Tim Bradner: State grapples with tax law reform

Lynne Curry

Are we going a little overboard offering tax credits? We have state tax credits for film production, fisheries investment, oil and gas exploration and a lot of other things. These cost the state treasury - the credits are dollar-for-dollar against state tax liability. Some legislators think it's time to step back and take a fresh look at them. That's always a good idea.

Right now the film tax credit is in the bull's-eye for Rep. Bill Stoltze, R-Chugiak, who co-chairs the House Finance Committee. Stoltze wants to repeal it, arguing the costs exceed the benefits. The program's defenders argue it's still new and deserves a chance to nurture a new industry.

The same pro and con applies to our oil exploration and production tax credits. I'm a little cool to the state paying two-thirds of the cost of an exploration well in tax credits and even cash, which we do. However, this could be worse: Until we passed Senate Bill 21 last year, we would also pay 20 percent of capital development costs in the event of a discovery.

In defense of the exploration credits, they did help get new natural gas discoveries in Cook Inlet, which are needed, and they can be credited with helping at least one small new oil discovery on the North Slope.

Tax credits for the petroleum industry were a huge part of the debate over SB 21, the bill passed last year that changed the oil production tax. Deliberations focused partly on whether a major tax break in the former oil tax, known as ACES ("Alaska's Clear and Equitable Share" law) was functioning properly. This was the 20 percent capital investment tax credit mentioned above.

Ultimately the Legislature decided the investment tax credit wasn't working because it was tied just to industry spending and had no clear connection to new production. The Legislature changed the law in SB 21 so that tax credits are linked to encouraging new production, not spending.

An example of the disconnect, given by Deputy Revenue Commissioner Bruce Tangeman, is that of a new airfield built by industry on the Slope. Under ACES, the state would pay for 20 percent of the cost through the capital investment tax credit. No doubt new airfields make for more efficient operations, but there's no clear link to new oil, Tangeman points out.

Another example is the big Point Thomson project now under construction east of Prudhoe Bay. If ACES were still in effect, the state would pay one-fifth, or about $800 million, of the $4 billion to be spent at Point Thomson.

This project will produce 10,000 barrels of condensates, a form of gas liquid, so we don't get a lot of new liquids produced for what we would have spent through tax credits. Footing 20 percent of the cost would also have worsened our state budget situation in 2015 and 2016.

ExxonMobil and the other companies that own Point Thomson have other reasons for building the field, but it doesn't make sense for the state to pay for a fifth of it.

Stepping back from all this, there are a lot of ways government can induce development, and we've used many of these tools over the years.

One approach is to just reduce taxes and see what happens. We did this in Cook Inlet, where we essentially eliminated the production tax on oil. This helped sustain those aging Cook Inlet platforms, and now we're actually seeing an increase in production.

On the North Slope, we reduced taxes with a per-barrel production tax credit in SB 21. There are no guarantees of new production, no more than in Cook Inlet, but there is already new activity and new production being documented by the Department of Revenue. It seems to be working.

Another approach to this, at the opposite end of the spectrum, is a negotiated reduction of the state take. We've done this, too, through a long-established provision in our law that allows a reduction of royalties on state leases to encourage development of economically marginal oil projects.

This approach led to development of three smaller fields on the Slope, the Oooguruk, Nikaitchuq and Northstar fields, all now producing. Those were win-win for the developers and the state because the terms of the deals resulted not only in new oil but, over time, the state eventually getting all of its royalty, and in some cases, more.

Sometimes these negotiated deals don't work out. I recall Unocal Corp. not being able to negotiate a royalty reduction for a Cook Inlet platform. The company was able to keep the platform operating but we'll never know what kind of new development work might have been done (these discussions are confidential) or why state negotiators felt it was a bad deal.

There are advantages and disadvantages of these opposite approaches. The negotiated deal, best done with specific projects, allows give and take for both parties and does guarantee a result. To get the reduction, the companies have to do the project.

A disadvantage is that the industry never really knows if it can successfully get a deal. This kind of reduction can never be counted on and therefore companies cannot assume it in their long-term planning. Negotiated deals may help with specific hardship projects, but to attract steady, long-term investment the approach isn't very helpful.

Even the exploration tax incentives have uncertainties. The Department of Revenue must approve expenditures to qualify them for tax credits, and sometimes there have been unpleasant surprises for the explorers.

The across-the-board tax reduction, as in Cook Inlet, or the new production tax credits on the Slope, are different because they are something that the companies can count on, and on which they can do long-range planning.

There's still a huge uncertainty for the SB 21 per-barrel credits, however, because voters may choose to repeal the new tax. A referendum question will appear on the August state primary election ballot.

The new production we're seeing on the Slope represents the producers' faith that Alaskans will vote to keep the new tax law intact. If SB 21 is repealed, we'll be back to footing a fifth of the Point Thomson tab, and other spending.

There's a third tool we use to induce development and that's the ability for the state to help finance infrastructure. We do this now with mining and other industries through our state development corporation, the Alaska Industrial Development and Export Authority. AIDEA may soon be able to partner with small oil companies in developing new petroleum-processing facilities.

Remarkably, these particular ideas are widely supported. Democrats in the Legislature have even proposed taking this further, having the state partner with small companies in exploration and development, in effect making AIDEA a state oil company. I'm not sure Alaskans are ready for that, but we're already close to having Alaska Oil, Inc., through the tax credit tools we employ as well as the state's one-eighth and one-sixth royalty ownership interest in state oil and gas leases. We're partners now with industry now, like it or not.

Tim Bradner is an Anchorage-based business writer. He was a member of BP's external affairs staff in the 1970s and early 1980s.

Lynne Curry