The governor's recent veto of funds needed to pay oil tax credits will do tremendous long-term harm to the state of Alaska that goes far beyond the current fiscal deadlock. As former commissioners of the state departments of Natural Resources and Revenue, the two of us have worked for years to enhance Alaska's oil production, secure a fair share of oil revenue for the state and set the state on a path to a strong financial future.
We see the governor's veto of the tax credits as one of the largest self-inflicted injuries in the state's history. We strongly support the governor's efforts to reach a sustainable fiscal system as well as efforts to reform the oil and gas production tax system to provide a better balance between state revenue and company profits; however, we must avoid doing excessive harm to the state's long-term interests during the political fight to achieve these goals. The Legislature must override the governor's veto of the tax credit payments to avoid a devastating hit to the state's future viability.
The immediate casualty of the governor's tax credit veto is the critical effort to diversify the companies that Alaska relies upon to produce oil in our state. In any discussion of Alaska oil and gas policies, it is important to recognize that different policies affect incumbent producers differently than new entrants, particularly those new entrants who are still in the exploration phase and have not seen positive revenue from production. The governor's veto will have zero impact on the major producers (BP, ConocoPhillips and ExxonMobil) and will only increase their control over the state's oil and gas industry.
The Walker administration says that rather than receive reimbursement from the state, the new companies can approach BP, ConocoPhillips or ExxonMobil and attempt to sell the credits for cents on the dollar. Then those large companies can submit the credits to the state and reduce their tax bill by the full dollar value. How is that a benefit to the state?
Alaska's best hope for sustained new production in the future is to encourage a group of independent companies to explore for and develop new oil and gas discoveries. The tax credits offered by the state, beginning around 2004, enabled us to overcome our high cost environment and other barriers to entry and begin to attract independent explorers. What started out as a very tentative trickle has grown in momentum and resulted in a substantial group of mostly small independent companies exploring in Alaska. Unfortunately, that momentum is fragile, and the governor's veto of the tax credit payments will shatter any momentum, scare away new investors and damage trust in Alaska's profitable oil potential, trust that could take decades to rebuild.
It is important to note the distinction between the governor's veto and modifications to the tax credit program or reforms of the oil tax system in general.
The Legislature recently passed changes to the production tax program and will likely pass additional reforms in the future. Changes to the tax system alter the state's share of oil profits and the obligations to pay tax credits. The governor's vetoes do not fix anything; they only delay the payment owed by the state. Changes to the tax system can be absorbed by the industry in the normal course of business; however, the governor's veto of scheduled tax credit payments is an abrupt breach of trust and creates an environment of uncertainty that is devastating to the new entrants to Alaska.
To make matters worse, these companies not only depend on the tax credits to reimburse their own investments but most have accepted the option to borrow against the credits and expand their exploration activities. Rather than simply cap their exploration activities to what they can cover solely with their raised capital, the companies borrow against the state credits and increase their exploration activities by 30 percent to 60 percent. The state encouraged such borrowing a few years ago by specifically making the tax credit applications assignable to lenders. As a result, the governor's veto will not simply cause these companies to await payment from the state but will also send many into bankruptcy when they default on their tax-credit secured loans. In effect, the state is abruptly pulling the rug out from under these companies that moved into Alaska believing we would honor our financial obligations in a timely manner. That is not a situation that encourages others to invest in Alaska's oil and gas potential.
Finally, the governor's veto of the tax credit payments will have a long-term impact on the perception of the state as a safe place to do business. As much as the governor references the potential threat to the state's credit rating in not passing a fiscal restructuring plan this year, his veto will have a real (not potential) impact on that rating. The credit rating is a measure not only of your ability to pay debts but also your willingness to pay. When the state has the funds in the bank and still fails to pay its debts (forcing its creditors into bankruptcy), the market will take notice in a hurry. It is no longer a theoretical threat of default; it is a demonstrated default on the part of the state.
The state of Alaska has many things to be optimistic about. We have huge, untapped potential for additional oil and gas production, as well as opportunities for other natural resource development and many other emerging industries. We have the reserves to help weather this current fiscal storm if we make smart decisions.
However, we can't afford to make poor decisions that result in damage that will take decades to repair. For that reason we ask that the Legislature put aside the politics of the moment and override the governor's veto of these tax credit payments to avoid devastating damage to the state's future.
Patrick Galvin served as commissioner of Revenue (2006-2010) and is currently chief commercial officer for Great Bear Petroleum; Marty Rutherford served as acting commissioner of Natural Resources (2002, 2006, and 2016) and as deputy commissioner of Natural Resources under six governors.