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Alaska Finally Fixes Sarah Palin's Biggest Blunder

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As Pulitzer Price winner Daniel Yergin once noted, "the major obstacle to the development of new supplies is not geology but what happens above ground: international affairs, politics, investment and technology." In the case of Alaskan oil production, the biggest obstacle for oil companies has been the tax system implemented by former Gov. Sarah Palin. The system would increase the royalty percentage Alaska receives as the price of oil increases, and at high prices companies would have to surrender as much as 75% of all income generated on a barrel of oil. Now that Palin's plan has been repealed in favor of a 35% flat tax, big Alaskan players like ConocoPhillips (NYSE: COP  ) and BP (NYSE: BP  ) are looking to invest there again.

Tune into the video below to find out what BP, ConocoPhillips, ExxonMobil (NYSE: XOM  ) , and Royal Dutch Shell (NYSE: RDS-B  ) all have in store for Alaska and what it means for these companies from an investment standpoint. 

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Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 12, 2014, at 1:11 PM, toomuchgas wrote:

    Strange how Palin would come up with such a socialistic system!

  • Report this Comment On January 12, 2014, at 4:39 PM, AKOIL wrote:

    The media and other outlets continue to print and re-print some misleading statements about the tax system that former Governor Palin instituted. One can say what one will about the fiscal system, but all should know that the tax rate NEVER approached the statutory maximum of 75%.

    Here's the deal: As Tyler noted, with "progressivity" the production tax rate increased as the price of crude increased. This feature was put in place because the fiscal system offered very generous incentives for capital expenditures -- i.e., hundreds of millions per year, approaching a billion dollars per year, in the form of direct cash payments from the State of Alaska treasury and/or a deduction from the company's production tax liability -- and Palin and Co. believed that the State of Alaska should, therefore, share in the windfall if and when crude prices were high.

    By statute, it is true that the maximum nominal tax rate under the Palin system was capped at 75% of the net (not the gross). Here's the kicker, though, folks: According to the Alaska Department of Revenue, the price of crude would have to be approx. $400 per barrel for the progressive tax rate to reach the statutory maximum of 75%. Obviously, the price of crude never came close to $400 and the net production tax rate, therefore, never came close to 75%.

    In 2008 alone, when the price of crude was at an all-time high (i.e., $140/bbl), that high price drove the average nominal tax rate in Alaska up to a high of 41.8%. Keep in mind, too, that this is a tax on the net (after the application of the Qualified Capital Expenditure credits, Exploration Incentive credits, Net Operating Loss credits, as well as deductions for capital and operating expenses, etc.), not the gross.

    According to the Alaska Department of Revenue, the average effective tax rate under the Palin-installed fiscal regime was 26%; if one would eliminate the outlier year of 2008, when crude prices drove the progressive tax rate way up, the five-year average effective tax rate of the Palin tax system would most likely be well below 20%.

    Keep in mind, too, that the royalty on Alaska's production from the two largest fields in North America (i.e., Prudhoe and Kuparuk) is just 12.5% of the gross, compared to at least twice that amount, sometimes more, on the production in nearly every other oil-producing state. This is significant, but almost never understood or acknowledged.

    Again, say what you will about Alaska's tax rate, but don't think (or tell others) that it ever approached the statutory maximum of 75%.

    At the end of the video, Aimee speculated whether or not Alaska might experience a boom similar to North Dakota (Bakken) or South Texas (Eagle Ford). The simple answer is "no!"

    The Bakken and Eagle Ford are experiencing a surge in production brought on by hydraulic fracturing and horizontal drilling that finally allows access to oil that was previously trapped in shale. Meanwhile, Prudhoe Bay and Kuparuk are decades-old conventional reservoirs that have been in tertiary production for many, many years.

    The conventional reservoirs like those producing on Alaska's North Slope and the unconventional shale plays in North Dakota and South Texas are very different geology with very different production profiles and decline curves, etc.

    In fact, at a November conference in Alaska, a reservoir engineer from BP stated that, "We can't stop the decline" in Prudhoe and Kuparuk. BP also told the audience that the focus in the legacy fields now is on adding oil in order to slow the decline of the remaining billions of barrels of oil.

    Significantly, BP also told the conference attendees, "As go Prudhoe and Kuparuk, so goes the North Slope." These are giant, world class, elephant-sized fields. They are the biggest and second biggest reservoirs in North America, with Prudhoe being one of the of 20 largest in the world. The contributions from all the other existing (and future) North Slope reservoirs certainly help slow the overall decline rate, but are not large enough to offset the natural decline rates of the two mega-fields. The very mature, conventional Prudhoe and Kuparuk reservoirs are the giants that drive the North Slope.

    Clearly, this is different than what is happening in North Dakota and South Texas, both of whom are still predicting production increases driven by shale oil for at least the next several (many) years!

    It's important for everyone, investors included, to be realistic about expectations for oil production from Prudhoe and Kuparuk, while also knowing that there remain billions of barrels in proved reserves in existing fields as well as billions in future production from likely discovered reserves on state land, heavy oil, shale oil, OCS, ANWR and the NPR-A.

    As for Sarah Palin's "biggest blunder," that's a debate for another time.

  • Report this Comment On January 12, 2014, at 11:23 PM, Suradit wrote:

    "As for Sarah Palin's "biggest blunder," that's a debate for another time."

    Such a lot from which to choose. Maybe they should be ranked within separate categories.

  • Report this Comment On January 13, 2014, at 4:25 AM, mypal00000 wrote:

    Wow!! This is probably the only situation that the liberal media would ever use to call a tax, a blunder. Would they ever call an Obama tax a blunder?

  • Report this Comment On January 13, 2014, at 6:57 AM, doraglasberg wrote:

    Sarah Palin IS Sarah Palin's biggest blunder.

  • Report this Comment On January 13, 2014, at 7:07 AM, daveleeander wrote:

    Sarah Palin has more common knowledge about what is right and just in the political and social realm than any of the fools who read this. I appreciate AKOIL's post, which refutes the lemming post put up here to try and discredit her. I do not think she is the answer to all ills, but certainly does not deserve the crap that would go along with a story line title such as this one.

    Shame on you "fool" for leading with such before checking out your storyline for your self. More of the lazy journalism which is prevalent these days.

    Thank you again AKOIL.

  • Report this Comment On January 13, 2014, at 7:24 AM, drgroup wrote:

    Thanks AKOIL for shining the light on the truth...

  • Report this Comment On January 13, 2014, at 9:58 AM, beeanangel wrote:

    Thank you AKOIL for your knowledge and sharing.

  • Report this Comment On January 13, 2014, at 11:15 AM, ugo wrote:

    When Sarah was bragging about her, in her own words,"share the wealth plan" during the election, was she advocating it be nationalized? Her plan is simply windfall tax on steroids that is redistributed.

  • Report this Comment On January 13, 2014, at 11:15 AM, ugo wrote:

    Romans 13:4-6

    New International Version (NIV)

    4 For the one in authority is God’s servant for your good. But if you do wrong, be afraid, for rulers do not bear the sword for no reason. They are God’s servants, agents of wrath to bring punishment on the wrongdoer. 5 Therefore, it is necessary to submit to the authorities, not only because of possible punishment but also as a matter of conscience.

    6 This is also why you pay taxes, for the authorities are God’s servants, who give their full time to governing.

  • Report this Comment On January 13, 2014, at 3:47 PM, wcraske wrote:

    What you have here is a failure of knowledge. Alaska, unlike the other 49 states, owns te oil and other minerals under the surface. The value of this resource is intended for the funding of government services.

    It took Sarah Palin and the majority of the legislature to create the ACES tax system; so to say that our half governor did this by herself is misleading and untrue.

    Altho the current legislature repealed the tax, the voters are going to reinstate the same tax again in November. This should come as no surprise, as the governor (Parnell) works for Conoco-Phillips, not the people of Alaska.

    Oil is a finite resource; once it is gone, it is gone. We have no intention of giving away our resources! If the oil companies want to leave, they are welcome to do so.

    These same companies have been ripping off Alaskans for almost 40 years. Look up the Sunoco settlements with the State of Alaska. These people are no different from the Seattle salmon packers of the last century; those companies drove us to statehood.

    Your article isn't researched and needs to be removed from the Internet until such time as you get a competent reporter.

  • Report this Comment On January 14, 2014, at 11:06 AM, Procannonfodder wrote:

    A little Palin hatred and we have the world's first example of Liberals thinking the reduction of taxes on Big Oil is a good thing. If only she had raised taxes on everyone.

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