An oil and gas tax credit report from Alaska State Senate Natural Resources Committee Chairman, Senator Cathy Giessel

June 7, 2016

June 6, 1944 was the turning point in World War II – the D Day offensive, on the beaches of Normandy, against Hitler’s German forces in Europe.
Alaska State Senate Resources Committee Chairman, Cathy Giessel. NGP file photo by Dave Harbour.

Alaska State Senate Resources Committee Chairman, Cathy Giessel. NGP file photo by Dave Harbour.

Yesterday, June 6, 2016, was a turning point here in Juneau.  The Senate took on the two remaining, largest pieces of legislation of this session.

The two bills were about Oil and Gas Tax Credits and the Permanent Fund Protection Act.  Neither of the bills were “easy votes.”  Both of them are significant policy decisions.
The day began with the House and Senate Conference Committee meeting on Oil and Gas Tax Credits (HB 247). That was followed by the Senate Finance committee completing work on the Permanent Fund Protection Act (SB 128). Both these bills then went to the Senate floor yesterday evening and were passed.

Click here to watch yesterday’s floor session part 1.

HB 247 (Oil/Gas Tax Credits) Compromise Reached 
Oil and Gas Tax Credit Reform has passed both the Senate and the House.  The bill, HB 247, strikes a balance between the Legislature and the Governor, providing a compromise between philosophies. The state has a debt of over $500 million in credits that are due in the next fiscal year, plus the debt from the Governor’s veto of $200 million last year.  The goal is to reduce the $500 million liability in areas where credits are no longer needed for continued development.
The reform bill came from the Governor.  He articulated 6 goals for the bill, back in January.  Five (5) of the 6 goals were met in the final bill that passed on Monday night.
  • The bill reflects a realization that the current fiscal reality of a $4.1 billion budget gap necessitates reevaluating current high levels of credits paid to incentivize oil and gas development. The bill prioritizes the credits and eliminates those we can no longer afford.
  • It dramatically reduces credits paid out for development in Cook Inlet by ramping down credit liability over the next 18 months and reduces hundreds of millions of dollars in the future.
  • It begins taxing oil in Cook Inlet, which was untaxed in the recent past.  This will bring $17,000 a day into the State treasury in new oil tax.
  • The bill reduces the length of time that new oil will get a $5/barrel reduction in tax value.  This is called the Gross Value Reduction (GVR) on the North Slope.  The bill turns new oil into legacy oil for taxation purposes in 7 years or after 3 consecutive years of price above $70 per barrel.
  • The bill increases the interest rate on unpaid tax liability, going from 3% simple to 7% compounded quarterly.
  • HB 247 reduces the amount each company can be paid for credits on an annual basis.
  • The bill supports Alaska workers by providing a priority of payment for credits for companies that hire resident Alaskans in their workforce and direct contractors.
  • It allows disclosure of the amount of credits each company earned in the previous tax year.
  • The bill finds a center for future liability since the Governor’s original bill left $1.2 billion in liability at the end of 2020 and the House version left approximately $70 million in exposure.  HB 247 splits the exposure to approximately $500 million.
  • It recognizes that work on the North Slope supports hundreds of smaller Alaska-owned companies and that the state has realized over $60 billion in benefit as a result of those credits.
  • It continues to incentivize exploration and development of new oil from smaller independent companies on the North Slope.
  • The bill keeps competition in the state:  over 60 small to mid-size companies apply for cashable credits.  THE BIG THREE (BP, Exxon, Conoco) do NOT receive any cashable credits.
This has been a difficult bill, and its components have been worked on for over a year. We held more than 70 House and Senate committee hearings (minimum of 140 hours) and countless hours of public testimony.  No one is truly happy with the bill, everyone has had to compromise, nobody wins.
The low market prices of oil and natural gas were unforeseen; HB 247 attempts to protect our good paying jobs, our hard-working Alaskans who face pay decreases and layoffs if we don’t keep oil and gas development in Alaska.
Stay tuned: I will discuss SB 128 (Permanent Fund Protection Act) in the next newsletter.
Bill Hardham, Repsol Alaska, NGP file photo, 10-18-13, by Dave Harbour. See Ak-Headlamp story below.

Bill Hardham, Repsol Alaska, NGP file photo, 10-18-13, by Dave Harbour. See Ak-Headlamp story below.

Repsol Commentary

While company offices in Alaska have closed, we remain both hopeful and appreciative that Repsol retains certain lease acreage and partnership interests in the state


Dave Harbour

We wrote about Repsol when the company arrived in Alaska and were heartened to witness their management’s optimism.  They were glad to be out of Argentina following expropriation of a large investment there in YPF (i.e. story here), but were also somewhat concerned about the lack of fiscal and regulatory certainty in Alaska.

Turns out, their concern was well placed.  The U.S. federal regime has demonstrated via its treatment of Shell’s Chukchi exploration program, that it can eliminate investment via unjustified delay and permit denial whereas Argentina was more transparent and just took Repsol’s investment to benefit the state.

Then you have Alaska, whose fiscal regime is unpredictable due to overspending and over taxation of industry.  If anything, Alaska’s ever changing tax and spending policies should be more — not less — welcoming to investors to make up for Federal disincentives to investment.  We have continually reminded decision makers that with its inherent logistical, labor, climate and remoteness from the markets cost disadvantages, Alaska should at least be a place where, “a deal is a deal.”  (The report in the left column reflects an interest by legislative leadership in walking the fine line separating the state’s fiscal challenges from its oil and gas investment incentives.  However, other contentious issues make resolution of state policy still uncertain, including spending cuts and a restructured Alaska Permanent Fund policy.)

Repsol has managed to obtain a certain reimbursement from Argentina and Alaska did provide certain incentives to explorers.  Even better, Repsol and its partner, Armstrong Oil, have encountered significant discoveries on the North Slope.  But readers familiar with this year’s Alaska Legislative session might better understand the concern of such companies as Repsol and Armstrong.  After all, even if the state were 100% faithful to the incentives it promises, companies have to worry that if there are discoveries, profitability can be threatened by a state whose tax and spend policies have been less than reliable.

In March, Bill Armstrong told Petroleum News, “Alaska finally has a fiscal policy that is working – promoting oil and gas exploration, development and production – but if state officials panic during this temporary price collapse and do something like raise taxes or do away with incentives, it could delay our project, maybe even permanently. And this is when the state needs the future revenues the most and when unemployed Alaskans need it the most.  There are a few tweaks that could improve the state’s fiscal policy in terms of encouraging more oil production, he noted, but basically the current regime is working.  Alaska can’t seem to get out of its own way,” he said, referring to an annual push in the state capitol by various factions to increase the burden on the state’s prime moneymaker, the oil industry.  “Once a fiscal regime is working for all parties, why keep threatening to change it?” Armstrong asked.


Today, our friends at Ak-Headlamp provide their view of Repsol’s departure, along with a fond ‘farewell’ (Below)

Best wishes. Alaska Dispatch News and other outlets reported that Spanish energy giant, Repsol, will plan to relinquish all 93 of the company’s federal leases in the Chuckchi Sea. The leases were part of nearly 500 Chukchi Sea blocks covering more than 2.5 million acres that were originally sold in the federal government’s record-breaking 2008 lease sale, when companies such as Shell, ConocoPhillips, Statoil and others snatched up little-explored prospects that offered the promise of a big discovery. The office has “essentially closed,” said Bill Hardham, Repsol’s Alaska asset manager. Jan Sieving, Repsol’s North America vice president for public affairs said she didn’t have information about what happened to all the workers in Alaska. Headlamp is sad to see—yet another—energy leader pull out of Alaska due to an unstable business climate and low oil prices. How many more Alaskan jobs must be lost before elected officials change their tune of higher taxes on the industry? 

Don’t let bureaucrats in Washington shut down future OCS leases and development. The comment period on the Bureau of Ocean Energy Management (BOEM) outer continental shelf proposal closes in 8 days! Tell the BOEM what you think here.