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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2019

Vol. 24, No 2 Week of January 13, 2019

Court dismisses HB 331 complaint but path to bonding not yet open

Kristen Nelson

Petroleum News

The Alaska Superior Court issued a decision Jan. 2 on House Bill 331, the bonding plan for cashable oil and gas exploration credits, but that doesn’t mean the state can go ahead with bonding, Revenue Commissioner Bruce Tangeman told Petroleum News Jan. 7.

While the Superior Court decision grants the state’s motion to dismiss the complaint challenging HB 331, there are still legal paths the plaintiff could take, Tangeman said.

Technically the state could issue bonds, but that would open it up to other issues if the Supreme Court were to decide in the plaintiff’s favor, he said.

As for the amount, Tangeman said the total liability is currently just under $800 million. Once the $100 million appropriated is used on a pro-rata share basis, and on the basis of where in the queue applicants are, the total will be just under $700 million.

Agreement with state’s position

The Department of Law said in a Jan. 3 press release that in the Jan. 2 decision the court agreed with the state’s position “that the subject-to-appropriation bonds authorized in HB 331 did not create unconstitutional ‘state debt’ for the purposes of the Article 9, section 8 of the Alaska Constitution.”

“The court rightfully affirmed that when bonds are ‘subject-to-appropriation,’ they are not truly a debt owed by the State,” Attorney General Kevin G. Clarkson said. “HB 331 was an innovative solution to the difficult problem faced by Alaska’s oil and gas explorers, and I am pleased that the superior court has upheld it as constitutional.”

The Department of Law noted in the press release that final judgment had not been entered in the case. The ruling can only be appealed once the final judgment is entered.

Commenting on the purpose of the program in the press release, Tangeman said the tax credit bond program allows the state to follow through “in paying down the tax credits, so industry and the financial markets know we are open for business. This will bring more stability to State finances and help the business community to get the economy back on track.”

HB 331

Credits designed to create incentives for oil exploration beginning in 2006 expanded the existing tax credit program, the court said in discussing HB 331. The Department of Revenue was given authority to purchase certain transferrable tax credit certificates and the Legislature created an oil and gas tax credit fund, supported primarily through appropriation by the Legislature, to fund purchases by the department.

By 2015 appropriations to the fund were no longer sufficient to pay the full amount of tax credit certificates, estimated by early 2018 to have reached nearly $800 million. Gov. Bill Walker introduced HB 331 in early 2018 in response to reduced appropriations to the fund and the decline in oil prices.

HB 331 allowed issuance of up to $1 billion in subject-to-appropriation bonds. It established the Alaska Tax Credit Certificate Bond Corp., with a board consisting of the commissioners of the departments of Commerce, Community and Economic Development; Administration; and Revenue.

The corporation would issue the bonds and proceeds would be disbursed, subject to appropriation, from the corporation to the Department of Revenue for tax credit and refund purchases.

Credits would be purchased at a discount from face value, with the discount paying the cost of financing the bonds.

Because of the litigation, no bonds were issued in 2018.

In the Legislature

In 2018 testimony on the bill, industry expressed concern over the discount rates but was supportive of paying off the credits sooner rather than later.

As passed, the bill has a discount of about 10 percent, covering the state’s costs and interest on the bonding. There are provisions allowing a discount closer to 5 percent for companies which meet certain qualifications: agreeing to provide the state an overriding royalty interest; committing to reinvest the money in Alaska within 24 months; agreeing to an early waiver of confidential seismic data; or having refinery or gas storage credits.

When oil prices were high, the state was able to buy all the cashable credits submitted; when prices dropped, the amount appropriated was limited, with payments pro-rated among companies, and companies ranked by when the purchase request was approved.

In the fiscal note accompanying HB 331, Revenue said that some $800 million in tax credits awaited state repurchase at the end of calendar year 2017. The department said that while most cashable tax credits were repealed in 2017, it would take time for the remaining credits to work their way through the system.

HB 331 passed the House 22-16 and the Senate 14-5, with both bodies passing the immediate effective date.

The bill applies only to cashable credits earned by small oil and gas companies; the state’s major oil producers were never eligible for these credits.

To qualify, a company must commit all its cashable credits to the program.

- KRISTEN NELSON






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