In an article published in the Oil & Gas Financial Journal, economist Roger Marks examines the decisions made by the Alaska Senate's leadership when they considered the governor's ACES legislation last year, and concludes that the decision was made using "problematic" reasoning he calls "DIRE" - Different Inputs, Results Equal:
- Assuming production decline rates are not affected by tax policy, based on past production decline rates in a period of relatively lower taxes under ELF. Marks notes that no one knows what the production decline would have been with higher taxes - and that oil prices averaged $18 per barrel during the ELF era.
- Assuming production in existing fields would not increase with additional investment. Senate leaders believed that if unfunded projects were profitable, tax reform was not needed. However, Marks notes that when corporations have a finite amount of capital to invest, not all profitable projects get financed, only the most profitable.
- Assuming that Alaska's tax regime was competitive based on a list of global fiscal regimes that Marks argues is not Alaska's peer group. Among regimes with comparable risks and rewards, Marks believes Alaska is the fourth highest out of 24.
- Assuming the same number of barrels would be produced under all tax plans. Under this reasoning, any tax reduction would automatically result in a revenue reduction. But Marks points out that the Department of Revenue forecasts do not consider the economics or relative profitability of production from the fields it includes in its forecast. This flaw in reasoning, according to Marks, is the source of the "giveaway" language used by opponents of tax reform. Marks believes that even a modest increase in production (reduction of the decline rate) would generate more long-term total petroleum revenue compared to the current tax structure.
Read the full article here.
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