State revenue stream OK but ‘fragile’

Assuming strong oil prices, state will have plenty of cash for budgeting and can build its savings, revenue commissioner says

Wesley Loy

For Petroleum News

Prospects are decent for ample revenue to support state government and preserve savings through the year 2020, but Alaska’s finances will remain “fragile” due to heavy dependence on oil production, state Revenue Commissioner Pat Galvin says.

Revenue from oil production taxes, royalties, corporate income tax and property tax combine for about 88 percent of the state’s general, unrestricted revenue. The production tax alone accounts for 50 percent.

The big variable is the price of oil, which is “more volatile than ever,” Galvin said at a luncheon the public policy forum Commonwealth North sponsored July 9 in Anchorage. Former governors Wally Hickel and the late Bill Egan co-founded the group.

State officials expend a lot of energy trying to forecast oil prices. Based on their latest projection, coupled with the level of oil production, state general revenue could grow from $5.9 billion in fiscal year 2009, which ended on the last day of June, to $7.6 billion in fiscal year 2020, Galvin said.

Further, one of the state’s main savings accounts, the Constitutional Budget Reserve, has potential to grow from $6.6 billion to $23 billion, assuming legislators sock away rather than spend surpluses.

Relatively rich, but …

The future sounds pretty rosy, especially considering the far more austere outlook only two years ago — before the big spike in oil prices — and the dire budget crunches other states are facing.

“We’re stable. We can sustain the current level of spending, given our current expectation of revenue,” Galvin said in a July 15 interview with Petroleum News.

But Galvin cautions that Alaska’s revenue outlook hinges not only on oil prices, but on the assumption of “a very modest spending expectation going forward.”

The outlook doesn’t factor in large capital budgets for construction and other projects, and is based on annual spending growth of 3 percent, Galvin said.

If Alaska wants to expand its economy and make big investments such as tackling deferred maintenance on state buildings, constructing roads or laying the groundwork for a natural gas pipeline, it might have to look “beyond the current system” for the money, he said.

Lower than expected oil prices could wipe out Alaska’s savings well before 2020, even assuming no growth in budget appropriations, Galvin added.

Oil production outlook

But as time goes by, the production forecast becomes more and more dependent on barrels termed “under development” or “under evaluation.”

Oil under development includes projects that companies have sanctioned to go forward, Galvin said. They include Eni’s Nikaitchuq field; expansion of Pioneer’s Oooguruk field; Prudhoe Bay, Kuparuk River and Alpine satellite fields; BP’s Liberty field; and ExxonMobil’s Point Thomson field.

Rising oil field costs have a negative impact on the state’s production tax collections, and those costs have increased in the last three years, Galvin said.

Thoughts on oil prices

But the state isn’t banking on that, he said.

“The last few months have shown how quickly conventional wisdom can be turned on its head,” he said, referring to the plunge in oil prices following record highs approaching $140 a barrel in 2008.

The state’s latest revenue forecast, issued in April, forecasts an average Alaska North Slope crude price for the current budget year of $58.29 a barrel, rising to $95.04 in 2018. These are West Coast spot prices. ANS crude settled at $61.54 on July 15.

How oil prices will behave in the future, of course, is anybody’s guess, especially considering the global recession.

“We are at a sort of particularly unsure time in terms of where the markets go from here,” Galvin said.

Explorers trade tax credits for cash

The payments are designed to give explorers an incentive to hunt and develop oil and gas deposits in Alaska.

For fiscal year 2009, which ended on June 30, the state distributed the $193 million to 15 “new” oil and gas explorers, the department said.

By new, the state means companies that might be familiar names in Alaska but aren’t yet producing any oil or gas, said state Revenue Commissioner Pat Galvin. He said he couldn’t by law reveal the names of the firms as individual taxpayers.

Galvin said fiscal year 2009 is the first full year the state has reimbursed companies for their credits under ACES — Alaska’s Clear and Equitable Share, the oil production tax reform Gov. Sarah Palin pushed through the Legislature in late 2007.

The credits are essentially advance rebates on future taxes the companies will owe once they begin production. Companies present proof of their spending to the state to build tax credits and swap them for cash.

Priming the pump

Galvin said $193 million is an impressive figure.

“The number shows there’s a lot of activity going on out there,” he said.

A Department of Revenue press release said $19 million of last year’s outlay was for credits under the Exploration Incentive Credits program, and $174 million was for capital investment credits under the ACES production tax system.

“In addition, hundreds of millions of dollars in ACES tax credits were taken by companies already producing oil and gas in Alaska who have made new additional investments,” the department said. “These tax credits were used by the companies as offsets to their tax liabilities, and did not require payment from the state.”

—Wesley Loy