Cook Inlet oil companies big users of state tax credit reimbursements

Presenters at a June 17 joint meeting of the House and Senate Resource Committees identified Cook Inlet companies as heavy users of oil tax credits.

Currently, Alaska offers nine credits to offset the tax liability of oil companies operating in the state. The types of credits vary from an up-to-$8 credit per barrel of extracted oil, to an as-yet-unclaimed credit covering 100 percent of the expense of erecting a jack-up rig in a deep area of Cook Inlet; the latter will go to the first company to accomplish the task, according to the Alaska Department of Revenue’s Tax Division Director Ken Alper.

Between the 2007 and 2015 fiscal years, Alaska gave a total of $7.4 billion in oil tax credits. For companies producing fewer than 50,000 barrels a day — generally smaller, newer companies with revenue too small to incur tax liability — the state also offers monetary reimbursement for tax credits not used against liability.

In his presentation to the committees, Alper divided that $7.4 billion total between two regions: the North Slope and the rest of Alaska, including Cook Inlet and the area between the Inlet and the Slope where relatively little oil is extracted. Of the $6.5 billion given in credits to North Slope-based producers, roughly a third — $2.2 billion — were claimed as monetary reimbursements. For companies outside the North Slope — predominantly in Cook Inlet — the percentage of credits claimed as reimbursements was much higher: of the $0.9 billion in credits, $0.8 billion were taken as monetary reimbursement.

Alper said one reason for the lack of tax liability among Cook Inlet companies may be a cap on production taxes that will expire in 2022.

As an alternative to exchanging a credit certificate for reimbursement from the state, a credit-holder can sell credit to other companies with tax liability to use it against. Alper said because these are private transactions, the state has little information about this secondary market.

The state’s recently passed 2016 budget estimates that the state will spend $700 million in credit reimbursement in the coming fiscal year, a growth from the $450 estimated in the fiscal year 2015 budget.

However, Alper said it is possible for the state to spend additional money from the general fund on credit reimbursement if claims exceed these estimates, as they have for the past two years. In 2013 the state spent $193 million in addition to the budget-estimated $400 million, and in fiscal year 2015, the state spent $175 millin beyond the estimate for a total of $625 million.

At the committee meeting Sen. Bill Stoltze, R-Chugiak, said that some of the Legislature’s recent budget debate was about cutting funding for the tax credit program. He asked Alper if the state’s operating budget could have been expanded by not funding the credit program.

“Those credits have been earned under the current regime, and they would have been paid as a direct reimbursable credit or as a credit that could be taken against tax liability,” Alper answered. “We could not have avoided those credits.”

In response to a later question by Sen. Anna MacKinnon, R-Anchorage, Alper said that if credit payments were unfunded, it would be “a deferral of payment, not a removal of obligation.” However, he said there was no interest attached to the credits if the state declined to pay them — rather, the credits are understood to be subject to appropriation.

Sen. Bill Wielechowski, D-Anchorage, asked if Alaska has “ever, in the history of our state, paid out more in tax credits than we’ve received in product taxes?”

Alper said that the state’s entire oil revenue apparatus — including production tax, corporate income tax, and royalties — was not losing money. However, considered independently of the state’s other mechanisms of oil revenue-gathering, Alper said the production tax credit system did have “a negative cash flow.”

“That is the result of policy,” Alper said. “Because the credits are more or less fixed in private spending, while the taxes are tied to profit. The profit is constrained through the price of oil.”

While two of the existing credits are valued in dollar amounts, the others are worth a percentage of money spent on certain activities and items — meant to reward companies for specific investments or behaviors — making them contingent on the money a company spends, rather than income it receives.

“In no cases are we paying anyone to take our oil,” Alper told Wielchowski. “With the possible exception of Cook Inlet.”

Following Alper’s presentation to the resource committees, two representatives from the consulting group Enalytica gave a presentation that included a comparison between Cook Inlet and North Slope oil producers. Enalytica’s President Nikos Tsafos and chairman Janak Mayer concluded that producers in the two regions created drastically different balances of tax credit and liability.

According to Enalytica’s analysis, Cook Inlet oil companies contribute 5 percent of oil revenue — exclusively through royalties on leased state land — while receiving approximately 50 percent of the credits. It is not clear what span of time was covered in the Enalytica analysis, and as of Saturday evening the company had not answered an email enquiry.

“We can’t look at this and not conclude that there is a substantial subsidy on Cook Inlet production,” Mayer said.

Representatives from three Cook Inlet oil producers — Caelus Energy, Hilcorp and Blue Crest Energy — and Cook Inlet Region Inc., the Southcentral Native corporation, testified to the committee by invitation on the value of that subsidy.

Caelus Energy, an independent oil company active on the North Slope, moved into Cook Inlet when it bought the assets of Pioneer Energy in 2014. Caelus’ Senior Vice President of Alaska Operations, Patrick Foley, described the state as a “co-investor” of his company.

“Our business started in 2002,” Foley said. “Since that time we have spent $2 billion of investment in this state. And we are the wonderful beneficiaries of nearly $300 million worth of state tax credits.” He said Caelus produces about 15,000 barrels a day, and has yet to make a profit — implying that its revenue is reinvested in its facilities.

Despite Caelus’ heavy investments on future production, Foley said that rapid changes in Alaska’s fiscal system had made investment difficult.

“For an investor, you’d like a favorable fiscal system,” Foley said. “But most importantly, you’d like a stable fiscal system… Once (the rules) are crafted, (and) when you make the financial commitment, let us experience the fiscal terms that we expected.”

Foley said that money paid through credits would result in future investments.

“There’s almost a sense of fear that the amount of credits the state will have to pay out over time might be a really big number,” Foley said. “But honestly, isn’t that a great thing? When you pay credits, it’s just the result of the investment that you made. I can imagine nothing better than the state paying out very large credits because very, very large investments were made.”


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