Audit finds $22.5M Mustang loan ‘inappropriate’ but legal

  • Crude oil is loaded to a tanker truck at the Mustang Operations Center near the Kuparuk River field on the North Slope. A legislative audit released Nov. 6 raised issues with how state agencies managed financing for the struggling project. (Photo/Courtesy/Alaska Industrial Development and Export Authority)

A special $22.5 million state loan for a struggling North Slope oil project that was paid back by another state agency in a complex financial arrangement was likely legal but created conflicts of interest among officials handling the state’s finances, according to a legislative audit released Nov. 6.

The Department of Revenue made the $22.5 million loan to Mustang Operations Center-1 , or MOC1 LLC, in October of 2015 to provide the Mustang project operator, Brooks Range Petroleum Corp. with the capital to continue advancing work on the small oil development.

It followed a partial veto of the state’s annual oil and gas tax credit payment by then-Gov. Bill Walker as the state deficit ballooned while oil prices fell. Global oil prices fell in late 2015 before bottoming out at less than $30 per barrel in early 2016, a situation that made it difficult for Brooks Range to secure construction capital, leaders of the small Anchorage-based independent said at the time.

The loan potentially pitted the Revenue commissioner’s duty to ensure the loan was adequately collateralized — it was backed by state-owed tax credits — against authority over the distribution of the tax credits, according to the audit.

Loans were not offered to other tax credit holders.

“Overall, the audit found the (Revenue) commissioner’s decision to loan up to $22.5 million to MOC1 under the authority of the department’s investment statutes was inappropriate when compared with behavior that a prudent person would consider reasonable,” the audit states.

“In support of this conclusion, auditors noted the following: the loan was made outside of DOR’s established investment procedures and DOR management failed to adequately document consideration of the associated risks when making the loan; adequate internal controls were not implemented over the accounting, reporting, and management of the loan; and the loan created conflicts of interest that were not sufficiently mitigated. These facts demonstrate the need for additional oversight of DOR’s investment functions.”

The loan was made to MOC1 and not Brooks Range because of a partnership the operating company had with the Alaska Industrial Development and Export Authority, the state-owed development bank.

That eventually led AIDEA to ostensibly pay off the lion’s share of the loan after MOC1 paid down $5.7 million of its debt over two installments made in early 2018 and 2019. Those payments — funded with state tax credit revenue — came only after Revenue officials agreed twice to extend the term of the loan, which was originally due in full at the end of 2016, according to the 45-page Legislative Audit Division report.

AIDEA first invested $20 million needed to build a five-mile road to Mustang and a 19-acre pad for production and processing facilities in December 2012. The gravel road and pad — in which AIDEA was an 80 percent owner — were finished in April 2013.

At the time, Brooks Range leaders said they wanted to have the field in production by fall 2014 and credited incentives in the just-passed and industry-supported oil production tax structure under Senate Bill 21 for improving the economics of the project and spurring it forward.

In April 2014, AIDEA committed another $50 million equity investment in the $225 million Mustang oil processing facility through MOC1. AIDEA held a 96 percent stake in the holding company as Brooks Range’s owners matched the authority’s equity with a $1 million investment of their own.

Brooks Range Chief Operating Officer Bart Armfield said at the time that the project would start production in late 2015 and likely hit peak production in 2017.

The state development bank assumed the loan balance in September 2018 when its equity investment in the Mustang project was converted to a loan; the new arrangement also guaranteed AIDEA would repay the loan and the interest rate was cut from 7 percent to 3 percent as well, according to the audit.

That situation created a conflict for then-Revenue Commissioner Sheldon Fisher because of a seat on the seven-member AIDEA board of directors designated for the Revenue commissioner, the audit concludes.

Both Fisher and his predecessor Randy Hoffbeck, who led Revenue when the loan was made, delegated their duties on the AIDEA board to deputy commissioners. The Revenue-designee identified a potential conflict on the AIDEA board in March 2018 and was recused from Mustang-related actions, according to the audit.

Hoffbeck said in a 2018 interview that the loan — requested by Brooks Range leaders — was made in an attempt to protect AIDEA’s investment in Mustang.

While loans were not offered to other companies holding tax credit certificates, it was determined the loan to MOC1 could be made under the department’s investment policies, according to Hoffbeck.

“We had our investment guys look at it and say, ‘yeah, we could fit that in with our portfolio,’” he said in 2018. “Not a large amount but the amount that we did was reasonable within our portfolio with a guaranteed 7 percent rate of return at a time when the markets looked kind of frothy and we didn’t know really which way they were going to go.”

The Revenue Department eventually netted nearly $4.3 million from the loan, but AIDEA’s outlays reduced the authority’s net income by approximately $1.8 million, according to the audit.

Current Revenue Commissioner Lucinda Mahoney noted in a written response published with the audit that the activity took place during Gov. Bill Walker’s administration before she was appointed and added that there were “control issues identified by this audit” but wrote further that “no financial harm to the general fund ultimately resulted.”

Brooks Range’s parent company owed AIDEA $90.5 million as of March 31 after going through several financing arrangements, according to the audit.

Brooks Range Petroleum, now under new management, briefly produced oil late last year but development has again slowed with the pandemic-induced disruption to oil markets this year.

Mahoney wrote that policies governing “non-traditional” loan requests put in place in 2018 continue to be in place.

AIDEA board chair Dana Pruhs wrote in response to the audit that the authority largely defers to Revenue’s conclusions given the report is directed at the department’s loan, but also emphasized that AIDEA board members are prohibited from voting on issues they are otherwise involved in.

“Please know that AIDEA and its Board are committed to advancing the public’s trust and transparency in our operations as a public corporation of the State of Alaska,” Pruhs wrote.

Elwood Brehmer can be reached at [email protected].

11/11/2020 - 9:05am