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Energy

Oil companies owed hundred of millions of dollars by state should have known risk, some say

  • Author: Alex DeMarban
  • Updated: August 27, 2017
  • Published August 27, 2017

Oil companies owed hundreds of millions of dollars in tax credits from the state of Alaska are canceling projects, protesting publicly, and in one case, suing the state to force it to set aside some $5 million in unpaid cash it claims to be owed.

But some say the companies should have known the potential consequences before they signed up for the state's generous tax credit program. State law shows they risked a slowdown in payments if oil prices crashed and the state's economy tanked.

And that's exactly what happened.

But industry representatives and company executives say small independent companies that the credits were meant to attract sunk hundreds of millions of dollars into projects, after getting the impression from the state that it would make timely payments.

"It's not what companies who invested in resource development in Alaska planned on happening," said Carl Giesler, chief executive of Cook Inlet Energy.

The Tennessee-based company, worried the state would pay competitors before it paid $5 million owed to its bankrupt parent company, Miller Energy, recently sued the state to set aside the money. A settlement, unveiled Tuesday, ensures the state will hold at least some of the money for possible payment, until a larger court dispute between the two sides is settled.

The tax-credit purchases began in earnest as part of a 2007 act that hiked production taxes, but offered generous cash payments to subsidize oil-field activity. Under the law, the state often reimbursed companies for two-thirds of their exploration costs.

With high oil prices filling the state treasury with surplus income, Alaska for years paid the companies as quickly as the claims arrived, according to Ken Alper, Alaska Tax Division director. The annual payments reached a high of $628 million from July 1, 2014, to June 30, 2015.

But in summer 2015 — after oil prices collapsed and with the state facing a $3.5 billion deficit — Gov. Bill Walker began using his veto power to defer payments.

Since then, the state has paid the legal minimum required by law.

In 2016, Walker approved paying $30 million while he deferred $430 million. This year, the Legislature paid $77 million, though companies were owed more than $700 million.

By July, the state's tab is expected to be about $1 billion. The Legislature ended the program this summer.

If Alaska sticks to the bare minimum, companies won't be fully compensated for 30 years, said Kara Moriarty, head of the Alaska Oil and Gas Association, representing the Alaska oil industry.

The relatively small payments to individual companies have made it hard for them to complete projects or attract outside financing to make up the difference, she said.

Some companies "are literally getting laughed out the door by financial institutions," Moriarty said. "They're like, 'Forget it, why would we be invested in Alaska as a partner?' "

Three companies have announced project delays this year, citing uncertainty over tax credits, and low oil prices.

Tennessee-based Cook Inlet Energy won't drill an oil and gas well, known as Sabre.

Smith Bay drilling rig in the Alaska Arctic southeast of Utqiagvik. (Caelus Energy)

Texas-based Caelus Energy Alaska, claiming it's owed at least $75 million, said it won't drill a planned appraisal well this winter at its potentially huge find at Smith Bay on the North Slope.

And Texas-based BlueCrest Energy may not be able to drill an additional development well in Cook Inlet this fall because it's owed about $100 million from the state and is having trouble raising new capital. The state has paid $27 million for a $525 million project.

BlueCrest Energy’s $77 million long-distance drilling rig. (BlueCrest Energy)

"It's better than nothing but it's not what we were told at the beginning that we'd receive in the credits," Benji Johnson, president of BlueCrest Energy, said in early August.

Brad Keithley, a budget hawk, former oil and gas attorney and business writer, said he's not buying that argument.

"As a longtime lawyer who did a lot of financing and deals, when you're entering into a government program, the first thing you do is read the underlying statute and review its limitations and risks," said Keithley, who spent about $100,000 attacking and supporting candidates in the 2014 election cycle.

"Regardless of what any rogue official may have said, the statute did not back up a statement that we'll pay you regardless," he said.

But Moriarty argues that the state gave the impression that full payments would be made each year. One tool the state used was a promotional document handed out by state officials at trade shows, she said.

Published in 2014 by the Alaska Tax Division during the administration of former Gov. Sean Parnell, the two-page pamphlet featured a cartoon moose with a wad of bills. Alaska would "be there for you," for a project's entire life, it says.

"We do not just talk big, we follow through big — with cash!" it proclaimed. It said the state will pay full value for tax credit certificates.

But there's no mention of payment timelines. And it references several statutes, including the one saying payments will be funded with a 10 to 15 percent portion of Alaska production-tax revenues.

Additional appropriations can be made, the statute says. But they aren't required.

Brad Keithley

"The risks were very clear," Keithley said.

Regardless of the "fine print," companies secured financing and made investments on the expectation of timely payment, said Giesler, with Cook Inlet Energy.

The state's choice to make minimum payments isn't necessarily unreasonable, given Alaska's financial position, he said. But it has consequences for future investment and jobs in Alaska.

"It's not great for current (oil field) activity or the credibility of the state with outside capital," he said.

John Hendrix, the governor's chief oil and gas adviser, said he's skeptical state officials in the past oversold the tax-credit program. He said no official could have guaranteed the state would always have the cash to pay the full tax-credit bill each year, he said.

"Show me the quotes that validate that," he said.

The lack of payments from the state prompted Caelus chief executive Jim Musselman to tell Forbes in November that Gov. Bill Walker "stuck his shiv" in the oil companies.

But Caelus has set a more moderate tone this summer, after Walker seemed open to supporting an Alaska Senate measure paying the industry $300 million. The payment would be part of a fiscal package that included using earnings from the $60 billion Alaska Permanent Fund. That would have boosted the tax-credit payments well beyond the legal minimum of $77 million.

It didn't pass, but the Legislature is expected to take up a fiscal package again, perhaps in a special session this year.

A statement from Caelus Friday urged swift payment.

"Alaska's elected leaders should be working overtime to instill confidence in investors to come back to Alaska and make our economy strong again," the statement said. "For Caelus and its partners, that means paying the earned credits in full within the next few budget cycles at a minimum."

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