Week 4 in Juneau: Gov’s oil tax credit overhaul under scrutiny
Independent companies developing new oil and gas projects are anxiously watching a major revamp of the state’s petroleum tax credit incentive program, but bills making those changes seem on a slow track in the state Legislature.
Hearings have been underway in the House Resources committee on House Bill 247, the tax credit bill introduced by Gov. Bill Walker, but it’s uncertain when the committee will act on it.
The bill must still go to the House Finance Committee and then to the Senate, and the 2016 legislative session is about one-third over.
One company ready to drill as soon as there’s clarity over the changes is BlueCrest Energy, of Fort Worth, Texas. BlueCrest must commit soon to the use of a jack-up rig for Cook Inlet drilling planned this summer, its president, Benji Johnson, said in an interview.
Senators are letting the House take the lead on the bill.
One House Resources Committee hearing scheduled for Friday, Feb. 5, was canceled when its members decided to wait for a study under preparation by the university’s Institute of Social and Economic Research.
It turned out that the study, intended to assess economic impacts of Walker’s fiscal reform package, did not deal with the changes proposed in the tax incentives.
The committee resumed work on the bill on Wednesday, Feb. 10, but a public hearing set for Friday, Feb. 12, was postponed until Saturday, Feb. 13, and then canceled.
Much of the hearings held so far have consisted of Rep. Mike Hawker, R-Anchorage, putting state Revenue Commissioner Randy Hoffbeck and Tax Division Director Ken Alper through the wringer with questions about the governor’s intentions with the tax credit rewrite.
The legislation is complex, however. The title of the bill is 273 words long, Alper said.
The governor decided in mid-2015 to reorganize the program, when the state was being hit with sharply declining revenues. Walker called it a luxury the state can no longer afford, at least as the incentives are structured now.
The state faces a $3.5 billion budget deficit this year and the incentives amount to $500 million of that. Originally, $700 million had been appropriated for the current budget year but Walker vetoed $200 million of that to bring the actual cash outlay to $500 million.
He has promised to eventually pay the remainder, however. Of the $500 million still authorized $472 million has actually been paid so far, Alper said.
The program was started years ago and was intended to spur exploration and new oil development. It has resulted in new drilling and discoveries, but it has also grown complicated over several years and through many changes. There have been unintended, and costly, effects, Alper told the Resources Committee.
"Some producers have been able to reduce their state production tax liability to zero and yet still receive cash payments under the incentives," he said.
Independents, many of them small, are able to get up as much as 75 cash percent reimbursement of expenses related to exploration and development of new projects.
The credits are taken in two ways, as credit against a company’s production tax liability if there is production, or in a cash payment from the state if a company is exploring and has no production.
Industry has warned he state must move carefully in restructuring the program. If the incentives are abruptly terminated (some by July 1, 2016, others retroactively to Jan. 1, 2016), some small- to medium-sized projects now in development will not proceed, several companies have said.
Sen. Cathy Giessel, R-Anchorage, who chairs the Resources Committee, said this could mean some future production the state is counting on may not materialize.
Giessel credits the incentives with stimulating exploration and new production mainly by independents.
"Using an analogy, this is like running a school system and wiping out your kindergarten class," she said. "There could be production in a few years and we won't have it."
Independents like Denver-based Armstrong Oil and Gas have led Alaska exploration in recent years and discoveries have been made, including by Armstrong and its partner, Repsol.
This is at a time when two of the largest Slope producers — BP and ExxonMobil — have shown no interest in Alaska exploration. The other large Slope producer, ConocoPhillips, remains active in exploration.
In the bill before the House committee, the governor would set a limit of $100 million for tax credits to explorers. That would be a big contraction from the several hundred million dollars a year spent in recent years.
Setting limits can make the program less effective, the Alaska Oil and Gas Association argued in a white paper. Limits placed on the state incentives adds uncertainty to a company’s planning and causes the incentives to be generally disregarded in assessing a new project.
In an earlier experience with this, when limits were placed on incentives in 2002 and 2003, “companies did not find value in the credits, so they were not utilized and many of them were eliminated or changed as the state’s tax policy evolved,” AOGA said in its paper.
A separate part of the restructured program would apply to projects in development. The governor has proposed a separate bill, HB 246, that would have the state development finance corporation, the Alaska Industrial Development and Export Authority, or AIDEA, offer loan guarantees to help small companies finance development costs.
This might work, said Johnson of BlueCrest Energy. Johnson said the loan guarantee approach could help his company finance development of gas reserves at Cosmopolitan, an oil and gas discovery the company has made in Cook Inlet.
Previously, BlueCrest and other small companies have used the state tax credits as collateral to backstop development financing by commercial banks. Loan guarantees from AIDEA would serve the same purpose, he said.
One problem is that HB 246, allowing the loan guarantee, appears to be on the Legislature’s slow-track, too. It is even further back in the queue of bills than the tax credit measure. It has been referred to the House Resources committee but is not yet scheduled for hearings and committee work.
Meanwhile, the state has spent a lot of money in the incentive program.
"Between 2007 and through 2015, there has been $7.4 billion in credits issued,” Alper said.
About $6.4 billion of this has been for the North Slope, and another $1 billion spent in Cook Inlet.
Of the $6.4 billion spent on the Slope, $4.3 billion was used mostly by major producers against production tax liability, or in tax payments not made to the state, with $2.1 billion in tax credits that were refunded in cash by the state mainly to independents.
Of the $1 billion in credits issued in Cook Inlet in the same period, $900 million was refunded in cash and $100 million taken by producing companies against tax liability.
The Legislature had already moved to reel in some of the more expensive tax credits. Much of the North Slope producers' $4.3 billion offset against taxes came from a 20 percent capital investment tax credit put in place in 2006 under the Petroleum Profits Tax, or PPT, under Gov. Frank Murkowski and continued in Alaska’s Clear and Equitable Share, or ACES, passed under Gov. Sarah Palin.
That 20 percent credit was repealed for the North Slope in 2013 in Senate Bill 21 under Gov. Sean Parnell, which involved a major rewrite of the state’s oil tax law.
The investment tax credit was left intact in Cook Inlet, however, and it is one major reason why explorers can “stack” credits to get as much as 75 percent of expenses in cash refunds. Walker’s current HB 247 would repeal the 20 percent investment tax credit in Cook Inlet.
The capital investment tax credit has become misdirected, state officials have said, since it was tied to capital spending by companies for all purposes and not directly related to spending for new production.
Several exploration-only tax credits were also put on the road for repeal in the 2013 tax overhaul, and those repeals take effect this year. However, some exploration incentives were retained, including some to help firms exploring in the large unexplored basins of Interior Alaska.
Legislators dubbed these "Middle Earth" tax credits. Two Alaska Native corporations drilling in the Nenana Basin and the Copper River basin are eligible to be refunded up to 65 percent of eligible expenses.
Minimum tax not a minimum
Other problems in the state’s petroleum tax laws have also come to light, particularly in the light of the plunge in crude oil prices. The state has discovered, for example, that it has a "hole" in a minimum-tax provision of the production tax, intended as a protection for the state budget if oil prices fell.
The minimum tax would have producers pay 4 percent of gross revenues in lieu of the net-profits production tax when oil prices drop below a certain point, which they have.
The tax credits, if applied against tax liability, can allow producers to pay less the minimum. The state is now worried that several producing fields on the Slope may be running at a loss, which could result in zero production tax being paid.
Citing confidentiality requirements, Alper could not say this has actually happened, but it could, though.
“We see one or more major producers showing a net operating loss for 2015,” he told the House committee.
The pending HB 247 would disallow the use of credits against the minimum tax, in effect sealing the hole. The bill would also raise the minimum tax from 4 percent to 5 percent, which would add about $100 million to the producers' tax bill.
Alper said untangling the web of tax credits for Cook Inlet, closing minimum tax loopholes and hiking the minimum tax are major objectives of the current legislation.
The state’s oil and gas industry is not happy about the hike in the minimum tax.
“While a 1 percentage point increase might not sound significant, it would represent a 25 percent increase for those companies already paying the 4 percent minimum tax,” the Alaska Oil and Gas Association said in its white paper.
Tim Bradner is a correspondent for the Journal. He can be reached at email@example.com.