Gov. Bill Walker signed a new law June 29 sharply cutting oil and gas exploration tax credits and also vetoed $430 million in funding for the credits.
Walker acted to stem red ink as Alaska faces multibillion-dollar budget deficits due to low oil prices.
Alaska industry officials reacted in dismay.
“These credits were earned in good faith by companies investing in Alaska oil and gas development projects under the state’s own policy. The veto is shortsighted because the state is obligated to make good on its commitments,” said Kara Moriarty, president of the Alaska Oil and Gas Association.
Alaska’s tax credit program is intended to spur new oil and gas development, and a unique feature is that the state purchases the credits for cash, mainly from small companies.
Some firms are caught in the middle of developments. The actions may have effects on at least three new projects, Caelus Energy’s planned Nuna and Brooks Range Petroleum’s Mustang projects on the North Slope, and BlueCrest Energy’s Cosmopolitan project in Cook Inlet.
These could add 25,000 barrels a day or more to Alaska production by 2018 if developed as now planned.
“While we are certainly disappointed that Governor Walker chose to ignore the state’s previous commitments to small oil companies investing in Alaska, we are hopeful that some sort of accommodation can be worked out,” said Benjy Johnson, president of BlueCrest Energy.
“The governor reiterated that the tax credits are a continuing obligation of the state and that his veto did not make those payments obligations go away,” he said.
Payments delayedAlthough current year funding is cut the payments are only delayed, state revenue officials reaffirmed. Ken Alper, the state tax director, said the structure of the program, although now scaled down, remains intact.
Companies earning tax credits, mostly small independents, will eventually be paid when an appropriation is approved. They are meanwhile free to sell them to third-party buyers, such as major Alaska producers, who are able to use them as credits against their own state production tax liability. The credits would likely be purchased at a discount, however.
In the new tax law tax approved June 29 the incentive credits for Cook Inlet development are being largely phased out over two years.
Those include tax credits for 20 percent of capital investments; 40 percent of well lease expenditures and 25 percent of net operating losses in Cook Inlet.
On the North Slope, a 35 percent credit for net operating losses will continue, a point of contentious by critics of the program in the Legislature. Other North Slope tax credits have ended, however, including the 20 percent capital investment tax credit that was repealed in 2013 by the Legislature.
While the state is essentially writing IOUs to explorers and new developers, the backlog of payments due on credits is building.
Applications total $693 millionAlper said to date the state Department of Revenue has received tax credit applications totaling $693 million, mostly for work done in 2015.
This includes $200 million in prior tax credits carried forward from last year left after the governor vetoed $200 million of the appropriations, which had totaled $700 million.
To date the state has made full payment on $485 million of the tax credits approved for last year, Alper said, which is close to the $500 million allowed by the governor after his veto.
As IOUs by the state, the tax credits become a financial liability although they are only a “moral obligation” subject to payment on appropriation by the Legislature. While not legally obligated to pay, the Legislature has a good track record of honoring moral obligations.
Credibility an issueHowever, the erratic nature of the state’s actions on the tax credit program is undermining the state’s credibility.
Benjy Johnson, at BlueCrest, said “What (the governor’s action) did is create a tremendous distrust of the state’s integrity going into the future. Unless something is worked out to help the small oil companies work through the payment delay, this is going to have a long term negative impact to the state and will surely come into play as the state tries to obtain financing for new capital programs.”
The governor’s veto actions mainly affect the tax credit payments made to small explorers and developers. Large North Slope producers BP, ConocoPhillips and ExxonMobil, and Hilcorp Energy in Cook Inlet, are not eligible for cash refunds for the credits. Those companies are still eligible for credits on net operating losses, but the credits must be applied to their future production tax liability, not taken in cash payments.