Fiscal and Socio-economic Impact of Marginal Oil Field Development in Alaska: Does It Pay Its Own Way?

Abstract

As oil industry interest turns toward Alaskan oil fields with higher unit costs of production and, consequently, lower state revenues per barrel, an important public policy question is whether these fields on state lands are able to "pay their own way." This is loosely defined to mean that the benefits to the state from the development of the publicly owned resource exceed the public costs associated with development. A related question is how much state tax and royalty policy can change in an attempt to stimulate marginal field development and still provide a net economic benefit to the state. This paper develops a methodology for analyzing the conditions under which an oil field development produces a net economic benefit to the state. The model calculates the public sector costs associated with field development and compares them to the public revenues generated by the oil production from the field. The methodology demonstrates that whether a project produces net economic benefits depends not only upon the characteristics of the economy, the characteristics of the oil field, and the existing or anticipated fiscal regime but also on the benefits and costs chosen for inclusion in the analysis. In particular, the question of which revenues and which costs to attribute to the development is an important determinant of the result. The paper presents an analysis using a hypothetical marginal oil field in Alaska as an example. This example demonstrates that using the definitions of costs and benefits commonly associated with other natural resource activities in the state, marginal oil field development is likely to be able to "pay its own way" under a variety of fiscal regimes. This paper was presented at the International Conference on Petroleum Fiscal Regimes in Anchorage, Alaska on May 3, 1996 .