State to accelerate oil tax credit obligation payoff

The state of Alaska plans to pay off $900 million in outstanding oil and gas investment tax credit obligations owed to companies. Money is owed to small and medium-sized companies, mostly independents, who were caught short when the state had to sharply cut reimbursements under the tax credit incentive program, under which the state had shared costs. Major Alaska producers were not eligible for the tax credit payments. The payments would be funded with revenue bonds issued by the state, Commissioner of Revenue Sheldon Fisher said.

Under the previous program the companies invested in projects through short-term financing and then led tax credit applications for part of the costs to be refunded by the state. Many rms were in the middle of exploration and development programs when the state cut the tax credit refunds in 2015. Projects were delayed when alternative financing could not be lined up. Fisher said the state’s inability to pay the obligations has tarnished its reputation in the industry. “By paying these obligations soon we’ll put this chapter behind us and help give small operators con dence in Alaska,” the commissioner said.

Credits to be eventually paid anyway, but state could pay faster

The credits would be ultimately be paid in any event over seven years under a formula in state law for a minimum annual payment. However, if the obligations can be paid off more quickly it would help companies who would otherwise have to wait to get their money. It would also help move stalled projects toward production. The state Legislature would have to approve the bond plan but most legislators have voiced support in the past for the state getting the tax credit obligations paid.

Under the plan the state would purchase the tax credits at a small discount that has yet to be determined but it would be equal to the state’s cost of issuing the bonds. The estimate is for a 6 percent discount, the commissioner said. The offer will be an attractive offer because the discount is likely to be below the companies’ weighted cost of capital in carrying the expenditures they have made. An additional idea is giving companies the option of accepting a lower discount by negotiating a small overriding royalty interest, meaning additional royalty, for the state in new developments. The state would typically receive royalty on state oil and gas leases between 12.5 percent and 16.5 percent, depending on the lease, so any royalty override would be in addition to that.

Incentives were aimed at attracting new explorers

The state started the incentive program years ago as a way to attract small and medium-sized companies. It has largely succeeded, with small and mid-size independents discovering oil and developing new elds on the North Slope. Repsol and Armstrong Oil and Gas explored and made a major discovery. Among companies caught short by the cut in tax credit payments were small independents Caelus Energy and Brooks Range Petroleum, who have had to delay development of discoveries, and BlueCrest Energy, which has had to slow its work on a new Cook Inlet oil project.