By Timothy Puko
For its entire history as a state, Alaska has made money,
sometimes billions of dollars a year, by taxing the oil pumped from
its wells.
That 56-year winning streak is over.
Alaskan leaders want to scale back subsidies designed to spur
production by oil companies but which have now ballooned beyond
expectations. Alaska is now giving back more than $1 billion
annually in tax credits and rebates to oil companies and Wall
Street lenders, wiping out what had often been its largest source
of income. In all, Alaska likely lost $263 million on its oil
production tax program in the last year, state estimates show.
Firms ranging from giants ConocoPhillips, Exxon Mobil Corp. and
BP PLC to Australia's Linc Energy Ltd. have benefited from the tax
breaks. Alaska enacted them about 20 years ago to stop a decline in
production and expanded them in recent years as the oil boom
increasingly lured drillers to North Dakota and elsewhere. The tax
breaks now include cash payments covering as much as 85% of a
well's costs.
While the subsidies have succeeded in drawing in
exploration-and-production work, their costs began skyrocketing
just before oil prices started plunging in mid-2014.
That cost adds to the state's financial troubles and is too high
at a time when declining oil prices have drastically reduced the
state budget, Gov. Bill Walker said last week.
The subsidy program "began for all the right reasons, and it's
reached a point beyond our fiscal appetite," Mr. Walker, an
independent, said in an interview. "We can no longer subsidize
exploration."
Alaska joins governments far and wide struggling to adjust to
shortfalls in oil, gas and coal money during a crash in commodity
prices. Venezuela is suffering from triple-digit inflation. Mexico
suspended a high-speed-train project this year. Louisiana's state
universities have been facing state funding cuts. West Virginia
counties have laid off sheriff's deputies, janitors and
laborers.
Alaska may be the hardest-hit state in the U.S. because it is so
oil-dependent. Oil money usually makes up 90% of the state budget
and funds dividend checks to every Alaskan, $2,072 a person this
year. Part of the administration's plan announced Wednesday would
remodel the state's oil fund after other countries'
sovereign-wealth funds, which could lower that dividend by
half.
While Mr. Walker hasn't detailed changes for the tax breaks,
industry officials are wary about his intentions to cut them. Local
startups and small wildcatters from as far away as Tennessee and
Australia have started exploring the state. Several openly credit
the tax breaks for their interest.
"We have increased credits because there's been increased
investments--and that's exactly what the state wanted," said Kara
Moriarty, leader of the Alaska Oil and Gas Association. Smaller
subsidies would likely lead to smaller investments from oil
companies, industry officials said.
That could create a conundrum for the state. Unlike other
states, Alaska owns its oil reserves, entitling it to royalties on
production.
That likely totaled $947 million in the last year, more than
half the state's oil income, according to state estimates. Even if
it cuts back subsidies and increases oil tax revenue, it could lose
money in the long run if that discourages drillers from tapping
Alaska's reserves.
The state may have to take that risk to fix its immediate
problems, said Gunnar Knapp, an economist at the University of
Alaska Anchorage. "In the short term...we're scrambling for cash,"
he said. "We are in a major fiscal crisis."
Because Alaska is so reliant on oil money, its income has fallen
in concert with global oil prices that are down 57% from last
year's highs. State officials hadn't anticipated that decline. They
had to cut funding for schools, police and roads, cap health-care
spending and dip into savings to close a deficit of more than $3
billion. Mr. Walker's administration is rolling out long-term
changes, too, which include the push for lower subsidies and
changes to the dividend.
The oil industry has become a target in part because some of the
world's biggest companies benefit from the subsidies. The companies
and state officials declined to detail how much each recipient
gets. But many across Alaska roughly know the biggest beneficiaries
because subsidies are often based on production and spending.
The state's largest oil tax break in 2014, $492 million, was
divided based on production in the North Slope. That likely makes
ConocoPhillips, Exxon Mobil and BP the biggest recipients because
they controlled about 85% of the region's production that year,
experts said.
Representatives at ConocoPhillips and BP said their companies no
longer qualify for these subsidies because of limits in place for
when oil prices fall. All three companies referred interview
requests to industry groups.
Wall Street lenders also have benefited. Debt investors like
Apollo Global Management LLC and banks like Bank of America Corp.
have made short-term loans to cash-hungry oil companies using the
tax breaks as a guarantee. Oil companies have been so eager for
loans, their lenders have been able to get returns as high as 20%.
But the returns can often be much smaller, and deals are sometimes
as small as a few million dollars.
Australia's Linc was one of the companies that used this type of
loan, working with Apollo. It sold the rights to $29.5 million in
state rebates it was eligible for in 2013, giving up a 15% cut to
Apollo, according to an investor prospectus from last year. Apollo
lent Linc $50 million total over two years, with Apollo's returns
in the "low teens," said Jude Rolfes, Linc's vice president for
corporate development.
Linc's oil reserves are in a spot largely ignored for 30 years.
Linc had to build an 80-mile ice road, ship its rig over it on
two-ton trucks, drill in subzero temperatures and round-the-clock
darkness and haul everything away within four months before the
spring thaw.
"This is almost like found money for producers up there," said
Mr. Rolfes. "It's why people are going to Alaska."
Matt Wirz contributed to this article.
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(END) Dow Jones Newswires
November 01, 2015 20:31 ET (01:31 GMT)
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