Somewhere high up in a London tower, BP's board members got a knee slapping laugh as they read Roger Marks' April 25 Alaska Dispatch News commentary justifying the Alaska Legislature's decision to take money from public savings and pay BP to haul our oil away.
Alaska's new oil tax base rate, 35 percent of profits plus royalty, puts Alaska among the lowest taxing major oil producers in the world.
Have doubts? Consult the U.S. Department of the Interior's October 2011 worldwide oil tax study. Click and page down to Interior's chart on page 62. Completed before Alaska's Legislature cut Alaska's oil taxes, the study shows Alaska's combined royalty plus local, state, and federal tax below Louisiana's 85 percent of net, next to Texas at 76 percent of net. If the same chart were done today, Alaska would be in the bottom third with a combined state and federal tax of 68 percent. But that's before we refund $625 million of the expected $1.6 billion in combined royalties and taxes. After refunds, the combined state and federal tax on Alaska's oil is about 48 percent; fourth from the bottom of the 29 countries surveyed.
Marks has never offered to tell Alaskans that it costs far less per barrel to poke a hole into a giant onshore pool of oil like Prudhoe than it does to drill in deep water or fracture oil-laden sandstone in North Dakota and Texas.
The big three just spent $16 million scaring Alaskans into believing higher profits were elsewhere. They lied. Drilling rigs out of service, and oil fields closing, prove beyond question that the profits per barrel in North Dakota and Texas and Canada weren't even close to the per barrel profits from Prudhoe Bay Alaska.
Scotiabank, a Canadian bank that has financed fracking projects all over North America, including North Dakota and Texas, reported that the unavoidable hard costs of North Dakota's and Texas' fracking have ranged from a low of $63 in North Dakota, to a high of $89 per barrel in Texas. When Texas crude was selling at $100 per barrel and costing $89 each barrel spun off $11 in distributable net cash profits. If you clicked on the above link, you saw that state, federal and local taxes in Texas then consume 76 percent of the $11, leaving $2.64 per barrel after tax take home payment for the producer. But don't take my word for it, click and read Scotiabank's report.
The chance to make a $2.64 take home after costs and taxes was enough to cause a rush for black gold in Texas. ConocoPhillips was, but is no longer, part of that $2.64 gold rush.
At the same time, ConocoPhillips was reporting quarterly taxable net profits ranging from $28 to $34 per barrel for its Alaska production. Four times the $11 taxable net in Texas. Just like in Texas, local, state, and federal taxes were consuming 76 percent of Alaska's profits, leaving ConocoPhillips with $6.72 to $8.16 take home from Alaska's crude. Three times the after tax take home in Texas.
Fracking wells run dry in about three years. The foot print of a fracking field is typically 50 to 150 times the footprint of Prudhoe. To produce the equivalent of Prudhoe would require 600 wells plus 200 new wells every year to replace spent wells. At $66 per barrel, most U.S. fracking operations have stopped replacing wells and are preparing to quit.
Then there's Alberta's Tar Sand production frequently compared as "competition for Alaska." The Alberta Tar Sands operation covers 55,000 square miles, about 55 times the collective footprint of every North Slope oilfield. Giant backhoes mine the surface soil laden with a tar-like hydrocarbon called Bitumen.
The mining operation heats the Bitumen to its melting point by burning gas and oil from the same field. It then thins the heated tar with solvents, allowing the heated tar to remain liquid at ambient temperatures. The liquid tar is then loaded into rail tank cars owned largely by Warren Buffett who charges $30 per barrel to deliver to refineries in Texas. That's over three times the cost of moving a barrel of crude through the Alyeska Pipeline onto BP's tankers and offloading at BP's Cherry Point refinery northwest of Bellingham, Wash.
Tar sand oil is "dirty oil" and expensive to refine. When it arrives in Texas, tar sand oil sells for about $20 pb less than competing crude. According to Scotiabank, breakeven for Alberta's Tar Sands oil is $60 to $65 per barrel. Selling oil sands oil for $20 below the benchmark leaves a $21 deficit and no profits to tax. Shell Oil, Norway's Statoil, France's Total Oil, and even Canada's SunCor Energy have all announced that they are pulling the plug on Alberta's Tar Sands projects due to low prices.
Notice Marks didn't offer one word that would contribute to a reader's understanding of where investment opportunities in Alaska fit in with the world crude oil market.
According to an Alaska Department of Revenue analysis based on the Spring 2015 forecast, the oil companies spend about $35 producing Alaska's oil plus $9 shipping it to market. At today's $66 per barrel, they have a leftover taxable net of $22 plus rebates. Under Alaska's new tax, state and local taxes will take $11, federal taxes will take $3.97 and the producers will take $7.27 plus rebates. That's likely more than twice per barrel than BP, Conoco, and Exxon are taking home anywhere else in the world.
When Alaska's new oil tax was being debated, Roger Marks used his petroleum economist credentials to help oil companies persuade Alaskans that Alaska profits were not competitive with North Dakota, Texas, and Canada. The fact that the North Slope still has a hefty net profit to tax while North Dakota, Texas, and Canadian rigs shut down proves beyond question that the opposite was true.
We don't need to be paying oil companies to produce our oil. Exploration companies parting ways with their fracking operations would be moving to Alaska by the dozens if BP, Conoco, and Exxon weren't able to restrict their access to North Slope gathering lines, conditioning facilities, and the pipeline.
Alaskans familiar with Norway's oil profits are mystified by Norway's Permanent Fund being 20 times the size of Alaska's. Here is the rest of the story. Norway and Alaska have produced similar amounts of oil. Norway's production comes from deep water and costs about twice as much to produce. The net profit from a barrel of Alaskan oil is substantially greater than the per barrel profit from Norway. The difference is that Norway keeps a much larger portion of the net profits and the producers get less.
Even when oil was selling for more than $100 per barrel, Shell, BP, and Exxon all agreed to produce Middle East oil in exchange for a flat after tax take home payment of between $1 and $2 per barrel. The host countries keep the rest regardless of price. In today's market many of their operations have no net profits. With exception of the suckers they found in Alaska, those $2 contracts are likely their most profitable.
But don't take my word about $2 per barrel contracts, click over to BP's web site. There you will find in BP's own words, the net revenue is shared 2% BP and 98 percent Iraq.
Comparatively, at $66 per barrel, net revenues are shared 50 percent Alaska, 18 percent feds, 33 percent producers. (See: Department of Revenue, analysis based on Spring 2015 forecast.)
Marks' livelihood depends on paychecks from oil interests, yet he expects you to believe he is an unbiased petroleum economist. The more Alaskans that Marks can persuade to give away their oil, the more BP, ConocoPhillips, and Exxon are likely to pay him.
Alaska doesn't owe BP, Conoco, or Exxon any favors. We would be within world market norms if we kept all but $4 of the net profit. The oil companies would still have twice the take home cash they get from their fracking projects and Middle East contracts. The Legislature could balance the budget without accessing the Constitutional Budget Reserve (CBR); and if the big three don't like it, there are hundreds of newly unemployed North Dakota and Texas companies who would jump at the opportunity.
Want more oil? Want a share of the profits comparable with what the rest of the world gets? Want the state budget to balance? Then tell your legislator to break the monopoly and get our fair share.
Ray Metcalfe is a commercial real estate broker in Anchorage and long-time political activist. He has served in the Alaska House of Representatives as a Republican. In the 2008 primary election, he ran unsuccessfully for the U.S. Senate as a Democrat.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.