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Agrium tax break bill passes House Kenai Peninsula fertilizer plant would obtain temporary income tax credit if it restarts; bill will go to Senate next session Alan Bailey Petroleum News
On April 13 the Alaska House of Representatives passed a bill granting a corporate income tax credit for Agrium Inc.’s fertilizer plant at Nikiski on the Kenai Peninsula, if Agrium restarts the plant. The credit could start at any time after July 1, 2017, and would sunset on Jan. 1, 2024, thus lasting for up to six-and-a-half years, depending on when Agrium puts the plant into operation.
The House has now sent the bill to the Senate for consideration during next year’s legislative session.
House Bill 100 The bill, House Bill 100, relates to any plant that produces fertilizer from natural gas but is clearly aimed at the Agrium facility. And the version of the bill passed by the House extends the credit to a gas-to-liquids plant in addition to a fertilizer plant, although Agrium has indicated that it has no interest in gas-to-liquids development.
The original version of the bill, when introduced to the House, had the tax credit sun setting in 2027, rather than 2024. The credit, which is indexed to the royalties that the state would receive from gas sold to the plant from state leases, would likely result in Agrium incurring no corporate income tax during the period when the tax credit would apply.
The fertilizer plant, which converts natural gas, water and nitrogen into urea and ammonia, was built in 1968 to monetize excess gas production from the Cook Inlet basin. Agrium purchased the plant in 2000 but closed it down in 2007 because of a shortage in Cook Inlet gas supplies at that time. Following a resurgence in the Cook Inlet gas industry, Agrium has indicated that it is considering re-opening the plant. The company has said that it would cost about $275 million to rehabilitate the plant for a re-opening.
$15 million in royalties On April 9 Tom Wright, chief of staff to Rep. Mike Chenault, R-Nikiski, sponsor of the bill, told House Finance that a study into the re-opening of the Agrium facility had indicated that, with one fertilizer train in operation, the facility would consume about 28 billion cubic feet of gas per year, with 21 billion cubic feet coming from state leases. That gas consumption would result in an estimated annual state royalty payment of about $15 million, Wright said.
Rep. Dan Saddler, R-JBER/Eagle River, a supporter of the bill, told House Finance that, having a large anchor gas purchaser such as Agrium would encourage gas exploration and development in the Cook Inlet basin. This would ensure the availability of more gas for local gas consumers, Saddler said. And, with Cook Inlet exploration tax credits that the state introduced a few years ago due to expire in 2016, a new anchor customer would maintain incentives for gas producers beyond that time, he said.
“It would cost only about $3 million to $4 million per year in tax credits … that would leave a net benefit to the state of $11 million to $12 million per year,” Saddler said.
The rehabilitation project for the Agrium plant would result in 440 jobs, with the operating plant then generating 340 direct and indirect jobs, he said.
“This is a way of getting revenue that we are currently not getting,” commented Rep. Tammie Wilson, R-North Pole. “This brings revenue into the state. It brings jobs for this area.”
Chenault compared the proposed tax credit with the current exploration tax credits that, he said, had revitalized the Kenai Peninsula economy.
“My community now is very prosperous,” Chenault said. “You may drive up that same north road today and you’ll see numerous new shop buildings, numerous new businesses moving into town … They’re moving into town because of the exploration tax credits that we were smart enough to move forward.”
A tax giveaway? Rep. Les Gara, D-Anchorage, an opponent of the bill, characterized the bill as a tax giveaway at a time when the state, short of revenues, is cutting funding for many programs. Gara expressed particular concern about authorizing a tax credit without any information about the viability of the plant. Agrium may well open the plant without any assistance from the state, he said.
“I want to see jobs on the Kenai Peninsula, but we have a $5.3 billion (state budget) deficit and we’re giving a company $4 million per year and they’ve told us that they might open the plant, even without that $4 million a year,” Gara told House Finance. “I think that’s a terrible way to negotiate.”
Arguing that the tax credit would ultimately lead to a loss of state revenues, Gara characterized as a red herring the view that the opening of the fertilizer plant would generate state royalties that would not otherwise be forthcoming - at some time the gas in the ground will be produced and will therefore generate royalties, he said.
“Nobody’s going to leave gas in Cook Inlet that’s producible and affordable,” Gara said.
Gara introduced amendments to the bill to limit the tax credit period to five years, and to limit the credit to $2 million per year, with Kenai Peninsula residents given the option to invoke further local tax credits for the fertilizer plant. House Finance and, later, the House floor rejected these amendments.
Ultimately, the House approved HB 100 by a vote of 27 in favor and eight against.
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