Monday, July 17, 2017

We aren't done yet with cashable oil credits ...

While Saturday's just-before-midnight vote terminated the "cashable" oil credit program going forward, the issue of what to do with the remaining amounts accrued before its termination remains.

A potential upcoming battle on that issue was signaled in the press release issued following Saturday night's vote by the Alaska Oil & Gas Association (AOGA), the producer trade group, repeated in this piece by KTVA's Liz Raines, "Legislature ends cashable oil tax credit program,"

Here is what AOGA had to say: "If Alaskans want to see exciting new oil fields developed and new oil flowing through the pipeline, then fiscal stability must be established in Alaska. The constant moving of the goalposts and continued failure to fully reimburse companies for earned tax credits is not only frustrating, but makes Alaska’s chances of attracting desperately needed investment worse with each passing year."

The reason that may signal an additional battle is AOGA's claim in the release that there has been a "continued failure to fully reimburse companies for earned tax credits."

That assertion is simply untrue.  Not only has the state met its commitments to date, the fact is the state has more than fully complied with its annual reimbursement obligations since the cashable oil credit program began.

Under the governing statute (AS. 43.55.028,, the state is obligated to deposit each year in an "oil and gas tax credit fund" a percentage of the revenues projected to be received in that year from production taxes. The accumulated cashable credits are then paid according to statute up to the amount existing in the fund.  If the fund doesn't contain an amount sufficient to pay all of the accumulated credits in any given year, the statute clearly contemplates that the remaining, not yet funded credits are rolled over to the next year.

That is what the statute always has provided.  Any producer participating in the program has been on notice of that aspect since the outset.

To this point, the state has always annually deposited at least the statutorily required amount.

Under the statute, the state can appropriate additional amounts to the fund, essentially to pay some credits in advance of the time at which they otherwise are required to be paid, and in years of high revenues the state did that.  But the statute does not require the state to do so.

The limitations contained in the statute were intentional and designed to limit the state's financial obligation, especially during periods of low oil revenues, to the specified amounts. AS 43.55.018(c) provides specifically that "[t]he applicable percentage for a fiscal year under (b)(1) of this section is determined with reference to the average price or value forecast by the department for Alaska North Slope oil sold or otherwise disposed of on the United States West Coast during the fiscal year for which the appropriation ... is made. If that forecast is: (1) $60 a barrel or higher, the applicable percentage is 10 percent [of production tax revenues]; (2) less than $60 a barrel, the applicable percentage is 15 percent."

Under the statute, those percentages set the limits of the state's annual reimbursement obligation.  The state doesn't owe any more.  The decision in any given year not to advance pay more isn't, as AOGA appears to claim, a "failure to fully reimburse" companies for earned tax credits. It is simply the exercise by the state of holding to the limits on its annual funding obligation built into the program from the outset.

The amount at issue is not insignificant.  According to a May 2017 presentation by the Department of Revenue the amount of accrued cashable credits totalled roughly $670 million as of that time. at 9. According to the same presentation, the amount that the state is obligated under the governing statute to deposit into the fund during FY 2018 is roughly $77 million. Id. at 6.

Contrary to AOGA's apparent claim, limiting the state's FY 2018  deposit into the fund to the $77 million contemplated by the statute -- and rolling over the remaining, roughly $600 million to subsequent years -- is not a "failure to fully reimburse" the remaining credits, it is simply implementing what the statute always has contemplated.

Earlier this session the Senate proposed through the capital budget to deposit an additional $288 million (above and beyond the $77 million required by the governing statute) in the fund. See "Alaska Senate proposes $288 million for oil company subsidies, plus cash for King Cove road,"

At a time when the state is financially challenged, and especially when it already has cut the PFD two years in a row, we opposed the Senate's proposal to advance pay an additional, supra ("a prefix meaning 'above, over' or 'beyond the limits of, outside of-”) -statutory amount of cashable oil credits and continue to do so.

The AOGA's false assertion about the state's past treatment of the claims may foreshadow yet another run at the advance payments as the House and Senate work to finalize in the coming days what hopefully will be a minimal FY 2018 capital budget.

We hope the leadership of the two bodies do not go down that road, and will oppose it again if they do.