Taking a hit today for success tomorrow
For Alaska, oil is the lifeblood of the economy. Thanks to oil royalties and taxes in the state, there is no sales or income tax. Also, residents of the state are cut a check every year from what is known as the Alaska Permanent Fund, a trust that receives royalties from the oil and gas sector. If so much of the state’s revenue is generated by oil, then why would they want to cut it so drastically? To get production going again.
![](http://g.foolcdn.com/editorial/images/46851/state-production_large.jpg)
Source: U.S. Energy Information Admininstration.
Another way to look at Alaska’s dependence on oil is that one-third of the state’s labor force is related to the oil and gas industry. With so much of its vitality tied to companies working in the state, Alaska needed to do something in order to get production or, more importantly, exploration investments up and running again.
Under the previous tax rates, the state taxed net profits on an oil companies’ share of Alaskan production at 25%, with an additional 0.4% for every dollar wellhead prices were above $30. With first purchase prices for Alaskan North Slope around $100 a barrel, this meant that oil companies were paying an effective tax rate of more than 50%.
For many companies, the combination of booming oil opportunities in the Lower 48 and these prohibitively high taxes made oil drilling in Alaska simply not worth it, and several companies decided to pull the plug on further investments. Marathon Oil Corporation (NYSE:MRO) decided to get out fully and sold a large portion of its North Slope assets for $1.1 billion back in January. The company plans to divest the rest of these assets in 2013 to focus on Lower 48 operations.
Just what I needed
It appears, though, that the new tax structure is enough to make them reconsider. Under the new rule, companies will pay a flat 35% tax rate as well as receive a $5-per-barrel tax credit and a 20% revenue exclusion for any production from new wells.
It should come as no surprise that the three companies that proposed and advocated for this rule change — Exxon Mobil Corporation (NYSE:XOM), ConocoPhillips (NYSE:COP), and BP plc (ADR) (NYSE:BP) — have all made significant changes to their oil exploration plans immediately following the passing of the new tax rules. The most obvious example of this was ConocoPhillips (NYSE:COP). On April 10, the company said it would halt oil exploration in Alaska’s Chuckchi Sea citing bad economics. Then, on April 17, two days after the new tax structure was implemented, the company announced it was planning to boost production in the Kuparuk and Prudhoe Bay regions.
Most recently, BP plc (ADR) (NYSE:BP) announced that it would be investing $1 billion over the next five years and that it will have two new drilling rigs in the Alaskan North Slope by 2016. It has also said that it is in discussion with both ConocoPhillips (NYSE:COP) and Exxon Mobil Corporation (NYSE:XOM) to start a $3 billion exploration project in the Prudhoe Bay region.
Of all the major oil companies in the Alaskan North Slope, only Marathon Oil Corporation (NYSE:MRO) and Royal Dutch Shell plc (ADR) (NYSE:RDS.B) seem to be sticking to their guns when it comes to saying no to expanded Alaskan operations. Royal Dutch Shell plc (ADR) (NYSE:RDS.B)’s decision is more based on its bad press related to a drill ship grounding and other operational woes rather than the tax structure in the state, though.
What a Fool believes
The debate on oil taxes in Alaska may not be over. Several opponents are planning to get a referendum put on the state ballot for 2014 to repeal the tax changes. Many opponents are claiming that this tax cut would lead to large budget deficits for the state. For now, however, oil companies are going to take as much advantage as they can with this newfound tax break.
The article Big Oil Takes Advantage of a Major Tax Break originally appeared on Fool.com and is written by Tyler Crowe.
Fool contributor Tyler Crowe has no position in any stocks mentioned, and neither does The Motley Fool. You can follow Tyler at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool.
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