A committee of the Alaska House of Representatives has diluted a plan by Gov. Bill Walker to cut the state’s subsidy for oil and gas drilling.
As a result, the state is poised for the first time to pay oil companies more in subsidies than it receives in oil taxes and royalties.
“2017 will be the first year that Alaska doesn’t earn positive income out of oil and gas development; that’s a significant step,” said Gov. Bill Walker.
The Alaska House Resources Committee introduced a substitute for House Bill 247 on Saturday and continued its discussion on the proposal Monday.
In fiscal year 2015, the state paid $628 million in tax credit incentives to oil companies, said Ken Alper, director of the tax division of the Alaska Department of Revenue.
As oil prices fell and the state was confronted with a multibillion-dollar deficit, Walker capped the credit program at $500 million in fiscal year 2016. That fiscal year ends June 30.
The cap didn’t stop companies from requesting credits — it just stopped their payment.
Alper said companies are expected to apply for (and receive) $700 million worth of credits this fiscal year, $200 million more than the governor’s cap. That $200 million will be rolled over and added to another expected $645 million in credits in fiscal year 2017, which starts July 1.
On Monday, the Alaska Department of Revenue released a report stating that Alaska will earn just $690 million in unrestricted oil revenue in FY17; a figure far below that expected for credits.
The problem wasn’t entirely unexpected: In December, Walker had proposed HB 247 to reform the tax credit program. Walker’s original plan was to save or raise nearly $500 million with a combination of cuts and tax increases.
In more than 20 hearings and 900 pages of background documentation, however, the House Resources Committee heard that Walker’s plan would have negative effects on the oil and gas industry. Hiring might suffer, and North Slope production three, five or 10 years in the future could be lower.
On Saturday, the committee unveiled its alternative. Instead of saving $500 million, it saves between $45 million and $60 million per year through 2019.
“This is an attempt now to immediately curb that direct state support while providing some level of protection for current investments,” said Rena Delbridge, an oil and gas expert who helped draft the replacement. Delbridge is a staffer for Rep. Mike Hawker, R-Anchorage, and offered her comments on Saturday.
The committee version of the bill would mean almost no changes to the oil and gas program on the North Slope. More significant impacts would be felt in Cook Inlet, where lawmakers in 2010 enacted a “fire alarm pull” slate of tax credits to encourage gas production feeding Anchorage.
Some of those credits would be allowed to lapse, others would be rolled back, and the whole Cook Inlet taxation system is scheduled for a renovation within six years.
Where Walker suggested a $25 million cap on the amount of credits a company could earn in a given year, the committee version of the bill raises that cap to $200 million.
Rep. Benjamin Nageak, D-Barrow, is co-chairman of the House Resources Committee and oversees a district covering the entire North Slope and Northwest Alaska.
“This is a damned if we do, damned if we don’t kind of thing,” he explained.
The oil and gas industry is being hammered by low oil prices just as much as the state is, he said.
In presentations, the committee was told that at prices this low, companies actually lose money producing oil on the North Slope. They still produce because they lose less money as long as oil is flowing.
“We don’t want to go in and spook the money away because that’s where the money comes from,” he said of Prudhoe Bay.
On Saturday, the consulting firm Enalytica, whom the Legislature hired to independently vet the tax credit proposal, said the $200 million cap in particular is an appropriate amount to result in the least impact on industry while still protecting the state from isolated spikes.
The impact of a still-large oil and gas tax credit program on the state budget is unclear. Alper said additional documentation will be available later this week, but what is known is that HB 247 contains a special $1 billion appropriation to fund the tax credit system.
Walker called for that appropriation in his version of the bill, but Alper said the committee’s version means that appropriation would run out more quickly, possibly in less than two years.
“The money is still there; it simply won’t go as far as we thought it would,” he said.
The idea of spending hundreds of millions on oil and gas tax credits is also alarming some lawmakers who see the state spending lavishly even as it cuts core services and considers spending the earnings of the Permanent Fund, an act that could reduce the Permanent Fund Dividend.
“We’re going to have to generate those funds from somewhere,” said Rep. Paul Seaton, R-Homer and a member of the House Resources Committee, about oil and gas tax credits. “That’s a huge budgetary expense, and we’re talking about budget cuts. Here, I don’t see any budget cuts.”
Rep. Sam Kito III, D-Juneau, spoke even more plainly. “It’s basically taking money out of Alaskans’ pockets to give to oil companies,” he said Monday morning.
• Contact reporter James Brooks at 523-2258 or at james.k.brooks@juneauempire.com.
