Sunday, October 21, 2007

Alaska One Of The Most Unstable Energy Tax Environments In The World, According To Wood Mackenzie

The Alaska Journal of Commerce reports that Alaska has one of the most unstable energy tax environments in the world, according to an analysis by Wood Mackenzie.

In searching the Wood Mackenzie website, the only publication I found meeting the description of the referenced analysis is called Wood Mackenzie's Government Take, but only an abstract is posted on the site. The report itself is only available to petroleum companies, financial groups and governments that subscribe.

Wood Mackenzie ranks Alaska 99th out of 103 petroleum-producing regions surveyed in terms of political stability in fiscal terms on oil and gas. Only Venezuela, Russia, Bolivia and Argentina ranked lower than Alaska in the report, which was published in June. Venezuela President Hugo Chavez and Russia President Vladimir Putin have attracted worldwide attention with their actions to strong-arm major oil and gas companies by changing oil and gas fiscal terms more in favor of their governments. In contrast, companies that ranked high on the scale included Australia, Norway and Azerbaijan.

Alaska's low ranking in the study is being cited by senior managers of North Slope producers who say it validates their claim that three tax changes in three years has made Alaska an uncertain place for the industry to do business. And now Alaska may be poised to make a fourth change. Gov. Sarah Palin has proposed an increase in the state's production tax and has called the state Legislature into special session to consider it. Read an Alaska Journal of Commerce report about the special session HERE.

Alaska State Revenue Commissioner Pat Galvin challenges the report, claiming that Wood Mackenzie was unfair in considering only the last five years in its survey, when Alaska did make changes, and ignoring the previous decade when the state made no changes in petroleum taxes.

But Graham Kellas, Wood Mackenzie's vice president for upstream consulting, defended the study. Graham said the study focused on the past five years, a period in which oil prices rose sharply, and the ability of a producing country or region's fiscal regime to respond to different economic circumstances.

We understand that some observers are arguing that a longer time frame than five years was necessary to properly measure the history's component,” Graham said in an e-mail from the company's corporate headquarters in London. “While this may generate some different results, our understanding of the period 1986 to 2001 is that, broadly, all countries were at least stable from a fiscal perspective and many significantly improved terms for investors during that period".

This reflects the relatively low-price environment and resulting high levels of cooperation between government and industry, including liberalization of the energy sector in certain regions. In broad terms, therefore, we would expect virtually all countries to receive the same rating for that time period, based on the methodology used,” Graham said in the e-mail. In addition, Graham stated that companies considering new investments will apply more weight to recent behavior of governments rather than that during the 1980s and 1990s.

While many governments increased their fiscal take from future investments during the surge of oil prices in the last give years, Wood MacKenzie found that only nine, Alaska being one, increased taxes on existing assets.

For investors, an unplanned increase in the fiscal take from projects where they have already sunk their investment is the worst kind of fiscal stability. As a result, these nine regimes were given the lowest rating on the measure,” Graham said.

On the “built-in flexibility” ranking, or how effectively the fiscal system responds to market changes, Alaska scored slightly lower than average and is considered mildly regressive.

Government take (in Alaska) as a percentage of profits can be higher from marginal projects than more profitable ones because of the impact of the royalty, which is levied on revenue rather than profit,” Graham said. The two components of the fiscal stability rating - flexibility and recent tax history are each given a 50 percent weighting - are then combined to produce the rating.

On this basis, Alaska ranks among the lowest of all the regimes included in the study,” Graham said in the e-mail.

Analysis: One of the reasons why Governor Palin wants to change the state's petroleum profits tax is because the existing tax reeks of the stench of corruption, being that three former lawmakers involved in its construction have been indicted, and one (Pete Kott) convicted. The trial of Vic Kohring begins on Monday October 22nd. But further complicating the ethical issue is the auspiciously-timed announcement by ethical gadfly Ray Metcalfe on Saturday that eleven more members of the state legislature accepted campaign contributions from VECO. In addition, many Democratic lawmakers would prefer a tax based on gross profits rather than net profits.

Governor Palin also hired Gaffney Cline & Associates to help her press the case for her ACES initiative. And on Saturday, they said oil prices aren't as decisive as many believe. The consultants said the companies often invest in places with tax rates much higher than those in Alaska if there are oil reserves that can bring them a profit. Other oil regions attract scant interest even if they have very low or almost zero taxes, Gaffney Cline said, giving the example of the United Kingdom's offshore experience during the 1990s.

But Governor Palin is also under increasing pressure from the producers and their advocates. Andrew Halcro and Dan Fagan have been particularly vocal in their opposition to any new oil taxes, as has House Majority Leader Ralph Samuels. And just today, Fagan launched another editorial broadside at Palin, claiming that our dithering may have caused us to blow our chance to get our gas to market in time to beat our competition. Fagan cited the testimony of his personal energy guru, Pedro Van Meurs, on Thursday before the legislature, where Van Meurs claimed that, because of dramatic cost increases, the proposed North Slope natural gas pipeline no longer makes financial sense to the producers. So Palin is under strong pressure from both sides.

Governor Palin's challenge is to persuade oil-friendly lawmakers and the increasingly-skeptical producers that a fourth change in oil taxes in just four years will not be representative of Alaska's future taxation policy. It will most likely not be met during this special session.

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