As the Alaska Legislature completes its annual task of setting next year’s budget, conversations about oil tax credits have once again taken center stage.
There are at least four known projects that are stalled due to the financial constraints of the companies involved. These constraints exist, at least in part, from the expectation of payment for tax credits. They invested in these marginal oil fields because they made sense under the program that was in place. Now, they are sitting on our oil resources, unable to develop them themselves and preventing others from doing so.
So long as Alaska is giving them reason to hope for the cash they were counting on, the resources sit idle. The companies won’t declare bankruptcy and the banks won’t foreclose as they hold out for the cash. Meanwhile, the oil leases can’t move forward with development.
After this last legislative session, I think there is too much evidence on the record from the administration and the appropriating body that relying on these purchases was a rational thing to do. And when a party relies on the promises of another, we get into some tricky legal waters to navigate.
While I still believe that the state never had a statutory obligation to purchase these credit certificates, I do think there are grounds to demand performance based on things like estoppel.
Just that threat of litigation undermines the reason that canceling the program would have been a good idea. The process of bankruptcy and court proceedings would keep these resources from being developed for years to come.
And even if the state were to win the court case, the tax reductions themselves will never be discharged. We would end up winning the battle and losing the war. Our reputation would be damaged as the resources go up for sale following a bankruptcy that the markets believe the state created. And the winner of those bids would end up claiming the credits anyway once the oil starts flowing.
We are really only talking about timing issues here, mostly relating to resource management. And from the perspective of resource management, we need to get these fields into production as fast as possible.
For these reasons, I’ve come around to support paying off these “obligations” as soon as possible.
But the state doesn’t have enough revenues to make these purchases. So, the only option would be to draw a billion dollars out of savings. A slower payment on these purchases makes more financial sense (and the slower the better). But, that is at odds with resource development goals.
A slow payment schedule doesn’t give the companies the capital they need to move forward. In fact, too slow a payment probably only pays the interest on their loans — which has the effect of delaying foreclosure, but never getting them to development.
House Bill 331 is a way to achieve both goals. It gets the capital into the hands of the developers to move forward but has the cash flow effect of a longer payment schedule for the State. This could result in a win-win for the state as we get both the development of the resources and the benefit of interest by leaving more cash in the interest-bearing account.
My advice on this issue is “don’t take a half-measure.” A trickle of payments is the worst outcome for the state. It leads to the resources remaining undeveloped and likely still results in future bankruptcy for the companies.
Either commit to purchasing these certificates now or tell them point-blank that we will not be buying them. In the former case, we would get movement toward development, in the latter we could start the process of moving the resources to someone that can develop them.
Full disclosure — until this year I would have suggested the latter based on some return on investment calculations. But given the testimony during this session, I now support HB 331 so long as the Legislature can commit to investing the budget reductions that it creates.
• Ed King is a professional economist and Principle of King Economic Group. He has been working on oil and gas issues in Alaska for the past six years for the Departments of Revenue and Natural Resources. He resides in Juneau.
