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Juneau World Affairs Council: Scotland and Norway Fact-Finding Mission

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Date:
Location: Juneau, AK

Thank you, Jim. Good evening.

[Regarding my recent trip to Europe], I took this fact-finding mission to learn firsthand about oil industry investment behavior and economic growth in response to more competitive tax changes.

During the debate and testimony this past session over oil tax changes, our State's independent experts testified in the abstract from finely-tuned economic models about how under the More Alaska Production Act we should expect increased investment, more production, and more opportunity for Alaskans.

But I wanted to see an area about five years after the fact -- for how tax changes played out over that time in the real world -- not just for the economy in the abstract, but for the people who live in those economies.

The North Sea turned out to be the place.

Like Alaska, the North Sea is a harsh, unforgiving environment. It's an offshore industry with platforms, supply ships, helicopters, and subsea pipelines operating in high seas, deep water, and sometimes violent weather.

- Scotland, off the Northeast Coast and around the Shetland Islands

- Norway, older production off the southwest coast, and newer platforms moving up farther north.

With relatively mature fields, the oil industry has been pumping oil from the North Sea for about 40 years.

Like Alaska, part of the North Sea's appeal is that there always seems to be more oil to find. It's been described as being like "fancy layer cake" because it has multiple geologic horizons. That means there are always new opportunities opening up.

In the last decade, North Sea production, we were told, was declining about six percent per year, with declines in two of those years at 15 percent. Is any of this sounding vaguely familiar?

In Scotland, we met with BP senior leadership, the trade association for contractors and industry, tax and law professors at Aberdeen University, local officials at the Port of Aberdeen, oilfield service contractors, other academic leaders on workforce training, and officials from the national government.

The UK and Norway have very different tax regimes, and I will speak a little bit to both.

The UK taxes oil using a base corporate tax and, over the years, adds percentage surcharges to it, as well as capital and field allowances.

In 2008, the UK gave extremely favorable tax treatment related to decommissioning costs that significantly helped the legacy fields. In 2009, the UK did more and introduced a "new field allowance" for small fields and challenged production, like viscous and heavy oil plays.

Billions in new investment started to pour into the UK side of the North Sea. Then, in 2011, George Osborne, the UK chancellor, launched a 2 billion pounds sterling tax raid on North Sea oilfields. The government raised the surcharge to 32 percent of profits, for a total tax rate of between 62 percent and 81 percent.

The oil companies started to bail. They shifted their resources and investment capital to other places. Exploration fell by half, to only 15 wells, the lowest level since the mid-60s.

Sound familiar? Kind of like how progressivity hurt Alaska.

Pretty soon, within months, the UK was scrambling to reform its tax structure again, to undo the damage of the 2011 tax hike.

Shortly thereafter, in its 2012 budget, the government announced revisions -- a new category of field that qualifies for the field allowance and a more generous small fields allowance.

The bottom-line take away for me was more confirmation that capital follows returns, and flees higher costs. More taxes meant less investment. Lower taxes meant more investment. Today, where the overall impact of the last five years of UK tax policy has made the UK more competitive, investment is up significantly.

I saw oil investment figures from five years ago in the UK at about 3-4 billion pounds sterling per year. Oil & Gas UK thinks UK investment offshore this year could reach 13 billion pounds.

Currently, companies have 100 billion pounds of capital investment in their business plans. Of this, 44 billion has already been approved and is under development. 44 billion!

Another 30 billion is rated as having a better than 50 percent chance of approval over the next five years.

The oil and gas sector is now the single largest taxpayer in the UK, contributing 11.5 billion pounds in 2012.

You can see where I'm going with this: It's very easy for governments to be short-sighted and just skim off all those taxes today under these high oil prices. Common sense tells you, as does the UK's experience, that the less competitive you are, the less capital you attract to your area. It simply has other places to chase better returns.

Beyond increasing investment, with the tax changes the UK expects production to rise from 1.5 million barrels of oil and gas equivalent a day to two million a day by 2017. Ambitious? Perhaps. But at least they are headed in the right direction.

New investment. New Production. New jobs. Did I mention that unemployment in and around Aberdeen is less than two percent.

These are what a basin rich in resources, combined with a competitive tax environment, technology, and a trained workforce can bring to our neighborhood.

And it's not just the oil and gas sector that benefits -- the tide of opportunity rises for everyone.

In summary, the UK's tax regime has been viewed as somewhat volatile, given multiple changes in the last 10 years. However, over the last five years, the UK's tax changes have made them more competitive, garnered new investment, new production and new jobs and opportunities for Scotland and the UK as a whole.

Norway's tax regime, on the other hand, is hailed -- at least until just recently -- as the picture of stability.

The sovereign, the Norway crown, owns and controls the resource to a far greater degree than most. For example, Norway originally owned all of the national oil company, Statoil, though it now holds a 67 percent stake in that company.

Unlike Alaska, Norway's tax is not calculated on the market value of the oil. The tax is agreed upon upfront before production and is stable for the life of the field (with adjustments for exploration credits).

Norway funds a huge percentage of exploration costs (something like 93 percent); they provide significant tax benefits to the companies for the first six years or so of development, and then they tax the heck out of the production beginning about year seven.

This is far different than what we had with ACES, where companies didn't have that stability of knowing the tax up front upon which to plan their investment. The progressivity factor and tax rate got calculated on the price of oil every month and changed for every field for every company each month.

Effectively, with the passage of the More Alaska Production Act this year, we gained more stability in our tax regime, analogous to the Norwegian system -- by eliminating progressivity under ACES and going to our 35 percent tax rate.

The crown of stability once resting so securely on Norway's head has been tarnished recently by government tax increases. Norway will make the companies foot more of those early project development costs beginning in 2014, and the companies expect more tax changes in the coming years -- lending credence to their argument of an uncertain future there.

The Wall Street Journal and others have reported recently that Norway's long-booming oil and gas industry is at risk because of new higher taxes. Some projects could be shelved due to these tax increases. This will get very interesting -- to see what decisions get made this year for projects that will be worked on next year and the following years.

Alaska, in my view, has struck the right balance for the times we live in. With the More Alaska Production Act, we aimed for the sweet spot, for the right amount of revenues for Alaska, while attracting investment and opportunity here.

With declining production, the riskiest course for Alaska would have been to keep taxing higher than almost anywhere in the world and to think we could get away with it forever. The UK couldn't do that without negative consequences, and neither could we.

[While in Scotland], we had the opportunity to meet with Alex Kemp, a professor of petroleum and economics at Aberdeen University. He is pre-eminent in his field, a frequent go-to guy for UK media tax questions, and a former Alaska Legislature consultant in the 1980s.

Dr. Kemp said he had followed SB 21 and was familiar with its provisions. Dr. Kemp said it should do much to attract new investment to Alaska.

Like the UK, the More Alaska Production Act has made our fields more competitive. We are well on our way to garnering new investments and new production.

Like Norway, the More Alaska Production Act provides a more stable tax across time, reducing the risk of long-term investments.

Whether you sell groceries in Alaska, or attend school on Alaska's oil money, we have a lot of opportunity to look forward to.


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