HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PAY HERE

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

Vol. 24, No.27 Week of July 07, 2019

Oil and gas bonding goes to Supremes

Oral arguments on lawsuit opposing Alaska Tax Credit Certificate Bond Corp. to be heard by Alaska Supreme Court on Sept. 12

Kay Cashman

Petroleum News

Oral arguments on a lawsuit opposing an oil and gas bonding program set up the Legislature are set to be heard by the Alaska Supreme Court on Sept. 12.

On May 13, 2018, Alaska lawmakers approved House Bill 331 establishing a state corporation, Alaska Tax Credit Certificate Bond Corp., that would be able to sell up to $1 billion in bonds to pay remaining exploration tax credit obligations to small oil and gas companies, which State Revenue Commissioner Bruce Tangeman said now total approximately $700 million. HB 331 passed the House 22-16 and the Senate 14-5, with both bodies passing an immediate effective date.

The reason for the difference between $700 million and $1 billion is that since HB 331 passed, the state has paid some of the tax credits, plus some of the small companies sold their credit certificates to larger North Slope oil producers who were not eligible for the exploration tax credits, but were allowed to use the credits against their annual oil production tax liability.

Credit holders cover state’s cost

To get paid under HB 331, the credit holders will have to accept a discount of up to 10% less than the face value of their certificates because that difference will be used by the state to cover the borrowing costs of the bonds. (There are provisions in the legislation allowing a discount closer to 5% for companies that meet certain qualifications, such as 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.)

Supporters of the bond plan said it was a way to restart stalled investment by small companies in Alaska’s oil and gas industry.

But opponents claimed it was unconstitutional.

One of those opponents, Juneau resident Eric Forrer, a former University of Alaska Regent, challenged the bonding plan by filing a public interest lawsuit in Alaska Superior Court.

Generally, the state constitution forbids lawmakers from taking on future debt unless it’s in response to a natural disaster, for capital projects approved by voters, or it’s in the form of bonds sold to support a specific project that is repaid through subsequent revenue from that project.

State corporations that already use such bonding are the Alaska Industrial Development and Export Authority and the Alaska Housing Finance Corp.

Lawsuit dismissed Jan. 2

Superior Court Judge Jude Pate dismissed Forrer’s lawsuit on Jan. 2, concluding HB 331 did not create unconstitutional “state debt” for the purposes of 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 Jan. 3. “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.”

Commenting on the purpose of the program, 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.”

Set a danger precedent

Forrer disagreed and appealed Pate’s ruling to the Alaska Supreme Court, contending that approving the tax credit bond plan would set a precedent for lawmakers and local governments to be able to do something similar in countless other situations, potentially burdening the state with additional debt.

State attorneys said similar tactics have already been used to pay for capital projects - and that a provision in HB 331 calls for the bond repayments to be “subject to appropriation” by the Legislature each year, meaning the state would not ultimately be liable for defaulting on the payments.

If the Legislature ever decided not to repay the bonds, supporters acknowledged it would likely have a negative impact on the state’s credit rating and reputation in the financial community, which is what happened when former Alaska Gov. Bill Walker originally decided not to repay the credits. Small oil and gas explorers had used the state credit certificates as collateral to secure loans from large banks to fund exploration and then were unable to repay the loans, earning a bad reputation worldwide for the state of Alaska’s reliability in dealing with the oil and gas industry.

Whereas the industry understood the state’s inability to continue the tax credit programs, it was less understanding when the Walker administration reneged on existing obligations.

The passage of the bonding plan by the Legislature resulted in the state paying just $2.8 million in tax credits in 2018, but earlier this year Revenue paid $100 million against existing obligations, which reportedly was a lifesaver to at least two of the state’s smaller explorers Petroleum News interviewed.






Petroleum News - Phone: 1-907 522-9469
[email protected] --- https://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)Š1999-2019 All rights reserved. The content of this article and website may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law.