Should the Permanent Fund invest in oil tax credits?

The Alaska Permanent Fund Corp. board had an unusual visitor at their meeting Friday.

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Former Attorney General Craig Richards addressed the Alaska Permanent Fund Corp. board on Sept. 2, 2016. (Photo by Rachel Waldholz, Alaska’s Energy Desk - Anchorage)
Former Attorney General Craig Richards addressed the Alaska Permanent Fund Corp. board on Sept. 2, 2016. (Photo by Rachel Waldholz, Alaska’s Energy Desk – Anchorage)

Former Attorney General Craig Richards showed up to pitch an unconventional investment idea: oil and gas tax credits.

The presentation came as Gov. Bill Walker’s administration faces a problem — or rather, as several of Alaska’s smaller oil and gas companies face a problem.

Those companies have earned tax credits from the state for things like exploration work. But for the last two years, the governor has vetoed payments for those credits. That means companies are holding IOU’s from the state, with no idea when they’ll actually get paid.

The administration estimates the state now owes more than $700 million in those IOU’s, or redeemable tax credits.

In the past, companies could sell the rights to those credits to a bank or outside investor. But that market has dried up.

And that, Richards told the Permanent Fund board, creates an opportunity.

“The proposal to the Permanent Fund would be that they view these tax credits very much like a state of Alaska bond,” Richards said in an interview after his presentation. “You have the potential to purchase a credit from the state … for yields that are something like 10 percent, whereas if you were going to go buy a state of Alaska or a state of Washington bond, it might yield 2 percent.”

Richards was a Permanent Fund board member himself until he resigned as attorney general in June. He’s currently on contract with the governor’s office, where he’s been brainstorming solutions to the oil tax credit dilemma, along with Walker’s oil and gas adviser, John Hendrix.

He said, like bonds issued by the state, tax credits are debt Alaska has to pay.

The difference is, there’s no deadline. So it may be several years or more before that payment comes.

But many companies need the money sooner than later. They were planning to use it to pay for next year’s work, or took out loans against the credits and now have to pay those loans back.

Right now, they don’t have many options.

They can sell their credit certificates to bigger companies on the North Slope, which can use them to offset future taxes. But for various reasons, the credits aren’t actually worth all that much to those companies. Richards said he’s hearing the big producers are only willing to pay maybe 20 or 30 percent of the credits’ face value.

What you need, he said, is an outside investor who isn’t bound by the same rules as North Slope producers. They might be willing to buy the rights to those credits, for, say, 70 percent of face value, on the assumption that at some point the state will pay the full amount.

Would go for this plan, if he were still on the Permanent Fund board?

“If I could get the tax credits at 70 cents on the dollar, absolutely,” Richards said. “If I could only get them at 95 cents on the dollar, probably not.”

As for the current Permanent Fund board members, they asked only a few questions, giving no real indication what they thought of the plan.

Kara Moriarty of the Alaska Oil and Gas Association was also listening. Her group represents several companies who are owed credits.

Moriarty said she still has plenty of questions. But no matter what, she said, the key issue remains the same.

“Whether you’re paying an investor … or you’re paying the companies themselves, at the end of the day it still comes down to, when is the state going to pay it?” she said.

For now, that’s a question with no clear answer.