Political manipulation of oil production forecast in 2012 distorts oil tax debate
One of the “facts” that ConocoPhillips, ExxonMobil, Hilcorp and BP include in their advertising onslaught against Ballot Measure No. 1 is that North Slope oil production is 75,000 barrels per day higher than predicted in 2013, all because of the SB 21 tax system.
Hidden beneath the tens of millions the companies are dumping into their propaganda campaign is another fact: North Slope oil production today is almost exactly what the state predicted in 2011 under the ACES tax system—486,000 barrels a day.
On Dec. 4, 2012, as part of the pressure campaign to approve what became known as SB 21, the state lowered its long-term North Slope production forecast.
Lowering the forecast had multiple benefits for Parnell and the oil industry—it made the long-term SB 21 tax cut appear lower at the time, it exaggerated the future rate of decline that they could blame on the ACES tax system and it created a target that would be easy to beat with a new system.
With the change, the Parnell administration abandoned its spring 2012 prediction of 493,000 barrels a day for fiscal year 2020 under ACES. It substituted a guess of 395,000 barrels a day for 2020, a 25 percent reduction, also under ACES.
The lower forecast was a political prelude to Parnell’s tax cut plan, which he introduced on Jan. 16, 2013. The Legislature approved it on April 14. The effort to repeal SB 21 failed in the 2014 primary election, just before oil prices crashed.
The tax cut on paper from SB 21 became much smaller with a dramatically lower guess of future oil production.
Was that the decision to lower the future production guess justified starting in 2012?
No. A smaller reduction would have made more sense. On Feb. 28, 2013, before the Legislature approved SB 21, ConocoPhillips told investors that it hoped to reduce the North Slope rate of production decline to 3 percent or 2 percent by 2017, while the state was predicting a much steeper rate of decline.
The state began using oil production guesses from Frank Molli, a Colorado contractor, who used a well-by-well analysis that Dudley Platt, the former state contractor, said would vastly underestimate the long-term production numbers. Platt said a far more accurate and higher number would be derived by the “pool method,” a claim upheld in a landmark Superior Court decision in 2012.
In a report prepared for the trans-Alaska pipeline property tax case, Anchorage petroleum engineer Bill Van Dyke said the state’s 2014 short-term production estimates were “far from accurate” and too low, “possibly out of design.”
Van Dyke said this performance “should not instill confidence in the short-term forecast methodology” and that it raised a question about the accuracy of the long-term forecast, which is subject to far more uncertainty.
He backed up that assertion by quoting Deputy Revenue Commissioner Bruce Tangeman, who told legislators that year: “My personal goal was to put a production forecast line out there and beat it for a change.”
Underestimating production guarantees production numbers that exceed the forecast. This can create an illusion of a change in activity and a trend when the only certainty is that there has been a change in the forecast.
It remains a guessing game, one that is open to manipulation and debate. The oil industry and its political supporters will argue that the guesses made in 2010, 2011 and spring of 2012 would never have come to pass had the state not approved SB 21 in 2013.
But here we are in 2020 and the guesses made under the ACES system have come to pass, proven to be more accurate than those made as part of the campaign to do away with it.
One result of guessing 25 percent lower was to make it easier to surpass the forecast under SB 21, which is why the oil companies are crowing about exceeding the dramatically reduced 2013 forecast.
They should be saying that they are matching the predictions made under the ACES oil tax system in 2010, 2011 and the spring of 2012. But that would undermine their opposition to the oil tax initiative.
In 2010, the state guessed that North Slope oil production in fiscal year 2020, under ACES, would be 520,000 barrels a day, which was a pretty good guess.
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Fact: Oil production is not higher in Alaska now than it was projected to be in 2011 under ACES.