Credit cuts move over industry objections

  • Sens. Mia Costello, R-Anchorage, and Lesil McGuire, R-Anchorage, discuss oil tax credits April 11 in Juneau. Photo/Rashah McChesney/AP

The legislation tree sprouting from Gov. Bill Walker’s oil and gas tax credit revamp grew again April 11 when the Senate Resources Committee introduced its own tax credit rewrite.

Meanwhile, the House continues to grapple with the third version of House Bill 247, which barely resembles what the administration planted in the Resources committees back in January.

The Senate Resources version of Senate Bill 130, now on its way to the Finance Committee, would ramp down the size of refundable capital expenditure and operating loss credits and available for Cook Inlet producers and explorers over the next two years.

It would roughly cut available state support — estimated at 55 percent for developing companies and 30 percent for producers under current law — in half starting January 2017, and eliminate refundable credits entirely from the Cook Inlet basin starting in January 2018.

It is assumed that by 2018 much more will be known about the future of the Cook Inlet natural gas market, which has temporarily stabilized, and current prospective purchasers of Inlet gas could be more solidified and open more opportunities for producers to sell gas in what is now a very constrained market.

The iteration of HB 247 being debated on the House floor at the time of this publication would keep state support for companies working Cook Inlet beyond 2018 at average rates of 25 percent for developers and 15 percent for producers.

Walker’s original proposal would have kept credits in place long-term to support about 25 percent of a company’s project development costs but also immediately end state support for Inlet producers.

The governor pushed for changes to the complex oil and gas tax credit program to lessen the state’s annual obligation to pay refundable credits at a time when Alaska is facing budget deficit of about $4 billion.

What started as a small, $10 million per year industry incentive program in 2003 has ballooned to a $700 million obligation this year and could eventually exceed $1 billion if left untouched, the Walker administration contends.

The administration’s plan also would have raised taxes by increasing the minimum tax “floor” for North Slope production from 4 percent to 5 percent. Further, it would have “hardened” the floor to prevent companies from using operating losses during times of low oil prices or after significant capital expenses to take their tax liability below the minimum tax.

How a sustained low oil price environment, such as today with prices hovering in the $40 per barrel range, would impact the minimum production tax was not understood or even considered when the overarching production tax law known as Senate Bill 21 was enacted in 2013.

The House would harden the floor at a 2 percent minimum tax rate.

SB 130 would not harden the floor, despite a recommendation to do so in a December Oil and Gas Tax Credit Working Group report led by Senate Resources chair Sen. Cathy Giessel.

Further evaluation by the Tax Division found that the state could be stuck paying more than $1 billion in deferred Net Operating Loss credits when oil prices recover because they couldn’t be used to take a tax liability before the floor when prices were particularly low.

The Department of Revenue forecasts Alaska North Slope crude prices will recover to average about $50 per barrel in fiscal year 2019, at which point the state would be on the hook for nearly $1.1 billion in Net Operating Loss credits that companies were forced to hold under both the administration and House credit bills.

Under current law and SB 130, that obligation would be closer to $700 million.

The progressing HB 247 would cap the amount of refundable credits each company is eligible for at $100 million per year; SB 130 sets an $85 million per year limit.

It is largely believed those caps will have little impact unless a small producer or new entrant to Alaska begins an exceptionally large project.

Walker proposed a $25 million per company per year refundable credit cap. Both bills contain a proposal by the administration to stop the 20 percent Gross Value Reduction credit to create or increase a net operating loss. The GVR immediately reduces the value of “new” North Slope oil before a tax liability is calculated.

(Editor's note: This story has been corrected to accurately reflect that HB 247 and SB 130 would end the Gross Value Reduction credit for current oil production eligible for the credit in 2021. A previous version of the story incorrectly stated that the Gross Value Reduction credit would be eliminated entirely in 2021 under the bills.)

They also put a five-year limit on the Gross Value Reduction credit and end it for current GVR-eligible production after 2021; that was not proposed by the Walker administration.

The bottom line savings to the state projected from HB 247 and SB 130 start small at up to $15 million to $20 million in fiscal 2017 because most of the changes take effect Jan. 1, 2017 — halfway through the fiscal year. The 2018 savings are projected at up to $155 million from HB 247 and up to $75 million from SB 130.

By 2022, the savings from HB 247 could hit the $200 million to $300 million-plus range depending on oil prices and tax credit applications; 2022 savings from SB 130 could hit $175 million, based on Revenue Department projections.

The administration’s proposal was projected to save and generate nearly $500 million almost immediately through significantly reducing refundable credit expenses and adding about $100 million in revenue by hardening and raising the tax floor.

A sharp response

The industry, to put it mildly, is unhappy that any tax change is progressing.

Alaska Support Industry Alliance General Manager Rebecca Logan took the Senate Resources Committee to task in public testimony April 12.

The Alliance, as it is commonly known, represents about 600 contractor businesses in the state’s various resource development industries — primarily oil and gas contractors.

Logan said the Alliance started the session with goals for the state to increase throughput in the Trans-Alaska Pipeline System and pass a sustainable budget.

“You guys didn’t do your job,” she told the Resources members. “On March 15, when the (operating) budget came out of the Senate and was at $4.6 billion I knew that we were going to get to a point where you were going to have to come to the oil industry because you didn’t do your job on the budget, and so here we are.

“Our position on this bill from day one has been we oppose this bill. We oppose any changes to the current tax structure but there was nowhere else for you to go because you didn’t do what you should have done with the budget.”

Increasing taxes or reducing incentives will further damage an industry that is already “hemorrhaging” money with oil prices in the $40 per barrel range, she said.

The average cost to produce and transport North Slope crude to market is currently about $46 per barrel before any taxes are applied, according to the Revenue Department.

Alaska Oil and Gas Association President Kara Moriarty was more measured in her testimony, but noted the state is looking to change its oil and gas tax policy for the sixth time in 11 years.  Some of the most recent of those changes, in SB 21, were requested by the industry.

“The industry is not asking for a tax decrease or for tax or royalty relief while we struggle through extraordinarily low prices and we asked that you proceed with caution,” Moriarty said. “The tax policy you have proposed will not encourage new entrants to come to Alaska, will not ensure current producers will remain committed to Alaska, will not lead to more jobs or more production, will not lead to more long-term revenues to the state, and will not improve Alaska’s long-term fiscal future.”

Jim Musselman, CEO of Dallas-based independent and small Slope producer Caelus Energy wrote in a frankly-worded letter to Walker April 8 that a change to the current tax credit system will be successful in reducing the state’s near-term cash outlays at the long-term expense of fewer oil industry jobs and less revenue associated with lower production.

Caelus leaders have called the company, which entered Alaska in 2014 by purchasing Pioneer Resources’ assets, the “poster child” success story for the state’s oil and gas tax credits.

The company has delayed further work on its $1.2 billion Nuna development, which was scheduled to start production in the second half of 2017 because of low oil prices, but drilled exploration wells this winter at its large, long-term western Slope Smith Bay prospect.

Job loss tally

Musselman also wrote to inform the governor that low oil prices have forced Caelus to cut its full-time Alaska workforce of about 80 employees by 25 percent and suspend formerly year-round drilling at its producing Oooguruk development. Stopping infill drilling at Oooguruk also means laying off nearly 300 contractor employees, according to a Caelus spokesman.

All told, the Caelus announcement brings the number of reported layoffs from producing companies to about 500 since ConocoPhillips announced last September cuts to about 120 positions in the state.

The Alliance estimates roughly 1,000 industry support positions had been lost before the Caelus revelation, which brings the total to about 1,300 jobs.  The Alaska Department of Labor estimates the state has lost 1,800 oil and gas industry jobs in the last 12 months.

04/15/2016 - 12:52pm