The consequences continue to
reverberate after Gov. Bill Walker’s veto of more than $600 million owed to independent explorers and producers in the last two years.
A pair of stories in the last week detail one company trying to meet its loan obligations to the state even as the state refuses to make good on its obligations to the company, and the other reveals that the major North Slope producers are now buying up the vetoed credits for pennies on the dollar to reduce their future tax liabilities.
We can begin with BlueCrest, the Cook Inlet company that is now drilling into the Cosmopolitan prospect from its onshore rig on the southern Kenai Peninsula.
The State of Alaska currently owes BlueCrest about $17 million in credits, which are rebates for prior spending on exploration and development.
BlueCrest intended to use the money owed by the state to fund a reserve account that was required to have $15 million in it as of this coming Dec. 31.
Shifting IOUs from one pile to another is a fine example of what’s become a tangled web of state loans and subsidies to the independent players from the oil and gas industry that were successful in attracting them to Alaska but have now become financially unpalatable in the throes of a budget crisis and radioactive when it comes to support from the Legislature.
Walker believes he had no choice but to veto $430 million in the payments from the current fiscal year budget based on the state’s burn rate through its savings and he does correctly note that his original budget submitted last year intended to get right with our bills to the independents.
But when the Legislature failed to enact any part of the long-term budget plan proposed by Walker that included the use of Permanent Fund earnings and new taxes, he slashed the PFD by half and the credit appropriation by 93 percent to its statutory minimum of $30 million.
Penny wise and pound foolish pretty much sums it up.
While Walker feels justified in the short term for stiffing companies on money owed because of the budget deficit — and will gladly point out that interest does not accrue on the state’s debts even as it continues to accrue for BlueCrest’s and other companies’ loans — he is sabotaging Alaska in the long term.
Roughly every $1 the state agreed to reimburse companies for exploring and developing in Alaska was being matched by $2 in financing from the private sector.
In some parts of that sector the state is now known as “Alaskanistan.”
Walker can aim his pique at the Legislature for failing to act until the sun shines all day again in Utqiagvik, but the fact is he himself and his administration officials assured the financial world that his 2015 veto was a one-off.
So he saved the Constitutional Budget Reserve a few hundred million dollars, but the result is that many of the financiers he’s depending on to invest 100 times that in the Alaska LNG Project now don’t believe the governor of a sovereign state can be taken at his word.
(About this point the zealous defenders of the PFD will probably come around arguing that veto is worse for the Alaska economy. From this perspective it’s more likely that the 5,300 people who lost their jobs in the year before the PFD was vetoed would probably rather have a paycheck than an extra $1,000. The combination of depressed oil prices and the state’s new lack of creditworthiness is going to be far worse for long term growth and investment than a reduced PFD.)
To the second consequence of vetoing the credit appropriation, Walker has now, probably unintentionally, given the major North Slope producers a cheap way to reduce their future tax bills by snapping up the certificates from the suddenly distressed independents that need cash.
Tax Division Director Ken Alper told the Resource Development Council that future credit obligations have been reduced in the last month by more than $100 million because of such transactions. Now, this may get the Legislature off the hook for actually appropriating the money at some point, but it will be absorbed through reduced tax revenue from the majors who are already paying billions less as the price per barrel hovers around the breakeven point.
Walker has not only damaged Alaska’s reputation in financial circles through his credit veto, but he has also sharply titled the state playing field to the majors’ advantage at the expense of the independent companies he once said he wanted to see 50 of on the North Slope.
Had Walker made good on the state’s debts, that money would have circulated back into the Alaska economy as projects continued to develop and attract investment from the private sector while the Legislature pursued a more sustainable solution that wouldn’t harm potentially large discoveries on the Slope by Caelus and Armstrong.
Instead, the legacy producers got an inexpensive windfall of a tax break that won’t benefit Alaska at all.
—Alaska Journal of Commerce, Dec. 8, 2016