House Bill 111 is the latest proposed tweak to the state’s oil tax system, one that supporters hope will hold oil companies to a minimum tax rate and get the state out of the business of writing checks to companies.
Right now, Alaska has a system of tax credits designed to drive new development to the North Slope. It does this, in part, by offering credits for exploration and development of new fields and then offering cash payments for those credits.
But, as oil prices have dropped, so has the state’s production tax revenue. And that’s left it in the awkward position of paying more in cash credits to incentivize new production then it’s making from actual production.
House Bill 111 proposes getting the state out of the business of cutting checks to companies and forcing them to pay a minimum tax rate. Not everyone is happy about it.
“I mean, I think the state worked feverishly hard to attract some of the new players. And the current bill, House Bill 111, seems to be chasing away those new investors,” Pat Foley Vice President for Alaska Operations at Caelus Energy, said.
Caelus is one of the independent companies that headed to the North Slope to look for oil. It has had a lot of support from the state.
Foley said the company spent about $125 million drilling two wells out in Smith Bay, earning enough tax credits on those wells to leave the state on the hook for about 70% of the costs. (Though, he said the state hasn’t actually reimbursed the company for those credits yet.)
That investment could pay off in a big way: Caelus announced in October, that it thinks its found at least 6 billion barrels of oil in Smith Bay.
But the site will be hugely expensive to develop. The company estimates it could cost up to $10 billion. And, under the current tax credit structure the state could be on the hook for hundreds of millions of dollars in cash subsidies as the company builds the infrastructure it will need to get that oil into the pipeline.
For many lawmakers, like House Resources Committee co-chair Geran Tarr, D-Anchorage, that’s an untenable position.
“The state cannot afford cash subsidies to the oil industry,” Tarr said. “We have over $900 million obligated right now. We’re having a struggle meeting our basic needs and paying for essential services. The cash credits have to go.”
Tarr said the bill is a change in philosophy for the state. But she, and others in the House, see it as a shift that needs to happen as the state grapples with low oil prices and a multi-billion dollar budget deficit.
Caelus isn’t the only company that has some potentially game-changing finds on the North Slope. And lawmakers are trying to find ways to continue leveling the playing field between legacy producers and the new companies — without writing checks.
One change in the bill would let companies carry forward half of their operating losses, plus a little bit of interest for up to seven years–essentially lowering their tax bill instead of giving them credits.
And Foley said that could be key to keeping independent producers operating on the North Slope.
“If they eliminate all the future cash payments, but there’s something in the system that compensates us for that change – we’re totally going to keep going forward,” Foley said.
The bill has a long way to go. It’s gotten a lot of push back from companies who see it as a tax hike at a time when companies are struggling with low oil prices.
Plus, it still has to make it through the House Finance committee and over to the Senate with fewer than 23 days left in the regular session.