Crude producers in Alaska may see a significant cut in tax credits they consider crucial to boosting flagging output, as the state struggles to plug a $4bn budget deficit.
Alaska, uniquely among US states, has relied on revenue from oil sales for the bulk of its budget receipts after abolishing the income tax in 1980. The nearly 70pc decline in oil prices since June 2014 cut Alaska's budget receipts to an estimated $1.3bn for the fiscal year ending June 2016, down from $6.35bn in the 2013 fiscal year. Budget receipts as a result cover only about 25pc of expenditures.
The fall in the oil price is not the only factor reducing the state's oil revenue. A complicated structure that ties the oil production tax to a producer's profits allows deductions for lease expenditures and downstream costs. Oil and natural gas production tax as a result fell to $153mn in the 2016 fiscal year, from $4bn three years earlier, according to the Alaska department of revenue.
The drop in oil and gas taxes means the state is paying more in tax credits to producers than it takes in production tax, Alaska governor Bill Walker says. "Changes to our oil and gas tax credit program are absolutely critical," he told Argus. "As the state considers making cuts to senior benefits and closing trooper stations in rural communities, it is important that all industries and Alaskans play a role in solving our fiscal challenges."
Walker's initial proposal would have slashed $400mn in tax credits in the 2017 fiscal year, with more cuts subsequently. Lawmakers in the state House and Senate are working on two separate bills, with fewer cuts.
The regular legislative session ended on 19 April without an agreement on the bills, which are still being debated at the relevant committees. The state Senate version would reduce tax credits for Cook Inlet producers so that by 2018 the state's contribution to a project's capital expenditures falls to zero, from 45pc-65pc at present. The state House version would cut state contributions to a project's funding to 25pc in 2018. Both affect producers in the Cook Inlet area. There is still no agreement on a special legislative session to consider these bills.
Walker said yesterday he had held meetings with oil and gas producers to push for an agreement to the reform. The governor's plan would shield North Slope producers, as well as the plans to develop LNG export capacity by subsidizing a trans-Alaska pipeline to deliver natural gas from the north to a Cook Inlet liquefaction plant.
"We are pushing for a reasonable plan. Our goal is to have a sustainable budget by 2019," Walker said.
The proposed changes to the tax credit regime will accelerate production declines and affect investment decisions, the Alaska Oil and Gas Association said. The potential reform is the sixth major change in oil tax policy in the last 11 years, according to the group. It cited Alaska Department of Revenue forecasts showing an average producer in the state was estimated to lose almost $50/bl in 2016, before taxes.
The proposal is a "nuclear bomb for Cook Inlet," the group said. It said the oil industry in addition to production taxes generates royalty revenue for the state, so its net contribution to Alaska's budget is positive.
The industry still is processing the potentially significant changes to the tax code. For now, onshore drilling in Alaska's north remains attractive to some companies despite the shelving of Arctic ocean drilling plans by Shell, Statoil and other producers. ConocoPhillips on 21 April announced plans to invest an additional $190mn into its CD5 drill site within the boundaries of the National Petroleum Reserve-Alaska, which began producing oil in October 2015. ExxonMobil last week started natural gas production at its Point Thomson project in the North Slope area, where it has invested $4bn to date.
Alaska's crude production slipped to 483,000 b/d in 2015 from 600,000 b/d in 2010, US Energy Information Administration data show. Total US output over the same period increased by 72pc to 9.43mn b/d in 2015. Alaska's share of the total US output as a result dropped by half to 5.2pc in 2015.
A potential change to the tax credits is part of the jigsaw puzzle that could involve more politically difficult decisions, including adjustments to the state dividend payable to every Alaskan. For the first time in decades, reintroduction of a state income tax is a possibility — and part of the budget plan by the Republican governor.
Potential solutions could include cuts to the budget, changes to the Alaska Permanent Fund management, increases in fuel, alcohol and other taxes, in addition to the measures affecting the oil industry, says the Rasmuson Foundation. The largest private foundation in Alaska has launched a civic education campaign to encourage politicians and voters to find a lasting solution to the budget deficit.
A wide variety of solutions, including a state income tax, are becoming politically acceptable to Alaskans, Rasmuson president Diane Kaplan told Argus. A bipartisan group of former Alaska governors has urged a combination of budget cuts and new revenues and changes to the dividend distribution system for Alaska's Permanent Fund that currently holds over $50bn in assets.
