Legislature adjourns on oil tax deal; capital budget still in limbo

Alaska’s Legislature approved changes in the state’s oil production tax late Saturday that would end a program of the state making cash reimbursements to explorers and developers of new discoveries, legislative leaders said.

“Ending the cash payments, which are unsustainable for the state, allows us to move toward a comprehensive fiscal plan for Alaska,” to address revenue shortfalls and budget problems, House Speaker Bryce Edgmon said in a statement.

The bill, House Bill 111, makes other changes that indirectly increase state taxes on producers, but the amount of the increase is still uncertain. Kara Moriarty, CEO of the Alaska Oil and Gas Association, and industry tax specialists are still reviewing the changes, said.

Moriarty is pessimistic about the effects of the legislation. “Make no mistake. HB 111 will cause companies to rethink their investment strategy in Alaska, meaning they will likely spend less money. With the state mired in an economic recession (caused partly by cuts in oil employment) these actions will hurt,” she said.

HB 111 is now on Gov. Bill Walker’s desk for approval. The governor supported many of the changes and is expected to sign the measure.

The Legislature, which also adjourned Saturday night was in an extended special session over a series of sharp disagreements, the oil tax changes among the most prominent. Alaska’s Legislature is normally required to conclude its work in 90 days after a start in January, which would have required finishing up work this year on April 16. That didn’t happen.

Alaska lawmakers dismantled most of the state’s exploration and development tax credit program in 2016 but left certain North Slope features in place, mainly tax credit cash payments for companies taking losses on projects in development.

The program has existed for years and was designed to attract new explorers and developers to the state, which has long been dominated by major companies like BP, ConocoPhillips and ExxonMobil on the North Slope.

Largely, the program worked, with new companies coming to the state, and discoveries made, but with the state picking up a good share of the tab. Costs for the cash payments mounted quickly and were approaching $1 billion a year until 2015, when the governor slammed on the brakes and vetoed part of the appropriations for the payments.

Formal dismantling of the program began last year and will be complete this year, assuming Walker signs HB 119.

The worry among legislators was the budget impacts of tax credit payments for two major new discoveries, one by Denver-based independent Armstrong Oil and Gas and Repsol, an international company, and a second by Dallas-based independent Caelus Energy.

Had the existing program continued the state would be liable for hundreds of millions of dollars in tax credit payments to the companies, assuming the discoveries, which potentially involve several billion barrels of oil, are developed.

The legislation approved late Saturday allows companies to take deductions against future production tax liability, assuming the projects proceed, but the deductions are limited in time and are reduced by 10 percent yearly after a period of years until they zero out at 20 years from the time the expense was incurred, state tax director Ken Alper said.

However, some companies may not be able to their full amount of deductions within 20 years if projects are delayed in development.

There has been little argument among legislators over ending the cash payments for tax credits. With oil revenues sharply reduced Alaska has been running multi-billion-dollar budget deficits and is drawing down cash reserves to support schools, police and other public services.

Sharp disagreements developed, however, over how the tax credits were converted to deductions against future tax liability, and whether to limit the deductions. The state House, led by Democrats, held out for terminating the deductions after seven years while the state Senate, led by Republicans, held out for an open-ended use of deductions as is common in most net income tax systems.

A stalemate over this resulted in an extension of the session until it was finally resolved Saturday with the gradual phase-out mechanism beginning after seven years.

A messy compromise on HB 119, however, leaves some independents engaged in projects exposed. For example, at the last minute the Legislature cut off the cash payments retroactively, effective July 1 instead of Jan. 1, 2018, which had been expected.

“Several companies now engaged in projects had arranged their finances expecting the payments to be made through the last half of the year,” Moriarty said. Now, independents like Caeulus, Armstrong and BlueCrest Energy, which is developing a Cook Inlet oil discovery, are scrambling to line up alternative funding.

The oil tax changes are also connected to efforts by Alaska lawmakers to restructure state finances so that they are not almost totally-dependent on oil income. One proposal still pending is a bill that would allow use of some earnings Alaska’s Permanent Fund, an investment fund now with about $60 billion, to help support the budget.

This idea has now been approved in principle by both the House and Senate but there is differing ideas for placing a cap on the popular Permanent Fund dividend, an annual cash payment made to all Alaska citizens.

Also, Democrats in the state House insisted that the oil tax changes be made first so they could argue that industry was forced to take a “haircut” before any cut was made to the citizen dividend.