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Exploration credits holding steady Proposed FY 2011 budget has $180M for tax credits, funds in-state and out-of-state gas, variety of other resource-related projects Eric Lidji For Petroleum News
The $10.5 billion budget proposed by Alaska Gov. Sean Parnell on Dec. 14 continues to fund many resource development projects started under the Palin administration, and creates several new projects, many focused on expanding infrastructure to improve access.
The proposed fiscal year 2011 budget — which the state Legislature will begin debating in January — sets aside $180 million for exploration tax credits, $150 million to reimburse work performed under the Alaska Gasline Inducement Act, $6.5 million for in-state natural gas development and $15 million for resource-related road construction and improvements.
The proposed budget also sets aside $25 million for the Renewable Energy Grant Fund.
Parnell based his first budget as governor on Alaska producing 623,000 barrels of oil per day at an average price of $76.35, yielding around $5.42 billion in unrestricted revenue.
Tax credit funding steady … The $180 million appropriation for exploration tax credits is the same amount the Legislature approved for fiscal year 2010, but a decline from previous executive requests.
That, combined with recent administration projections about industry spending, suggests oil industry investment may be on the rise in Alaska and explorers are bringing projects online, but new companies are not necessarily arriving in the state in equal number.
The exploration tax credit is a key component of Alaska’s Clear and Equitable Share, or ACES, the new state fiscal regime for oil and gas development approved in late 2007.
Until spending plans began rolling in as required by the law, the state had to guess what it would need to set aside for credits. In FY 2009, the first budget cycle after the passage of ACES, the Legislature set aside $400 million for exploration tax credits. In her proposed FY 2010 budget, then-Gov. Sarah Palin initially requested $300 million for tax credits.
That decline most likely represented the startup of oil production from the offshore Oooguruk unit in June 2009. Oooguruk gave operator Pioneer Natural Resources and its partner Eni Petroleum their first production in Alaska, making the companies taxpayers.
Companies that produce oil in Alaska and pay production taxes to the state don’t claim exploration tax credit certificates, which must be reimbursed by the state or sold to a third party. Instead, they simply deduct expenses from their tax payments.
As a result, the cost to the state shifted from “credits being paid” to “taxes not being received,” and the budget line for the tax credit program fell even as investment rose.
In a revised FY 2010 budget, Palin lowered her $300 million request to $200 million. At the time, state officials said the reduction also didn’t indicate a drop in investment, but rather the lag time for getting and reimbursing requests from companies claiming credits.
That lag continued to play a role in the creation of the FY 2011 budget, Director of the Office of Management and Budget Karen Rehfeld said in a Dec. 14 press conference.
If companies began requesting tax credits at a higher or faster rate, Rehfeld said, the Department of Revenue would adjust the requested appropriation as needed.
… but investment to increase. The Parnell administration expects industry investment in Alaska to rise.
Under ACES, oil companies give the state five-year estimates for planned spending. In his Dec. 10 revenue forecast, Revenue Commissioner Pat Galvin said those plans suggest investment in Alaska would jump from $4.5 billion in FY 2010 to $5 billion in FY 2011.
If those figures prove accurate, the administration’s decision to fund the exploration tax credit program at FY 2010 levels suggests it believes that current oil producers will increase spending, while explorers without production will hold spending levels steady (or at least request credits this year at the same level they requested them last year).
State officials consistently point to the exploration tax credit program as proof that the state is balancing greater upfront risk in return for a larger share of industry profits.
Oil companies in Alaska have been divided on whether that balance works.
While larger companies believe the increased tax rate is starting to harm investment in the state, pointing to the fact that several traditional explorers don’t have work planned for this year, many smaller companies, particularly those without any production in Alaska, say the exploration credits make Alaska more attractive than other regions.
Citing a “disconnect” between the claims that ACES is oppressive and the projected increases in industry spending, the state is now publicly challenging oil companies that oppose ACES to submit data proving that the tax system is harming investment.
“If they can suggest changes to ACES in a way that creates jobs and opportunities for Alaskans, I’m listening. … Show me the data,” Parnell said on Dec. 14.
Parnell also said that he has already discussed ACES with 10 oil companies. Of those, he said, “four to five” thought the tax system was “just fine,” while “two or three” thanked the state for the tax credit program and two companies wanted to see ACES changed.
Asked for some specific examples of company opinions, Parnell said ConocoPhillips and Armstrong Oil and Gas wanted changes, while Renaissance Alaska liked the credits.
He also noted that the state is “paying a significant portion” of Exxon’s on-going exploration effort at the Point Thomson unit on the eastern North Slope.
Continued funding for efforts Although allocation-level information was not available at press time, the proposed budget appears to continue funding several on-going resources-related projects.
The proposed FY 2011 budget sets aside:
• $3.5 million for reservoir studies on the North Slope;
• $2 million for the Fairbanks Pipeline Training Center;
• $300,000 for the fourth year of a five-year study of the geologic hazards along the corridor of a proposed natural gas pipeline from Prudhoe Bay to southern markets;
*$160,000 for Arctic Power, the lobbying group for opening the coastal plain, or 1002 Area, of the Arctic National Wildlife Refuge to resource development; and
*$125,000 for the third year of a four-year analysis of the “gaps” in state management and oversight of resource development conducted by the Petroleum Systems Integrity Office.
The budget also kicks off several new multiyear programs, including:
• $500,000 to assess in-state energy potential, the first in a three-year funding proposal and
• $370,000 for a budget line listed as “Foothills Oil and Gas Development Infrastructure Investigations,” which is also the first in a three-year funding proposal.
Increasing natural gas Asked about his strategy for increasing natural gas supplies for Alaskans, Parnell took an expansive view, saying, “My administration is acting on all options.” He said those include a big pipeline from Prudhoe Bay to southern markets, as well as various iterations of an in-state pipeline to deliver some source of northern natural gas to southern cities.
Currently, companies are exploring for gas in the foothills on the Brooks Range and in the Nenana basin south of Fairbanks. Parnell said the administration wants to be ready for a project before a company discovers natural gas. “If they find something, we will hope to have permits in hand for a company that wants to build a pipeline,” Parnell said.
The proposed budget also sets aside $15 million for the Roads to Resource program, including $8 million to permit a road to Umiat, $5 million to resurface more than 100 miles of the Dalton Highway, $1 million to study a road from Fairbanks to Nome, and $1 million for general resource-related road projects that arise in the coming year.
The fiscal year begins July 1.
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