JUNEAU — House Republicans are preparing to unveil their rewrite of Gov. Bill Walker's proposal to scale back the state's $630 million oil-tax credit program.
The oil industry is watching closely.
Depending on whom you ask, Walker's House Bill 247 would close tax loopholes and reform an out-of-control subsidy program, helping to eliminate the state's $3.8 billion budget deficit. Or the bill represents a public policy that's "hellbent, 24-7," to send oil companies packing from the North Slope, as one company official, Bill Armstrong of independent Armstrong Oil and Gas, said at a hearing last month.
Interest in the legislation from lawmakers, lobbyists and the public is intense, given the potential for huge effects on the state budget, and on North Slope and Cook Inlet oil and gas companies.
Rep. Dave Talerico, R-Healy, the co-chair of the House Resources Committee where HB 247 currently sits, said he gets questions from some three-dozen people every day who want to know when the rewrite of Walker's bill will be ready. ?
Talerico's committee has held 20 hearings on the 29-page bill, which now comes with more than 500 pages of supporting documents and analysis attached. Talerico, a former human resources and safety director for the big Usibelli coal mine in Healy, relies on an oil and gas statute book on his desk that's cluttered with pink tabs.
"Heck of a learning experience for me — I'll tell you," he said in an interview Thursday.
Walker's bill would sharply scale back the state's cash payments to oil producers. Those payments have ballooned over the last decade, to $630 million in the last fiscal year from $54 million in 2008 — and they're now the third-largest line item in the budget, trailing only the education and health departments.
Walker says that's unsustainable.
"There's no question there had to be change," he said in an interview Thursday.
The credits go primarily to two groups of smaller producers — not to the North Slope operations of giants Exxon, BP and ConocoPhillips — and Walker wants to change the program to eliminate or defer about $400 million in payments.
About $200 million would otherwise go to companies in Cook Inlet exploring and producing oil and natural gas, some of which goes to utilities in Southcentral Alaska to heat peoples' homes or generate electricity.
The cash payments to Cook Inlet companies, estimated at $404 million in the fiscal year that ended in June, are made largely under provisions of former Gov. Sarah Palin's Alaska's Clear and Equitable Share, or ACES, oil tax legislation, made more favorable under a Cook Inlet tax regime that passed the House and Senate unanimously in 2010.
The 2010 legislation, sponsored by House Speaker Mike Chenault, R-Nikiski, and Rep. Mike Hawker, R-Anchorage, was aimed at averting a feared Cook Inlet natural gas shortage, and it's credited with helping bolster reserves. But it's also led to the state paying as much as 65 percent of companies' exploration and development costs.
The other companies that would see about $200 million less in payments are small producers developing new projects on the North Slope. They collected $225 million in the last fiscal year.
Their credits stem from provisions originally contained in ACES, then tweaked in former Gov. Sean Parnell's 2013 oil tax rewrite, Senate Bill 21.
A third component of Walker's bill would close a provision in SB 21 allowing the major North Slope producers to use credits to drop their tax payments below a 4 percent minimum. It would also raise the minimum tax rate to 5 percent — a 25 percent increase.
Each component of Walker's legislation has drawn sharp protest from oil companies, some of whom say they're already losing money with prices at historic lows.
Even if only part of the bill passes, the industry is warning of further layoffs, like the ones announced recently by BP, which reported a $194 million loss for its Alaska operations in 2015.
"Where are we going to take that next hit from?" asked Kara Moriarty, the president of the Alaska Oil and Gas Association, in a phone interview Thursday. "We don't have any money to give."
Walker said he's not trying to hurt any particular industry. But he added that his proposal to reduce the credit payments, and increase taxes, comes as he asks for more money from other industries like fishing and mining.
He's also is proposing to use some of the earnings of the $52 billion Alaska Permanent Fund to help pay for government, which would dramatically reduce the size of residents' annual dividend checks.
"We just can't hold anybody harmless," Walker said.
The House Republican-led majority, which includes Hawker and Chenault, has defended elements of the existing tax regime, saying the changes proposed by Walker would jeopardize investments that companies are making. But majority members also acknowledge that there's a need to cut spending on the credit program.
Chenault said at a news conference Thursday that lawmakers are looking at "mechanisms that we can use in order to still keep players interested in Alaska, both on the North Slope and in Cook Inlet."
"But also, how do we draw down on some credits to help our bottom line?" Chenault asked.
Members of the House Resources Committee have so far revealed few specifics about how they plan to adjust Walker's proposal, leaving everyone trying to read the tea leaves.
"They plan to do something with the governor's bill," Moriarty said. "I just don't have a good sense of what that is."
Rep. Ben Nageak, D-Barrow, is the co-chair of the resources committee responsible for oil and gas issues, and he's responsible for the rewrite of Walker's bill, Talerico said. But Nageak's office wouldn't make him available for an interview Wednesday or Thursday.
Nageak is in the Republican-led majority caucus. Democrats in the minority, who are pushing for higher taxes and reductions to credits, are worried that the resources committee's adjustments will leave Walker's bill watered down.
"I don't see them doing enough," said Rep. Andy Josephson, D-Anchorage, one of two minority caucus members on the committee.
Josephson said he sympathizes with one of the arguments mustered by some of the oil companies: that it's unfair for the state to change the tax framework that drew them to invest in Alaska projects.
But the credit payments are "crowding out everything else" in the budget under the current tax regime, which Josephson called "a reflection of panic over declining oil."
One tool that Walker has to steer the process is his veto pen, Josephson added.
Currently, there's only $73 million in the state budget for tax credit payments, which is far below the $625 million that companies are projected to claim next year.
Any more money would have to come through other legislation, like Walker's bill, which includes a one-time payment of $925 million to phase down the credit program.
If lawmakers change Walker's legislation to the extent that he sees the proposed reforms as insufficient, he could veto his own bill — which means that legislative leaders may have to compromise with him.
Striking that compromise will likely be a difficult and acrimonious process, said Larry Persily, a former deputy revenue commissioner who's now an oil and gas advisor to Kenai Peninsula Borough Mayor Mike Navarre.
Part of the problem is that it's tough to predict how changes to the tax regime will affect companies' behavior, Persily said. And, he added, emotions over oil and gas run as high in Alaska as any other issue.
"People say the Permanent Fund's the third rail of Alaska politics," Persily said. But oil and gas, he added, is a "pretty supercharged electrical core of Alaska politics, too."