At first glance, Gov. Bill Walker’s veto of payments for tax credits to the oil industry may appear to be a bold move to save money for the state in a time of crisis. But in reality, the governor has not saved a dime for the state, and — with one stroke of his red pen — has instantaneously demolished the state of Alaska’s credibility among worldwide financial institutions and with potential oil industry partners who could be essential to the state’s future. If not corrected quickly, this will hurl the state into a deep and painful chasm that will have long-reaching impacts to all Alaskans.
Let’s be clear. The governor’s veto does not eliminate the state’s obligation to pay the credits owed, and it does not affect Alaska’s largest producers in any way. The veto was actually a postponement of payments that are owed only to Alaska’s small independent oil companies for work already completed and did not address changes in the laws for earning future credits. These vetoed amounts have previously been earned through the good-faith actions of Alaska’s small companies, and much of the credits have even been reviewed and approved by the state. But, make no mistake, the postponement of payments is dangerously harmful to Alaska’s small companies and will create severe repercussions for the state for years into the future.
The bottom line is that the state of Alaska just a few short years ago made a strategic move to attract new companies to Alaska’s oil patch. By any measure, the credits have been successful in bringing new players to the state, with new projects launched, jobs created, and new oil and gas discovered and produced. Now, only when the political landscape is challenging, the state is backing away from its own policy, even when it is working as intended.
The credit program was created as an innovative industry/state partnership concept intended to bring extra value to the state from Alaska’s resources. Every producing well that would not have otherwise been drilled without the tax credits is a new source of revenue for the state, and the state receives a very positive return on its investment resulting from that new production. Today, one side of the partnership (the small independent oil companies) has fulfilled its requirements. Now the other partner (the state) has simply decided to walk away from its obligation to pay. The credits were set up to be a win-win for both industry and the state. The promise of the credits has worked, and the small independent producers have done our part. But now the state is going back on its commitments to actually pay the credits that are owed.
I first learned about Alaska’s tax credit program in 2009, when representatives from the state of Alaska had a booth at the North American Petroleum Exposition. They were enthusiastically urging new companies to come north to develop the state’s resources. State officials handed out a book ironically called “Dispelling the Alaska Fear Factor” and provided information sheets describing the incentives the state was providing for new explorers and developers to come to Alaska. Investments in Alaska are daunting: it costs roughly three to five times as much to drill a well or build production facilities in Alaska as it does anywhere else in the U.S. The state was offering to rebate a portion of upfront investments made by oil companies in order to help make the Alaska investments more competitive with investments in the Lower 48, and the state has offered a consistent schedule up until last year for reviewing and paying those credits on time. The tax credits were meant to tip the balance in favor of Alaska. And they have worked exceedingly well — until now.
In 2012, BlueCrest completed our first acquisition in Alaska. And just a couple of months ago, we began oil production from the first new oilfield in the Cook Inlet basin since 2001. Our small company has spent hundreds of millions of dollars on the project, and we have received $24 million in tax credit payments. But now, the future of many new oilfields throughout Alaska is in jeopardy, thanks to the veto of the credit payments.
It is important to understand that small, independent companies typically don’t have the cash on hand to finance the daunting costs of exploring and operating in Alaska. We instead typically look to outside investors and lenders to provide the enormous funding required for finding and developing Alaska’s new resources. That is not an easy process, and the funding must be committed years in advance of any significant spending. Of course, that planning has included the tax credits that clearly were earned and were supposed to be paid. If payment for those tax credits is not received as promised by the state, there will be severe challenges created for the small companies whose investment budgets were based on the belief that the state could be trusted.
You don’t have to be an investment banker to foresee what this kind of erratic behavior does to Alaska’s standing with the tight-knit global investment community: it is damaged. Instead of being a steady, reliable business partner, Alaska now looks to be no better than some of the dictatorships across the globe that change their policies based on political whim. The harm this veto has done to Alaska’s reputation is hard to overstate, and Alaska may have to pay the price for these shortsighted actions for many years into the future.
Indeed, unless something meaningful is done to help the small companies survive a payment delay, the state is certain to experience a long-term, negative impact that will surely come into play for any future development plans requiring substantial outside financing — possibly even extending to the Alaska LNG project. After all, why would any investor, large or small, take the state of Alaska seriously the next time it receives a copy of “Dispelling the Alaska Fear Factor”?
• Benjamin Johnson is the President and CEO of BlueCrest Energy. He grew up in Kenai, graduated from Kenai Central High School, and worked his way through college on the Cook Inlet platforms and on the North Slope. He earned his master’s degree from UAA and is a registered Professional Engineer.
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