Thursday, April 4, 2013

Short Takes| Jack Roderick is wrong

Tuesday, Dermot Cole wrote a blog piece on Jack Roderick's testimony before House Resources.  "Jack Roderick offers sound advice to lawmakers about need for more research on oil taxes," Faribanks News Miner (Apr. 2, 2013).  The piece praises Jack for suggesting "[y]ou have to have some guarantee [from the companies that they will spend the money you're giving them in Alaska], and preferably in writing that that will happen ... before giving a tax break."

The problem with demanding such "guarantees" is that the state is neither willing -- and perhaps, constitutionally impaired -- from giving any guarantees of its own.  As a result, there is no "guarantee" to a producer if it makes an investment in Alaska based on one set of tax provisions, that the tax provisions won't change two years later and convert to state take a portion -- perhaps a large portion -- of the revenue stream on which the investor relied in making the investment in the first place.

It is not enough to suggest in that instance that the producer can back out if the legislature makes such a change.  Because oil and gas investment is front end loaded, by the point such a change occurs the investment already will have been made and, just like the Prudhoe and other infrastructure on the North Slope today, it will have become a sunk, immobile cost.

Knowing that, investors will never make a "guarantee" as long as the state retains the right to change the rules once that investment is made.  Insisting on such an upfront commitment simply assures mutually assured destruction between the two sides, as investment -- and production -- continue to decline.

As I have written elsewhere, I greatly respect Jack Roderick -- and Dermot Cole for that matter -- but they simply are wrong on this one.  In order to obtain guarantees, the state will have to give them as well.  Neither the state (nor Jack, nor Dermot) have indicated any willingness to do so, and absent that, neither will the state's largest investors.