Tax policy can impact oil production levels, new study says

WASILLA — Can oil tax policy make a difference, when it comes to impacting oil exploration levels in Alaska?

A newly-published study by two Alaskan researches, says that the answer is yes — a small, but statistically significant, difference.

The study, by University of Alaska Fairbanks professor and economics program director Jungho Baek, and then-graduate student Sam Tappen, was published in December 2016 in the journal Energy Sources, Part B: Economics, Planning and Policy.

The study applies a regression analysis to tease apart the relationship between changes to Alaska’s oil tax policy under ACES (Alaska Clear and Equitable Share); and exploration levels, taking into account other variables, such as oil prices and interest rates.

The study looks at data up through 2013.

The oil tax structure ACES was passed in 2007, capturing a higher share of oil money for state government.

It was later replaced by the More Alaska Production Act, or MAPA, in 2013. That acronym never caught on the way ACES did, however. Most Alaskans refer to the current oil tax policy by its senate bill number, SB21.

For those who are unfamiliar, a regression analysis is a tool used by researchers to identify the distinct impact of a variable – in this case, ACES – when other variables are also at play, such as, in this case, variables related to overall market conditions.

In an interview with the Frontiersman, Tappen, who now works for the Alaska Energy Authority, said he kept working on the analysis after the newly-published paper was completed in 2013.

It’s not unusual for a research paper to take two to three years to be published in a peer-reviewed journal.

Tappen said that, since completing the first analysis with Baek, he refined and updated it for a master’s thesis at the Resource and Applied Economics program at UAF.

The new paper by Tappen, completed in 2014, is free and open to the public, and can be requested by contacting Tappen at swtappen@alaska.edu

“I think the main contribution this paper had,” Tappen said, “was that it was the first to mathematically do a data-based empirical analysis on recent oil tax legislation in Alaska. The state has done a lot of research with the data they have. But it’s proprietary. All that comes out is findings. I think it’s important for the general public to have a better understanding.”

Tappen said the article published in Energy Sources Part B had a page limit, and that constrained researchers somewhat; in his new paper, he said, he better explains the work, which he hopes can be examined and understood by others, as well as reproduced by other researchers.

“Absolutely if I had more time I would love to do more analysis on (MAPA),” Tappen said. “This analysis was based on data available at that time, basically just comparing ACES to prior tax regime. It can give you some insight as to potential issues with ACES. But it really doesn’t compare ACES to our current legislation. Personally, I’d love to do more research in this area, and I’d love to see other Alaskan researchers doing statistical and economic analysis on oil taxes in general.”

Tappen said his analysis shows ACES depressed new applications for exploration permits through Alaska’s Oil and Gas Conservation Commission, by 3.62 during the study period from 2007 to 2013, compared to what it would have had under the prior tax regime been in place.

That might sound counterintuitive to Alaskans who followed ACES and oil production; a perusal of the U.S. Energy Information Administration’s table on barrels-per-day crude oil production in Alaska show an overall steady decline after a peak in 1988; but also, a more gradual decline in the years after ACES, than for the seven-year period before.

“It does appear that from looking at the production rate that things actually improved under ACES,” Tappen said. “But that doesn’t show you the effects of the market conditions. So while ACES was in effect, oil prices dramatically increased, and interest rates were decreasing. Both of these conditions made exploration for new oil sources a lot more favorable. The beauty of a regression analysis is, it can take in those other factors’ effects as well, to show that even though the number of permits increased under ACES, it should have been increasing significantly more based on historical trends on how the oil market reacts to those changes.”

The publication of Tappen and Baek’s research comes prior to an Alaska legislative session in which the state faces a budget crisis, and oil tax reform is on the table for discussion.

Historically, Alaska Republicans have in general favored oil tax policies that favor business, citing the need to stimulate exploration and production. Meanwhile Alaska Democrats have tended to favor oil tax policy that captures more money for the state.

At the heart of that argument, is whether or not Alaska’s oil tax structure impacts oil exploration in the first place.

Alaska State Senator Bill Wielechowski, a Democrat who has worked steadily on oil tax issues and is an advocate for oil tax reform, said, “With all due respect to Mr. Tappen and Mr. Baek, the study is complete garbage.”

He cited increases in oil and gas companies’ capital and operating investments, total jobs, and exploration and development permits, in the years after ACES.

“It’s a shockingly bad and dangerous document,” Wielechowski said. “It has the potential to skew things in a really dangerous direction.”

When asked to comment on the study’s central thesis, that such increases were due to market conditions, and that permit applications would have been higher without ACES, Wielechowski pointed to Alaska’s tax structure, oil production and market conditions during the 1990s and 2000’s under ACES’ predecessor, ELF (Economic Limit Factor).

“You look at the investment numbers that occurred under the ELF, the production numbers, and you had some of the lowest taxes in the world under the old economic limit factor,” Wielechowski said. “Oil prices tripled in the 90s and 2000s. And you had investment, jobs and production declining.”

Wielechowski added that ACES incentivized the entry of newer, independent oil businesses into the Alaska market.

He pointed to testimony delivered to the Alaska state legislature on Feb. 1, 2012, from Shelby Gerking, a statistician and researcher associated with Arizona State University. Gerking’s curriculum vitae shows he has published on a variety of subjects relating to statistical tools and methodologies, as well as on oil tax policies.

Wielechowski said Gerking testified to the legislature that “over the long-term, there’s virtually no difference in the amount of oil that was produced,” in response to changes in oil taxes.

Tappen called ACES “a very complicated tax system that’s not easy to model, which is the main reason that nobody has modeled this before. The benefit of this approach is, you’re not improperly modeling the effects, and you know you’re showing the real effects of ACES. The problem with that approach is, you don’t know exactly which characteristics of ACES are causing the detrimental effect.”

Tappen said he hopes his analysis enables a more open examination of the potential relationship between oil tax structure and oil exploration, and one that isn’t reliant on proprietary data provided to the state by oil companies.

“I think the public is eager to be involved in the discussion,” Tappen said, “But without adequate data and analysis, most people are forced to rely on assumptions and political dogma.”