AJOC EDITORIAL: Tax credit program would benefit from transparency

When the Legislature finally adjourned after a second special session to pass a budget this past spring, about 20 percent of the approximately $3.5 billion deficit was related to payments from the state’s oil and gas tax credit program.

Unlike deductions, which the large producers use on a per-barrel basis to reduce their tax liabilities, the credits are direct payments from the state to mostly independent companies exploring for oil and gas in Cook Inlet and the North Slope.

Gov. Bill Walker roiled the industry and lending circles with his move in late June to use his line item veto authority to reduce a $700 million appropriation for the credits by $200 million, deferring the payments to future fiscal years.

The short-term effect was a credit freeze between lenders and explorers that required damage control by the state Revenue Commissioner Randall Hoffbeck to assure financial institutions and private equity firms that Alaska would make good on the payments owed.

That’s according to the report released Dec. 1 by the Senate Oil and Gas Tax Credit Working Group formed among members of the Senate Majority and Minority member Sen. Bill Wielechowski, D-Anchorage.

The report was short on recommendations to actually reduce the annual outlays and focused more on going slow with any changes so as not to disrupt projects in the development stage, protecting the state’s interests should a company go into bankruptcy as Buccaneer Energy and Cook Inlet Energy have, and firming up the tax “floor” on production taxes so companies cannot use a net operating loss, or NOL, deduction to reduce their liability to less than 4 percent.

Cementing the tax floor seems to be a no-brainer and should be an easy fix by requiring companies to spread the NOL out over multiple years if necessary to ensure a minimum production tax is received.

Ultimately, though, there is no silver bullet to fix Alaska’s revenue problem at the current oil prices under any current or prior tax system.

Without question the oil and gas credits, or rebates, require examination along with every expenditure the state is making.

There is also no question that the state’s oil and gas credit system has major successes to tout. The Cook Inlet gas supply resurgence led by Hilcorp would not have happened absent the credit system, nor would the recent start of gas production by Furie Operating Alaska that is now delivering gas to Homer Electric Association at a lesser price than some of Hilcorp’s customers from the first new production platform seen in Cook Inlet in more than three decades.

 Looking to the North Slope, the independent Caelus is currently developing the Nuna prospect it acquired from Pioneer Natural Resources in 2014, and is scheduled for production in 2017. Hilcorp has entered also the fray by purchasing some smaller BP assets and has now submitted a development plan for the Liberty offshore field that could produce 60,000 to 70,000 barrels per day by 2020.

The majors are also spending money on the Slope despite the price crash. ConocoPhillips has spent $1.5 billion developing Drillsite 2S in Kuparuk and the CD-5 field in the National Petroleum Reserve-Alaska. It also just sanctioned a billion-dollar project at Greater Moose’s Tooth-1, also in the NPR-A.

When companies continue to spend money in the current price environment and bid on acreage as many independents did at the recent state Slope lease sale, something is working.

While we can piece together a rough picture of how credits may be benefitting the state economy, the credit program needs to be more transparent. The public has a right to know how much in credits is being paid out and for what projects. That is the only way to tell if the state is getting something back for what it is spending.

The working group reached a rather strange conclusion in its recommendations to disclose the amount of credits paid by project, but not the recipient of the credits. It is hard to understand what difference it would make to withhold the recipient of the credit while disclosing the project for which it was paid.

Under the since-discontinued film tax credit program, the public was able to see the project, the recipient, the amount of the credit and the qualifying expenditures that led to the credit.

If the oil and gas industry really wants to see this program continue, they should be disclosing how much they’re spending, what they’re spending it on, and how many people in Alaska are being hired as a result.

A simple return on investment analysis of credits relative to production taxes does not capture things like local wages, their multiplier effects or the economic impact of ratepayers in Homer or elsewhere benefitting from lower utility costs.

The best way to ensure a stable credit system continues — and it must continue — is to make it more transparent.

Updated: 
12/02/2015 - 2:17pm

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