments to Government|
|Total Production Tax Liability Net of Credits||$140,946,249||$90,229,583|
|State Corporate Income Tax||$165,849,479||$100,921,457|
|Property Tax to State||$49,785,268||$30,025,292|
|Property Tax to Municipalities||$176,511,406||$106,453,308|
|Federal Corporate Income Tax||$411,489,836||$261,152,684|
|Total Payments to State of Alaska||$827,359,022||$537,164,432|
|Total Payments to Fed/Muni||$674,599,974||$367,605,991|
|Net Revenues to Company||$960,720,173||$575,079,786|
|State Share of Net Revenues||34%||36%|
|Federal/Other Share of Net Revenues||27%||25%|
|Company Share of Net Revenues||39%||39%|
|Effective Gross Tax Rate||4%||4%|
|Effective Net Tax Rate||5.7%||6.1%|
|Net Revenues before Government Payments||$1,250,469,974||$113,023,979|
|Production Tax Liability||$339,990,652||$31,421,346|
|Production Tax Credits||$267,274,415||$24,305,858|
|Payments to Government|
|Total Production Tax Liability Net of Credits||$72,716,237||$7,115,489|
|State Corporate Income Tax||$84,476,449||$7,770,020|
|Property Tax to State||$25,541,180||$2,283,698|
|Property Tax to Municipalities||$90,555,094||$8,096,747|
|Federal Corporate Income Tax||$218,001,746||$20,145,440|
|Total Payments to State of Alaska||$461,801,979||$40,417,910|
|Total Payments to Fed/Other||$308,556,840||$28,242,187|
|Net Revenues to Company||$480,111,156||$44,363,882|
|State Share of Net Revenues||37%||36%|
|Federal/Other Share of Net Revenues||25%||25%|
|Company Share of Net Revenues||38%||39%|
|Effective Gross Tax Rate||4%||4%|
|Effective Net Tax Rate||5.8%||6.3%|
|Net Revenues before Government Payments||$170,000,067||$268,134,319|
|Production Tax Liability||$41,530,001||$61,494,589|
|Production Tax Credits||$32,307,939||$47,155,687|
|Payments to Government|
|Total Production Tax Liability Net of Credits||$9,222,062||$14,338,902|
|State Corporate Income Tax||$10,624,341||$15,167,833|
|Property Tax to State||$3,487,996||$5,697,462|
|Property Tax to Municipalities||$12,366,532||$20,200,093|
|Federal Corporate Income Tax||$26,895,967||$38,175,716|
|Total Payments to State of Alaska||$44,677,320||$122,519,217|
|Total Payments to Fed/Other||$65,672,682||$63,496,282|
|Net Revenues to Company||$59,650,064||$82,118,820|
|State Share of Net Revenues||26%||46%|
|Federal/Other Share of Net Revenues||39%||24%|
|Company Share of Net Revenues||35%||31%|
|Effective Gross Tax Rate||4%||4%|
|Effective Net Tax Rate||5.4%||5.3%|
|Net Revenues before Government Payments||$94,696,892||$224,591,854|
|Production Tax Liability||$17,561,365||$26,789,885|
|Production Tax Credits||$15,704,113||$26,789,885|
|Payments to Government|
|Total Production Tax Liability Net of Credits||$1,857,252||$0|
|State Corporate Income Tax||$7,894,473||$15,277,640|
|Property Tax to State||$2,179,132||$5,358,922|
|Property Tax to Municipalities||$7,726,013||$18,999,814|
|Federal Corporate Income Tax||$17,586,555||$31,433,135|
|Total Payments to State of Alaska||$20,786,741||$82,700,329|
|Total Payments to Fed/Other||$25,312,569||$50,432,949|
|Net Revenues to Company||$48,597,582||$91,458,576|
|State Share of Net Revenues||22%||37%|
|Federal/Other Share of Net Revenues||27%||22%|
|Company Share of Net Revenues||51%||41%|
|Effective Gross Tax Rate||1.0%||0.0%|
|Effective Net Tax Rate||2.0%||0.0%|
Total State Average
|Net Revenues before Government Payments||$6,063,446,462|
|Production Tax Liability||$1,513,404,976|
|Production Tax Credits||$1,176,979,203|
|Payments to Government|
|Total Production Tax Liability Net of Credits||$336,425,773|
|State Corporate Income Tax||$407,981,692|
|Property Tax to State||$124,358,951|
|Property Tax to Municipalities||$440,909,006|
|Federal Corporate Income Tax||$1,024,881,079|
|Total Payments to State of Alaska||$2,137,426,950|
|Total Payments to Fed/Other||$1,583,919,474|
|Net Revenues to Company||$2,342,100,038|
|State Share of Net Revenues||35%|
|Federal/Other Share of Net Revenues||26%|
|Company Share of Net Revenues||39%|
|Effective Gross Tax Rate||4%|
|Effective Net Tax Rate||5.5%|
While there is not explicit transparency in our tax collections, the data does exist. What I’ve shown here is an educated guess about where the oil money is going, based on publicly available data and some expertise in the field.
I hope this information is helpful. As you use it, here are a couple of things to remember.
The State is currently receiving about 35% of the total net revenues from oil production. That says nothing about whether or not that is the right amount. But, if you are one that likes to quote a former Governor, it seems like we are living up to that dream.
Everyone (except Caelus and ENI) is paying the minimum tax. That means that the whole exercise of calculating the tax payment was pointless. I could have reached the bottom line without any cost data at all.
Might this mean we are paying several State employees to do work that is pointless at the end of the day?
It is easy to pick out single data points from within this complex accounting system. If you do that, you can make a number of technically correct and very misleading statements.
Be careful and look at the whole picture. As Mark Twain said “facts are stubborn, but statistics are pliable.”
Cash Flows vs. Profits
And Finally, remember that these numbers are cash flows, not profits. If you want to know more about the difference, read this.
Just because a company is banking revenues this year, we still don’t know if that amount is adequate to compensate the company for the use of their capital and assuming the risks that are involved.
In other words, we still haven’t answered the question of whether or not this distribution of net revenues is “fair”. I’ll come back to this topic at a later time.