Oil tax credits must be targeted, affordable

Legislators in Juneau are closing out at least one chapter in a very creative, but also expensive, incentive program to stimulate new oil and gas development.

The state's oil and gas tax credit program has existed for years. I will argue that it has achieved its goals of getting more companies exploring, more wells drilled and more oil and gas discovered. But it also grew, piecemeal, into something so top-heavy and complex it just couldn't be sustained, particularly after state revenues imploded in late 2015.

A sore point for legislators was the state's purchase of tax credits for cash from small independent companies who are explorers and developers.

Most of the heavy-lift in winding this down was done last year by the Legislature in a phase out of most tax credits, with most gone in 2019.

[Alaska Senate proposes $288 million for oil company subsidies, plus cash for King Cove road]

This year lawmakers are working to finish things left undone last year, but they're also trying to preserve some of the incentives in ways that don't, like the cash purchases, directly hit the state budget.

Of course, the oil tax bill now before legislators does more than phase out tax credits. It also increases taxes. Whether we want to really do that when our industry and services companies are struggling is another conversation.

Back to the tax credits: Critics have called these subsidies but I think they should be considered investments with the state helping share risks in return for more oil and more revenue, though there are no guarantees.

There's nothing new about this. The state has done it for decades, beginning soon after statehood with a generous royalty break for new discoveries which stayed on the books for many years.

Over the decades we've had many forms of tax and royalty incentives, most to help small, economically-challenged new fields but also incentives for companies who were just exploring.

Governments do this all this time. Across the nation tax breaks are offered to woo new investment. In Alaska the Kenai Peninsula Borough did it in the late 1960s to help get a liquefied natural gas plant and ammonia plants built near Kenai. Anchorage did it in the late 1980s to get the air cargo hubs built at Ted Stevens International Airport.

Incentives can be abused, of course. They have to be thought out and administered carefully. The trick is to design them to really accomplish what's intended and for the sponsoring community to get something back, ideally in results that are measurable and transparent.

[Alaska can't afford current oil tax credits but should think twice before raising taxes]

I believe our oil and gas incentives have had mixed but mostly good results, using these yardsticks. Just a few years ago there were only a handful of large oil and gas companies operating in Alaska and very little exploration with the exception of ConocoPhillips on the North Slope. The incentives helped bring in a number of aggressive new companies, mostly experienced independents.

Thanks to them fears of a gas shortage in Southcentral are in the past. On the Slope, the list of recent new discoveries could, potentially, increase the amount of oil moving through the Trans-Alaska Pipeline System to a million barrels a day, twice what it is now. Clearly, we're doing something right.

However, it has been at a substantial cost to the state treasury. While we note the successes it's important for legislators to do due diligence and ask questions. One is whether these developments might have happened without the incentives. Some might have. The companies are quick to acknowledge that what really brings them to Alaska is geologic prospectivity, or good rocks, although the tax credits help and result in getting more work done more quickly.

A core dilemma in all incentives is whether investment would have occurred anyway, but in most cases this is unknowable. Government officials in charge of these programs, and elected officials approving the framework, just have to make the judgment call.

However, what is always a good idea is for incentives to be targeted to achieve certain goals, for example enticing exploration in large, unexplored Interior Alaska sedimentary basins, or exploring for new gas in Cook Inlet to meet local utilities' needs, or deep oil in the Inlet or technically-challenged oil deposits on the North Slope.

The unexplored Interior basins offer an example where incentives are clearly helping get exploration done, in this case by Alaska Native corporations like Doyon Ltd. and Ahtna Corp., which are investing their own money in exploring, interestingly, state-owned lands. These are areas where few oil and gas companies have been willing to spend money.

There are a lot of ways incentives can be structured, too. We do have options, even tools that are unused, as we wind down our current program.

Arguably, incentives work best if they are automatic if certain criteria are met. There's no subjective judgment by a state bureaucrat, in other words. An explorer can then have confidence that the incentive will come, as long as criteria are met, and on that basis financial planning can be done.

Another way to offer incentives, however, is through negotiation, which does involve judgment. This is a procedure that may be cumbersome as a part of tax policy but more workable, and in fact required, as a part of modification of state royalty. This approach can provide for assured outcomes, such as certainty that development will occur. This works best after a discovery is made and we do it now through modifications of royalty for discoveries that appear to be economically marginal.

Another form of this, designed for explorers, is our state exploration licensing program. This allows a company to negotiate an exploration contract for a block of state lands without having to tie up money in up-front bidding, instead spending the money on exploration. If a discovery is made this is converted to conventional state leases. The key is that a commitment to invest, and to drill, is achieved.

The state can assist in other ways. Low-cost loans and even equity participation can be done. Equity investment is another option. The Alaska Industrial Development and Export Authority, the state development corporation, has already participated in at least three oil and gas projects, two through equity and one in a loan.

The prime example of participation was our state's partnership with North Slope producers in pursing a large natural gas pipeline project.

Ironically, we're already a partner with industry through our royalty interest in state oil and gas leases. We own one-eighth to one-sixth of the oil and gas through the royalty share.

No matter how we may feel about joint-venturing with Big Oil, we're already doing it.

Are there creative blends of these ideas that could preserve some incentives without breaking the bank? I believe there are, but surprisingly I haven't seen much discussion of alternatives despite all the angst over tax credits. I believe it's time for that to happen.

Tim Bradner is co-publisher of the Alaska Legislative Digest.

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