When it comes to oil taxes, fair is fair

Oil economist Roger Marks accused me of misleading Alaskans in my op-ed comparing ConocoPhillips’ $26 per-barrel net profit in Alaska with its profits “in the rest of the world.” He wrote, “Metcalfe is comparing the oil profits in Alaska, where we produce 100% oil, with the combined oil and natural gas profits everywhere else.” In response to another writer’s similar comparison, he said, “it was like comparing apples to oranges.”

So I’ll compare Alaska’s costs to three winning bids for production of crude, just like Alaska’s pure 100% crude.

BP formed a partnership with China’s state-owned CNPC to make a costs-plus-$2 per barrel net bid to produce 100% pure crude from Iraq’s Rumaila field. BP’s bid required Iraq to reimburse 100% of all BP’s hard costs, plus pay BP $2 for every barrel produced. It makes no difference whether the price of oil is $25 per barrel or $100 per barrel, a net profit of $2 per barrel is what Iraq pays BP.

ENI, an Italian oil company that has interests on Alaska’s North Slope, won a similar cost-plus-$2 per barrel net profit bid to produce 100% pure crude from Iraq’s Zubair oil field.

Exxon and Shell formed a partnership that made a similarly structured bid to produce 100% pure crude from Iraq’s West Qurna oil field. To beat ENI’s and BP’s $2 bids, Exxon and Shell bid hard cost-plus-$1.90 per barrel net.

Five years into the above contracts, BP, Exxon, and Conoco spent $16 million telling Alaskans that they needed a tax break because the hard-cost plus-$26-to-$32 per barrel they were making from Alaska’s oil in 2014 was not enough to warrant the investments necessary to continue Alaska’s North Slope production.

Meanwhile, Exxon’s $1.90 per barrel and BP’s $2 per barrel net profit fields in Iraq are not only still producing, increased investments have increased Iraq’s production threefold.

And before those opposed to changing Alaska’s oil taxes try to mislead readers again, let’s take two more sleights of hand off the table. Although BP’s contract with Iraq is titled; “A Technical Services Contract,” BP’s Iraqi advertising cited Alaska as an example of where “they are doing the same thing.” They provide engineering, manage hundreds of subcontractors and thousands of workers. And BP did not walk into a risk-free, already operating field. BP discovered and developed Iraq’s Rumaila field. BP got kicked out for being too greedy and got back in by offering to resume production services at market rates.

Another way to make sure we are comparing "apples to apples" is to compare BP's international rate of return on investment to BP's rate of return on their Alaska investments.

After signing with Iraq, BP’s CEO Tony Hayward explained to Bloomberg News, “We’re looking at returns in Iraq that are compatible with 15% to 20% returns we earn across the rest of our portfolio.” Colin Lothian, Middle East Upstream Research Analyst for Wood Mackenzie, told Bloomberg News that BP had similar contracts in Iran, Abu Dhabi, and Kuwait. Bloomberg News explained that BP had an international average rate of return on investment of 19% in fiscal year 2007.

Simply put, on average, BP earns $1.19 for every dollar it invests in oil production. Except for Alaska, that is. In Alaska, BP got $2.23 back for every dollar invested. According to Gaffney and Cline, an internationally respected oil consultant hired by the Alaska Legislature to advise them on oil taxes, BP’s estimated North Slope investment returns were 123% during the same 2007 time period.

I have analyzed dozens of ConocoPhillips’ quarterly earnings reports on their Alaska earnings. Not once have I seen a Conoco report reflect an annual profit of less than 100%. Conoco’s proven Alaska earnings are five times BP’s stated international averages.

Marks also stated that Alaska’s “government take” now equals 74% of net proceeds, leaving 26% to oil companies. BP’s own website says Iraq’s “government take” is 98%, leaving 2% of net for BP. To top it off, BP’s CEO told Bloomberg News 2% meets BP’s normally expected return on investment. Why should Alaska accept a paltry 74%?

For 40 years, Alaska has been paying oil companies a fair price for their services, plus giving them a large chunk of our equity. Here’s an example of what I mean. I’m a commercial real estate broker. I analyze investments and compare rates of return on properties I am marketing. My commissions range between 3% and 6% of sales price. Similar to Iraq’s production contract, when I’m selling a newly constructed building, it doesn’t matter if the seller’s expected net proceeds, after all costs of construction are paid, add up to two million or eight million — the equity belongs to the seller. My percent-of-sale commission for my services remains between 3% and 6%. For 40 years, we owners have been paying oil companies a fair price for their services, plus we have given them billions of dollars worth of our North Slope equity.

Just like my real estate commission, proceeds from selling oil that exceed hard costs and fair payment for producer services equals equity that rightfully belongs to all Alaskans.

Had we received our equity in 2019, we would have received about $4 billion more. If the Fair Share Act that Roger Marks is so dead against becomes law, it will make up for about 25% of the Alaskan wealth that has, for 40 years, been hemorrhaging into the pockets of the stockholders of the companies that pay “oil economists” to lie to us, and finance the campaigns of legislators willing to sell us out.

The Big Three have historically made 14 times as much producing Alaska’s half-million barrels per day as BP makes producing three million barrels per day for Iraq. Allowing oil companies to continue fleecing Alaska rather than financing education, infrastructure, ferry systems and dividends is insane.

Ray Metcalfe rough-necked and drilled on the North Slope in the early 1970s. He was in the Legislature in the 1970s and 1980s. He chaired the House State Affairs Committee and co-authored the legislation establishing the investment strategy for Alaska’s Permanent Fund. He has built several residential subdivisions in Anchorage and he has owned Metcalfe Commercial Real Estate, Inc., since 1976.

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