$100 million-plus tax boost on oil company Hilcorp added to carbon storage bill

JUNEAU — Hilcorp would pay over $100 million more in state taxes per year, under a provision added by Alaska lawmakers to a carbon sequestration bill Friday. But the Texas-based company warned that a tax hike could “significantly” impact its investment decisions and its existing contracts.

Hilcorp is among Alaska’s top oil companies as the current operator of the Prudhoe Bay oil field, and is by far the largest producer of Cook Inlet natural gas.

House Bill 50 was introduced by Gov. Mike Dunleavy last year. The measure would provide a statutory framework so the state can lease depleted gas reservoirs in Cook Inlet to store carbon dioxide deep underground. Originally pitched as a way to raise state revenue, the carbon sequestration measure is now being touted as a way to boost investment in the oil and gas industry.

The House bill was amended in the Senate Resources Committee on Friday to close the so-called S-corporation loophole. Hilcorp, which is privately owned, does not pay state corporate income taxes.

The Alaska Department of Revenue estimated last year that applying corporate income taxes to privately owned oil and gas companies in Alaska would net the state $190 million in the current fiscal year. For the fiscal year that starts in July, the state was projected to collect around $122 million.

The amendment includes a non-binding provision that directs the Legislature to use the additional revenue to fund renewable energy projects or improvements to the electrical grid.

Sen. Bill Wielechowski, D-Anchorage, proposed the amendment and has long fought to raise taxes on the oil industry. He said it is “fundamentally unfair” that Hilcorp does not pay state corporate income tax when those taxes do apply to publicly owned oil companies like ConocoPhillips.

Due to state confidentiality requirements for individual taxpayers, legislators are unsure exactly how many oil and gas companies the tax would apply to. Legislators also are unsure much tax revenue the state could be collecting from Hilcorp. In an interview Monday, Wielechowski said that he knew the “lobbying effort” against the proposed tax hike would be fierce.

Over the weekend, Luke Saugier, senior vice president at Hilcorp Alaska, sent an email opposing the tax hike to the heads of the five Railbelt electric utilities and Enstar, Southcentral Alaska’s natural gas utility. He said that over $1 billion in investments is planned in Cook Inlet over the next five years to maintain gas supply in Southcentral Alaska.

“Due to this new tax’s vague and uncertain language, as well as the provision not being sufficiently modeled, we are unsure what the impact will be on our ability to meet your gas supply needs as we will need to re-examine the investment we had planned for Cook Inlet,” he said. ”Unfortunately, it will also negatively impact our ongoing negotiations related to gas storage options, jack-up rig availability, new gas supply contracts, and could harm our ability to meet existing interruptible contracts.”

[Energy bills intended to address Cook Inlet gas shortage in doubt as end of legislative session approaches]

Since BP sold its Alaska assets to Hilcorp in 2019, there have been calls in the Legislature for the company to pay corporate income taxes. Progressive legislators have also called on the state to enforce a 2012 consent decree signed by Hilcorp in order for it to become the dominant producer of Cook Inlet gas.

Referring to the consent decree, Wielechowski said that the company should either use its leases to fill Southcentral’s looming shortfall of natural gas or give those leases back to the state. He said Saugier’s message to utilities was “outrageous,” and was a threat to Alaskans who rely on the company for their heat and power.

“That is an absolutely abusive, horrendous form of intimidation, and hostage-taking,” he said. “That is just not acceptable. And I don’t think the people of Alaska should stand for it.”

Hilcorp told utilities in 2022 that their gas contracts would not automatically be extended, which has led the Railbelt utility managers to look at importing natural gas as likely the best available alternative. All of Hilcorp’s exploration efforts are directed at fulfilling its existing contracts, Saugier said to lawmakers in February.

Anchorage Republican Sen. Cathy Giessel voted in support of the Hilcorp tax hike. Giessel, chair of the Senate Resources Committee, said the state is struggling to pay for behavioral health and education, and that over $100 million annually would help.

Hilcorp is “a very wealthy company” owned by Jeff Hildebrand, a Texas billionaire who doesn’t live in Alaska, and doesn’t pay local property taxes or send his children to Alaska schools, she said.

“But he has a pass on corporate income tax that other companies pay. I guess they kind of own the narrative here, don’t they? ‘You either keep us tax-free, or we will simply stop producing gas in Cook Inlet that supplies more than 75% of the population with energy.’ I guess I’d ask citizens what they think about that,” Giessel said.

The amended bill was heard for the first time by the Senate Finance Committee on Monday. But some in the Legislature are concerned that the proposed tax increase on Hilcorp could see the underlying carbon sequestration bill fail to pass.

[Alaska Supreme Court gives city of Valdez partial win in effort to unlock Hilcorp financial secrets]

Anchorage Republican Sen. James Kaufman opposed the tax hike. He said it was “a very heavy tax policy” that needed further consideration. And Kaufman was concerned that abruptly changing the state’s tax code could disincentivize future oil and gas investment.

“We need to be a high reliability partner. If you come here to do business, we can’t bait-and-switch,” he said.

At a committee hearing Monday, Department of Natural Resources Commissioner John Boyle told Senate members that the carbon sequestration bill had been “festooned” with other provisions. Dunleavy opposed the tax increase on Hilcorp, and the administration found that to be “the most problematic provision” in the bill, he said.

Boyle told senators it was a priority of the governor to monetize the storage of carbon underground. He referred to ongoing discussions between the White House and the Japanese government about potentially sequestering carbon in Alaska.

The measure has been amended as it has advanced through the Legislature. A provision was added in the Senate Resources Committee that is intended to block companies that receive federal tax credits from deducting carbon sequestration expenses from their oil production taxes.