Voices of Alaska: ‘Agrium Tax Credit’ bill brings opportunity to Alaska

  • By Ken Alper
  • Sunday, October 9, 2016 9:49pm
  • Opinion

Governor Walker recently signed a bill that provides a new tax credit benefit for a major gas project. This might be confusing to some Alaskans considering how hard the administration has worked to reduce our oil and gas tax credit liability. Last session the legislature passed the governor’s HB 247, which phases out refundable credits in Cook Inlet and makes some other important changes. The governor also vetoed most of the funding to repurchase credits until we can resolve our fiscal situation.

The new credit established in HB 100 is different. Compared to many of our credit programs, this credit has much less risk and much more upside, and is targeted at a specific goal. That goal is to reopen the Agrium fertilizer plant in Nikiski, which for decades provided hundreds of good jobs in that part of the state while providing a steady market for Cook Inlet natural gas.

The fertilizer plant operates by capturing nitrogen from the atmosphere, and turning it into chemicals like urea that are valuable in agriculture. This takes a lot of energy, and Alaska’s natural gas provided that energy until the plant closed in 2007. Part of the reason the plant closed was uncertainly about gas supply as well as increasing gas prices.

Over the past decade, the state has provided a lot of support for producers to find and develop new gas supplies. This has helped solve the supply concerns that not many years ago had Anchorage planning brown-out drills. And now we have the opposite problem: new potential gas supplies that are looking for a market.

That’s why the governor was glad to sign House Speaker Mike Chenault’s bill, which provides a credit against a company’s Alaska corporate income taxes for purchasing Alaska gas and using it to produce fertilizer.

To earn any value from this credit, Agrium will have to sanction a project to renovate and remodel its Nikiski facility, which the company estimates will cost about $250 million. Agrium will then have to commit to buy large amounts of gas from state leases in Cook Inlet.

How much gas? For just one “train” of production, which is half the plant’s capacity, the company would need about 28 billion cubic feet of gas per year. That’s almost as much as Enstar uses in its entire system, and would increase average demand in all of Cook Inlet by a third.

This big new market would help the newer gas explorers and developers make the commitments to invest what is needed to bring on their resources. In fact, when the legislature was debating the governor’s tax credit reform bill this was an important point that came out: Cook Inlet gas projects have pretty good economics, and can be built without a lot of subsidy, but only if the producers have a steady year-round market to sell their gas.

After it reopens its fertilizer plant, Agrium would have to earn a profit and owe the state our corporate income taxes before claiming the new credit. That is at least three years off.

There are protections for the state built into HB 100. The most the company could benefit is to zero out its income tax. There are no refunds, and the credit can’t be carried forward, transferred or sold to another company. And the maximum amount of the credit is the amount of royalty we receive from the gas Agrium buys. Finally, the program has an expiration date or “sunset” of 2023.

That much gas from state leases will generate about $15 million in royalty revenue each year, and about $4 million in production tax. That’s money we wouldn’t see at all if the gas isn’t developed. There’s also a benefit for Alaska’s farming industry, which will be able to purchase less expensive locally made fertilizer. So this is very much a win-win.

I wish Agrium good fortune going forward, and hope the company will take advantage of this important new benefit and help put Alaskans to work.

 

Ken Alper is Director of the Alaska Department of Revenue Tax Division.