New House Resource chairs ready to take on oil credits and the AK LNG

  • By ELWOOD BREHMER
  • Wednesday, November 16, 2016 9:24pm
  • News

The shakeup in state House control seemingly gave Gov. Bill Walker allies in leadership positions on fiscal issues, but the upcoming session will still be an uphill battle on the Alaska LNG Project.

Anchorage Democrat Reps. Andy Josephson and Geran Tarr will co-chair the House Resources Committee, the first stop for any oil and gas tax bills on their way through the legislative process.

They take the Resources gavel from outgoing Reps. Mike Hawker, R-Anchorage, and Ben Nageak, D-Barrow — strong supporters of the state’s oil and gas tax credit program — when the 30th Legislature convenes in two months.

All indications are the credit debate, which dominated this year’s marathon session, will again be front and center in 2017. The refundable credits for work in the Cook Inlet basin ultimately went the way of the horse and buggy when the dust settled, so now the administration and the new House Majority and have their sights set on at minimum reworking the North Slope incentives.

The challenge will be threading the needle to reduce the state’s future credit obligation without discouraging industry activity on the Slope that the state needs to keep its largest revenue stream flowing.

Any credit reform legislation that makes it out of the House will also have to appease at least a few Republicans in the Senate, which cut major changes to Slope credits out of last year’s bill, in order to make it to the governor’s desk.

Josephson said the fact that the state will have burned through more than three-fourths of its savings from when budget reserves peaked at about $17 billion — and will be left with about one year of cash left at the end of this fiscal year — means “we have to do something (on oil tax credits). The idea that we could choose not to do something is, frankly, at this point ludicrous.”

The central issue, the new Resource chairs said in separate interviews, is that the state is no longer generating meaningful revenue from its production tax since oil prices have fallen and largely stabilized at sub-$50 per barrel prices.

The Revenue Department projects that net operating loss, or NOL, credits claimed by the state’s large producers and used against tax liability will virtually offset production taxes through 2021, with the state taking in about $130 million in production tax revenue over that time based on its oil price forecast.

On top of that, Alaska could owe upwards of $1.1 billion in refundable credits to smaller companies by the end of fiscal year 2018, according to state Tax Director Ken Alper.

New House Finance co-chair Rep. Paul Seaton, R-Homer, was central in drafting a credit reform-reduction bill that passed the House last session with support from Democrats and moderate Republicans, but was picked apart when it got to the Senate.

Tarr acknowledged that the Legislature has at times been fairly criticized for frequent oil tax changes — also noting some recent changes came at the request of industry — but added that the oil prices of today weren’t even considered when Senate Bill 21 and other oil tax laws were passed.

“It’s been proven now the low price environment is the new normal,” she said. “There’s just no denying that when we created the current tax structure — the record is clear — we only looked at the $60 to $120 (per barrel) band. We did not create a system that works at these prices and I believe 100 percent we would not have the system we have today if we had done that.”

As challenging as it might be, her goal is to come out of the next session with an oil tax system that is durable for the next 10 years, and last year’s lengthy debate should help legislators pick up where they left off, Tarr said.

Josephson and Tarr both served on the Resources Committee previously, so they have significant working knowledge of the issues at hand.

Tarr said she would support capping the amount of losses companies can claim in any one year to spread the tax deductions or allow them to be deducted at a reduced rate.

“You just can’t do what you can’t afford,” she said.

Walker proposed phasing out the 35 percent NOL in legislation his administration submitted during the final and short-lived fifth special session in July.

On refundable credits, the Democrats said they are open to ideas on how to change the system, but not interested in the status quo.

Currently, small and non-producing companies working on the North Slope can claim the 35 percent NOL credit for cash, an incentive aimed at spurring development in the high-cost regime, under the theory that the state will ultimately recoup the credits in royalty and taxes when the oil starts flowing.

The large Pikka and Smith Bay discoveries recently announced by Armstrong Energy and Caelus Energy, respectively, which together could produce more than 320,000 barrels per day when fully developed, would be eligible for the refundable NOL.

Those discoveries are also estimated to cost a combined $13 billion or more to bring online, costs that could translate into a roughly $4 billion NOL liability to the state.

“The $4 billion we would spend helping those fields is not practical; it’s not something that’s affordable, so (the state help) is going to have to be something less than that,” Josephson said.

He added that does not mean doing away with state support for early-stage projects.

“What I’m interested in is a more iterative plan that is more like royalty relief where the industry would carry the burden and they would be able to prove up to our geologists and our DNR team and Revenue team that something is truly viable and not pie in the sky,” Josephson said. “If anyone thinks that I’m going to be supporting the abolition of all cashable credits; that is not necessarily going to be my position at all.

“It would be foolish to look at a prospect like (Caelus’) Smith Bay and say, ‘Well, we’ll just walk away from this sort of thing.’ That would be extremely foolhardy.”

Tarr also said she sees a place for direct state investment in the exploration and early development phases of projects. She added finding ways to encourage companies to partner on projects could reduce the dependence on state subsidies.

“What we have to recognize is what we can afford. It may be that it means at lower prices there’s less (money) available for support,” she said.

Tarr noted that Caelus has said the tax credits were influential in bringing the Dallas-based independent to Alaska.

Caelus expects to have about $200 million in credit certificates by next spring, according to spokesman Casey Sullivan.

Josephson emphasized that the current North Slope credit system isn’t working for anyone, as Walker’s collective $630 million in vetoes to tax credit payments in the last two years have thrown the current program into disarray.

“I think anyone would look at this and say things are so dire that all you have to do is look at the last two years of governor’s vetoes — no one benefits from this anymore because (the credits) are just not something you can rely on,” he said. “It frankly becomes a fiction at some point and you might as well deal with something that is more predictable and reliable.”

Tarr concurred.

She said the state “looks like an unreliable partner at this point and we need to change that.”

Josephson said he would support paying the credit obligation off in full to start fresh with a new system and hopefully restore some confidence in the state’s business climate. Open to that possibility, Tarr added at a minimum there needs to be a plan to pay them off sooner than later.

“There’s a lot of uncertainty about Alaska and I think we need to try and address that quickly,” she said.

Alper said at a Nov. 15 Alaska Common Ground fiscal policy forum that he expects the administration to include a mechanism to pay off the outstanding credits “in the short to medium timeframe” with its coming tax credit legislation.

Walker’s original tax credit bill last year included a lump sum appropriation to pay off all expected refundable credit liabilities, but that was pulled from the bill that passed the Legislature. He said his $430 million veto in the 2017 budget was a consequence of the House failing to pass a plan to use Permanent Fund earnings to help pay down more than half of the state’s roughly $3.5 billion deficit and the state could not afford to pay the credits without its own budget solutions.

Tarr summarized that further changing the program has to be a part of the state’s larger fiscal plan “because there’s just not going to be any public support for using people’s PFDs to pay down oil tax credits.”

Gov. Walker will have a harder time finding partners on his plans for the Alaska LNG Project in House Resources, however.

Josephson, who generally characterizes himself as a “stalwart supporter” of the independent governor, said he wants to see concrete information that the administration’s plan for the state to lead the $45 billion-plus project is progressing.

Minus a revelation that the Alaska Gasline Development Corp. has lined up a major investor, or news on par with that, he said it will be hard to support much more state spending on the project.

“If there was some amount of money that I thought could be justified based on the work plan and based on the potential and prospects, I would look at it,” Josephson said. “But I do think that the hope and optimism that came with Senate Bill 138 (that outlined the state’s role in the project), that I was very much apart of, has seriously waned and I don’t think anyone is to blame for that; I think it’s just the way things are.”

The House and Senate Resources committees hold joint quarterly hearings on the project that serve as the Legislature’s Alaska LNG status reports.

How much funding the administration will request for the project is unclear; the governor has until Dec. 15 to release his budget, but AGDC president Keith Meyer has said the corporation is trying to stay within general state budget restraints.

The corporation’s operating budget is $10.3 million this fiscal year.

Walker and Meyer have also said it will take about a year to determine if there is a place for the Alaska LNG Project in the global market.

Tarr has been an outspoken critic of a state-led project because of concerns about the state’s ability to handle what is the epitome of a complex mega project.

She would also need to hear more details about the administration’s plan and the prospect of success before supporting more funding for a project that the producers have backed away from because of market conditions, she said.

Spending more on a project that won’t come to fruition simply isn’t an option, Tarr added.

“It’s not even about supporting or not supporting a project. But it’s just infuriating to me that we spend money on things that never get done,” Tarr said, noting the state ended up spending nearly $500 million on developing a gasline under the Alaska Gasline Inducement Act, or AGIA.

“That project, it’s going to happen. That resource is not going anywhere but we can’t undercut our future trying to force it at the wrong time. I need more to tell me there’s a reason to go forward,” she said.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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