Senate Majority recommends prudence on tax credits

The state Senate Majority is urging caution when examining changes to Alaska’s oil and gas tax credits in a report released Dec. 1.

The overarching theme of the 37-page report is that low oil prices and historically waning North Slope production have put the state’s economy in a precarious situation, and drastically cutting the tax credits to directly save money — yearly refundable credit obligations upward of $700 million — could cause additional retraction of private investment in Alaska’s basins.

It was born from six meetings of the Senate Oil and Gas Tax Credit Working Group, assembled and led by Resources Committee chair Sen. Cathy Giessel, R-Anchorage. The group included five other members of the Senate Majority and minority member Sen. Bill Wielechowski, D-Anchorage, along with industry and Alaska Native corporation representatives.

“The credit system has brought natural gas stability in the Cook Inlet, as well as more competition to the North Slope,” Giessel said in a formal statement. “We must make the system more sustainable, but also respect the tremendous investments coming into our state.”

In June, Gov. Bill Walker caused a stir in the oil and gas industry when he vetoed $200 million of state refundable tax credits from a $700 million line item for the credits in the state operating budget. At the time the governor said the partial veto was intended to spark discussion about ways to change the layered tax credit system he has called unsustainable given the state has a $3.5 billion budget gap.

The first of six recommendations made in the report suggests the State of Alaska should implement any changes to the oil and gas tax credits gradually as to not impact ongoing work relying on current credits.

“A massive change that takes effect even in the next 12 months could be considered retroactive since many projects have gained and expended funds on exploration and development,” the report states.

It further notes that almost immediately after the $200 million veto, members of the Walker administration had to reiterate to independent producers and their lenders it did not mean the state would dodge its obligation to pay the credits; rather the payments would just be delayed but still be made in time to meet statutory requirements.

The report states the credit freeze for explorers loosened after the state’s reassurances.

Wielechowski said that a recommendation to ensure the 4 percent production “tax floor” for legacy producers under Senate Bill 21 is protected is the only significant proposal in the report. The 4 percent floor was installed as a way to prevent legacy North Slope producers from using deductible tax credits to lower their tax liability to zero or less, which, given low oil prices and production value, could happen.

Tax Division representatives said at a working group meeting that neither SB 21, nor its oil production tax system predecessor known as ACES, were designed to effectively tax oil production at market prices less than $50 per barrel, as they are today.

While Wielechowski doesn’t object to the ideas outlined in the report, he said it lacks substantive suggestions on how to better invest dwindling public money in the state’s dominant industry.

“We’ve taken more of a scattershot approach, where we just provide (oil and gas) tax credits and deductions and we aren’t really taking a deep enough look into whether companies really need these to make their fields and projects profitable,” Wielechowski said in an interview.

The ACES progressive production tax, with a tax rate directly tied to the price of oil, attempted to maximize production revenue to the state in exchange for significant tax credits and deductions, he said. While ACES progressivity is gone, the tax breaks are not.

In a Nov. 27 letter to Giessel, Wielechowski thanked her for the opportunity to participate in the working group, but also noted what he felt was a missed opportunity by not delving into per-barrel production tax deductions.

He wrote that the Revenue Department projects oil and gas credits deductible against tax liability will be more than $1.2 billion in each of the next two fiscal years and decline to $999 million in fiscal year 2019.

Wielechowski also said the working group did not hear from BP, ConocoPhillips, or ExxonMobil, the three companies that benefit the most from the deductible credits.

“How do you have any discussion of oil taxes in the state of Alaska without hearing from the three largest producers in the state?” he told the Journal.

Presentations and discussions during the working group meetings focused primarily on the refundable credits, or “rebates,” eligible to smaller, independent companies producing less than 50,000 barrels per day.

Unlike the deductions, which are applied to reduce tax liabilities, the state purchases the refundable credits from the companies because they have no tax liability until a project reaches production.

Further considerations outlined by the report include ensuring Alaska support companies “be made whole” in the event an explorer or producer receiving state credits goes bankrupt — as Buccaneer Energy did last year following its Cook Inlet natural gas work.

It suggests allowing Frontier Basin credits, those eligible to companies working outside of the North Slope and Cook Inlet, to expire because most Frontier Basin operators utilize credits designed for Cook Inlet. That is a result of Cook Inlet credits being rebated quicker.

If the refundable Cook Inlet exploration and production are changed, Frontier work could be exempted. Incentivizing work such as Doyon Ltd.’s exploration in the Nenana Basin near Fairbanks is a relatively small expense when put against the potential benefits of oil and gas discoveries in non-traditional producing regions of the state, according to the report.

Finally, it requests making more information, but not the names of operators using credits, public.

“Without compromising the confidentiality and proprietary data of an operator, it would be a service to the public to know what the investment and spend amounts on a project applying for credits are,” the report states.

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

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