Alaska’s explorer and small producer tax credit program has been capped for this year but the program is still on the books and applications for credits are still being accepted, state Revenue Commissioner Randy Hoffbeck said.
There is $500 million in the budget for the program and that’s enough to pay for tax credits that have been applied for, which total about $475 million, the commissioner said.
That leaves $25 million for the year, and if more applications come in the companies, mostly small independents, will have to accept an IOU from the state.
Gov. Bill Walker trimmed a $700 million appropriation for the credits by $200 million on June 30 when he approved the final fiscal year 2016 state budget. However, the governor said tax credits that have already been applied for would be paid, that the June 30 action should be seen as a “deferral.”
The veto affects only part of the state’s tax credit incentive program for the oil and gas industry. Only the program where the state actually purchases the credits from explorers and small producers is being capped. Companies with tax credits still have to option to sell them to a firm that has production tax liability against which the credits can be applied.
In this case the state still feels a revenue impact eventually but it is in the form of reduced production tax paid by the producer who purchased the credits and is also delayed.
When tax credits are sold, however, they are usually purchased at a discount, for example 90 percent, so the explorer or small producer gets a reduced refund of expenses while the purchaser, for example a larger firm with production, can apply them at full value against tax liability and pocket the difference.
It is because of this that the state instituted the straight purchase policy a few years ago because the state treasury feels the same impact either way and a purchase of the tax credits by the state ensures that explorers and small producers get full value in the refund.
However, the governor said June 30 that the program as it is currently structured, with the state writing checks, can’t be sustained in tight budget times, and discussions are underway on a more affordable replacement.
Hoffbeck said the administration hopes to flesh out several options now being considered and to have a proposal ready for the Legislature next year.
“The governor’s action has really gotten people talking,” Hoffbeck said.
So far there are three plans on the table, he said. One is a direct state equity investment in a project, such as the Alaska Industrial Development and Export Authority has done with infrastructure to support Brooks Range Petroleum’s small Mustang field development on the North Slope.
“We’re talking with AIDEA now on whether the authority could be a conduit for this kind of investment. It would require a good deal more capital than the authority now has available,” Hoffbeck said.
Also, current state law does not allow AIDEA to invest “upstream” in oil and gas reserves, but only in the infrastructure needed to produce oil and gas. For example, in the Brooks Range investment AIDEA is a partner in an oil and gas processing plant needed for Mustang as well as the civil support structures like the pad for the plant and an access road.
There are separate investment deals for the road and pad, which have been constructed, and the plant, and the agreement provides for AIDEA’s investment to be temporary, with the private partners buying out the authority after the project gets up and running.
AIDEA invested in a similar deal in a jack-up rig in Cook Inlet and sold its shares at small profit. The deal facilitated the rig being brought to the Inlet where it drilled exploration wells and made a significant natural gas discovery. The authority sold its stake when the rig was taken out of Alaska.
Two other options being considered include some form of long-term financing, at very low interest, as well as a new version of the tax credit program but with pre-approved credits so there is certainty for the companies that the credits will be paid, Hoffbeck said.
A new version of the tax credit program would still likely be capped at some level, not as open-ended as the previous one, but it would be more predictable and that is important, the commissioner said.
Meanwhile, some legislators have criticized Walker for capping the program.
“I couldn’t agree more with the governor that we have to have a realistic budget conversation, but choosing to short the tax credit commitments is not the way to do it,” said Sen. Mike Dunleavy, R-Wasilla, in a formal statement.
Dunleavy is co-chair of the Senate Finance Committee.
“At a time we’re facing an unprecedented shortfall in revenue, the last thing we want to do is send a chilling message of uncertainty to not just the oil industry but any potential industry looking at Alaska for potential investment,” Dunleavy said.
Walker’s unexpected veto of $200 million for the program on June 30 came after months of budget deliberation by the Legislature and the administration, Dunleavy said. Also, the governor had expressed support for Senate Bill 21, which contained changes to the tax credits, and which has overall generated more revenue for the state, Dunleavy said.
Tim Bradner can be reached at firstname.lastname@example.org.