Oil industry prepares to fight to keep tax credits alive in 2017

Caelus Energy’s Smith Bay rig. Caelus CEO Jim Musselman says tax credits are needed to help develop the find. (Image courtesy Caelus Energy)

When Governor Bill Walker released his state budget last week, the phrase “oil and gas tax credits” was notably absent from the announcement. But that doesn’t mean it won’t be a hot topic this year. Lawmakers in the new House majority coalition say the current oil and gas tax credit structure is unsustainable, and they’re working on a bill to change it..

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The oil industry is trying to keep the tax credits alive, but it’s not going to be an easy fight.

When it comes to oil tax credits, Jim Musselman said he feels like a character from the Sunday comics.

“Lucy’s holding the football for Linus to kick it and then he gets up there and she pulls it back and she does it time and again and poor Linus keeps trying to kick it and she keeps pulling it back,” Musselman said. “That’s kind of the way we feel, we kind of feel like we’re Linus.”

(For Peanuts sticklers out there, he means Charlie Brown.) Lucy, in this analogy, is the State of Alaska. Musselman, as Charlie Brown, leads the oil company Caelus Energy. Caelus estimated it will have earned close to $200 million in tax credits by spring. But last summer, citing the state’s budget crisis, Governor Walker vetoed $430 million in oil tax credits.

Musselman said the promise of those credits was a big reason a small company like Caelus came to Alaska to explore for oil. That’s exactly what the current tax credit system was designed to do, given the dwindling flow of oil down the pipeline. This fall, Caelus announced it had found two billion barrels of recoverable oil in waters off the North Slope. Musselman said Caelus needs the credits to move forward.

“We lived up to our end of the bargain, so first and foremost, we need to be paid what we’re owed,” Musselman said.

But that may not happen any time soon. When Gov. Walker released the 2017 budget, he appropriated the statutory minimum, $74 million, to pay back oil tax credits. All told, the state estimated it will owe oil companies about $650 million by June. The governor’s position is the state needs pay off the credits companies earned eventually, but Alaska needs to solve its budget problem first.

Brad Keithley, president of Alaskans for Sustainable Budgets, said the state should ask itself two questions when it thinks about whether to keep letting oil companies earn credits.

“One is: do we really need to have that sort of reimbursable tax structure to make these projects go forward?” Keithley said. “Is that really necessary? And the second one, and frankly the one I focus on a lot, is whether it’s a good deal for Alaskans.”

Keithley said for something like Caelus’ Smith Bay development, the state could be on the hook for billions of dollars in tax credits before any oil is produced. He said Caelus’ big oil find is promising, but not 100 percent guaranteed. That means there’s a chance all the money due in tax credits won’t result in more oil in the pipeline. Some lawmakers agree with Keithley; they think the state can’t afford to promise credits to companies any longer.

“We know that we want to keep the industry active, but also we can’t be cutting essential services or taking PFDs to pay off unsustainable credits,” Democratic representative Geran Tarr said.

Tarr is the incoming co-chair of the House Resources Committee. She said the governor may introduce legislation to change the oil and gas tax credit system, but House Democrats like her are also working on their own bill to retool the credits.

Neither bill will just slip by Republican lawmakers. Cathy Giessel, who chairs the Senate Natural Resources Committee, said the fact that Alaska isn’t paying back credits that oil companies earned is bad for the state’s economy.

“Fundamentally, we are viewed as an unstable regime in the world because we keep changing our tax policy,” Giessel said. “So, it’s going to have to be a pretty solid case for me to even consider yet again another change.”

Giessel won’t say she’ll reject any proposal House Democrats come up with, but she won’t easily be convinced. She said the state already phased out some oil and gas credits in the last legislative session.

In other words, Republicans plan on asking tough questions before the oil and gas tax credit football is yanked away for good.

Correction: A previous version of this story referred to lawmakers as the “House Democratic majority”; the name has been corrected to the “House majority coalition.”

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Elizabeth Harball is a reporter with Alaska's Energy Desk, covering Alaska’s oil and gas industry and environmental policy. She is a contributor to the Energy Desk’s Midnight Oil podcast series. Before moving to Alaska in 2016, Harball worked at E&E News in Washington, D.C., where she covered federal and state climate change policy. Originally from Kalispell, Montana, Harball is a graduate of Columbia University Graduate School of Journalism.