Officials say tax credits work, but need reform

State administration officials and legislators are working on changes to the state’s complex system of oil and gas exploration and development tax credits, and State Sen. Cathy Giessel, R-Anchorage, chair of the Senate Resources Committee, says her goal is to have a proposed change ready for review by Dec. 1.

An informal tax credit “working group” of legislators and various stakeholders including industry, also chaired by Giessel, met Sept. 8 in Anchorage to review status of the program.

The changes, which the Legislature must make, would attempt to limit the cost of the incentive program while allowing it to continue, in some form, as a spur to new exploration and development, Giessel said.

Despite its cost to the state treasury, Revenue Commissioner Randy Hoffbeck and Division of Oil and Gas director Corri Feige both told the working group the incentive program has resulted in a huge public benefit by stimulating exploration for and development of new natural gas supplies in Cook Inlet.

That has alleviated earlier concerns for a regional gas shortage, both said. However, the total cost of the Cook Inlet incentives to the state treasury is now estimated at $1 billion, state Tax Director Ken Alper told the working group. However, some of those tax credits went to Inlet oil developers rather than gas developers.

Still, the turnaround in regional gas supply is a big accomplishment. A few years ago former Anchorage Mayor Dan Sullivan was rehearsing for electricity winter “brown-outs” in the state’s largest city because of pending shortages of gas for power generation, and regional utilities like Enstar Natural Gas Co. were actively working on plans to import liquefied natural gas, at considerable cost, to ensure there would be adequate supply.

Five years later things are a lot different, Hoffbeck said, and that’s thanks to the incentives and their effect in spurring exploration, mainly by a group of aggressive independent companies.

“We now have five years of committed supply contracts and many years worth of gas believed to have been discovered. There is substantial potential (gas) supply now looking for a market,” Hoffbeck said. “The greatest constraint on production in Cook Inlet appears to be the limit of the market.”

Feige, in a separate presentation, said, “The tax credit (incentive) system has done exactly what it was intended to do in Cook Inlet. It has attracted new investment and reaffirmed public confidence in Cook Inlet,” that there are additional resources to be discovered, she said.

The incentives have boosted efforts by a small group of independents, allowing them to “de-risk” prospects they were evaluating. It has caused exploration to occur sooner, Feige said.

That said, the program has to be looked at in a balanced way that includes its cost to the state, she said.

The growing cost of the program caused Gov. Bill Walker to delay payment earlier this summer on $200 million in tax credits that had been applied for from Cook Inlet and North Slope explorers. The state would have paid out $700 million in fiscal year 2016, the current budget year, but Walker reduced that to $500 million.

The state will eventually pay the other $200 million, Hoffbeck said. That will appear as a cost in the fiscal year 2017 or fiscal year 2018 budgets.

For Cook Inlet, the state has paid about $1 billion in exploration and development incentives since 2007, most of that since 2013 and in refundable tax credits, or payments made directly to companies, with a small amount of credits used by companies against state tax liability, state tax director Ken Alper told the working group.

An oddity in Cook Inlet is that oil producers pay no state production tax (state royalties are paid, however) but gas producers do pay a production tax, Alper said. Even though oil producers pay no tax they are still eligible for state tax credits on various development expenditures, and these are typically turned in to the state for cash refunds, Alper said.

“The state reimburses producers between 20 percent and 40 percent of non-operating expenses,” Alper said.

Under state law the identity of tax credit refund recipients, or details on their applications, cannot be disclosed, he said.

Typically Cook Inlet companies receive much more of the state tax credit cash refunds than do North Slope explorers and developers. A preliminary final figure for fiscal year 2015, the budget year that ended June 30, is that $409 million in credits were paid to Cook Inlet operators compared with $212 million paid to firms on the North Slope.

On the North Slope, oil producers do pay state production taxes and a greater share of the tax credits are taken by producing companies against tax liability, but smaller companies who are exploring and who do not yet have production, and a production tax liability, turn in their tax credits for cash reimbursement.

In theory the tax credits can be sold to companies with tax liability but these are typically sold at a discount.

Hoffbeck told the working group that the administration is looking at a number of possible changes to the tax credit program that could include an annual cap on funding and a pre-approval process for eligibility of expenses for tax credits.

The administration may also seek to limit the “stacking” of different types of tax credits that allow firms to get as much as 65 percent to 70 percent of exploration and development expenses reimbursed. For Cook Inlet, the state may allow credits only for gas exploration and development, but not oil, he said.

Other changes might include the state lending funds for development through state entities like the Alaska Industrial Development and Export Authority, or direct state participation, as a working interest owner, in an oil and gas development project, Hoffbeck said.

Or, there might be some form of “hybrid” approach with the state able to convert loans to a working interest in development if there is a discovery, the commissioner said. “This approach would protect the state from dry-hole costs,” in exploration, he said.

09/09/2015 - 1:35pm