Sunday, May 5, 2013

Alaska Oil| Keeping thoughts on Norway's tax increase apples to apples ...

A brief wire story carried in today's Anchorage Daily News is getting some comment this morning -- and I anticipate will continue to do so.  The story reports on a decision announced today by the current Norwegian government to propose a tax increase on the oil industry. See "Norway to shift tax burden more to oil industry," May 5, 2013.

Some will see some relevance in the development to Alaska's continuing debate over oil taxes and attempt to draw parallels.  Three things make clear that is not the case.

  • The first is that the increase is being made, in part, to "damp" industry activity. According to the story on the increase in today's Financial Times, "[a]s oil prices stay comfortably over $100 a barrel and energy firms make big discoveries in areas once thought close to depleted, Norwegian oil investment is hitting record highs, extending the sector's outlook several decades into the future."  The increased level of investment has brought about significant increases in costs and shortages in the workforce and supply chain, which in turn have resulted in "huge delays and cost overruns [in new projects], reducing government revenue."  This activity level stems, in part, from a number of benefits the government provides to industry outside of the tax code, which Alaska doesn't, such as co-investment.  The increased tax is an attempt to respond to the overheated activity level, by "increas[ing] the industry's cost-consciousness," and in significant part, simply offsets other benefits the government provides.  Certainly, steps designed to reduce overheated demand and investment levels are not analogous to Alaska's current situation.
  • The second is that the increase is part of a broader macroeconomic move to equalize economic activity in the country.  The tax increase is not designed to raise overall government revenue or spending; instead, the tax increase on oil is being offset by a reduced tax on other industries.  As the Financial Times story continues, "[c]ompanies outside the energy sector have been struggling as the oil sector crowds out traditional industries, ramping up wages. Export demand has also been weak because of Europe’s debt problems while a strong currency hurts competitiveness."  The result has been to "split the economy, causing job cuts in traditional industries such as forestry production as record investments offshore pushes wages and costs up nationwide."  The purpose of the shift in taxes is to remedy the split, by providing a moderate reduction in costs to Norway's other industries at the same time as the government moves to dampen heightened activity in the oil sector.  Again, this is not a problem Alaska shares; indeed, Alaska doesn't significantly tax its other sectors and does not face overheated demand in any sector.
  • The third is that the increase in part relates to the structure of the oil sector.  The largest oil company operating in Norway is Statoil, which is 67 percent state owned.  As a result, a large part of the tax will simply take dollars that Statoil otherwise would retain and either invest elsewhere in the world or distribute as dividends, and retain them directly in the government.  As I anticipate Statoil's private investors will conclude as they think through the government's move, the effect really is to create a special dividend to the government in the amount of the tax to be paid by Statoil instead of allowing those revenues to flow through as earnings to be shared also with the company's private investors.  The government will then use the revenues to offset the reductions being made in the tax rate applicable to other industries. In other words, a significant portion of the tax is best explained as an internal play designed to direct a bit more of Statoil's earnings through the state to Norway's other industries at a time when they are not doing as well.  Alaska has no similar situation.
While some will jump to different conclusions, this change in rates actually has very little to do with the oil industry, and provides very little in the way of guidance to Alaska.  The tax increase is out of step globally (where recent efforts mostly have been focused on lowering the share of government take), and is explained mostly by the fact that Norway's oil industry has become overheated compared to its other, "mainland" industries.  The increase is much better understood as an effort to restore some balance between those two sectors, and to use the tax code to reduce some of the other benefits the oil industry receives in Norway which have contributed to the overheated nature of the industry.

Finally, it is important to understand that these steps are being made as the current government faces an election this coming September and feels a need to respond to the current state of Norway's other industries.   As the Financial Times story reports, "Polls indicate that [the governing] Labour party will be easily defeated by the centre-right opposition after eight years in office."  As a result, just as with the UK and Alberta tax increases before them, this change in policy may end up being very short-lived.