The Alaska Legislature has approved a cut to oil and gas drilling subsidies that promises millions in savings but fails to close a loophole that led to an explosion in the amount the state owes oil companies.

House Bill 247 preserves a “net operating loss” tax credit intended for smaller oil producers who are developing a new oil field and losing money in the process. At low oil prices, however, the credit can be used by the North Slope giants that produce the bulk of Alaska’s oil, reducing their production tax rate to zero.

“That means that as we address other issues of fiscal stability, we are totally hamstrung because there will be no production tax,” said Rep. Paul Seaton, R-Homer, and the creator of an alternative bill that eliminated the loophole.

Speaking on the floor, Seaton said the final version of the bill will cost the state $1.2 billion more than his alternate over the next decade at projected prices. If oil prices underperform those projections and average $40 per barrel, the difference will be as much as $4.2 billion, he said.

Despite Seaton’s opposition and that of others in the House, the bill advanced from conference committee on Monday morning, then passed the House by a 21-19 vote about 5:30 p.m. Monday.

The Senate approved the bill 13-6 at 6 p.m. Monday. Sen. Dennis Egan, D-Juneau, was opposed.

The crucial votes in the House were Rep. Jim Colver, R-Palmer; Rep. Lynn Gattis, R-Wasilla; Rep. Tammie Wilson, R-North Pole; and Rep. Cathy Muñoz, R-Juneau.

Shifting perspectives

In mid-May, each of those representatives voted for a version of HB 247 that called for steeper cuts in the drilling subsidy. Wilson and Seaton were the key authors of that version, which was approved only after more than a month of wrangling behind closed doors.

The Wilson-Seaton version of HB 247 was confronted in mid-May with another version passed by the Senate, and to resolve the differences in the two bills, they were assigned to a conference committee tasked with creating a compromise.

On Monday morning, that committee met at 8 a.m. after weeks of closed-door lobbying and negotiations between lawmakers.

The compromise it drafted was the Senate bill with a handful of amendments. The amendments call for greater disclosure on who is receiving tax credits, the preservation of a tax credit benefiting refineries, a preference for companies that employ more Alaskans, and the extension of a tax credit for companies drilling in places other than the North Slope or Cook Inlet.

“I don’t think there was much conferring going on here today,” said Rep. Geran Tarr, D-Anchorage, and the sole member of the six-person conference committee to vote against the compromise bill before it reached a floor vote.

Roots of the issue

The problem facing the Legislature on Monday stems from flaws in the drilling subsidy incorporated into Senate Bill 21, which passed the Legislature in 2013.

At that time, lawmakers and analysts — as well as much of the world — believed oil prices would remain high. They failed to analyze the effects of SB 21 if oil prices dropped below $60 per barrel. On Jan. 20, Alaska North Slope crude was worth $26.23 per barrel, according to figures from the Alaska Department of Revenue.

When oil prices drop below $46 per barrel, big North Slope oil producers start losing money with every barrel they pump down the trans-Alaska Pipeline System.

Ordinarily, oil companies are held to a 4 percent minimum production tax. The operating-loss credit allows companies to go below the minimum. That was supposed to be a rare feature, for small companies with little production.

When the big producers began claiming that credit, Revenue Commissioner Randall Hoffbeck previously testified, it signified a significant problem.

That’s because the North Slope’s biggest producers — BP, ConocoPhillips and Exxon — might pay nothing in production taxes if they can collect and use the operating-loss credit. While those companies are still required to pay a royalty, property taxes and other fees, the effective elimination of the production tax almost halves the state’s oil revenue, depending on oil prices.

Furthermore, the operating-loss credits don’t expire. If a company earns more than it can use in a given year (a tax can only be reduced to zero), unused credits roll over to the following year.

After Gov. Bill Walker vetoed the payment of $200 million in tax credits last year, those credits remained due. The state is now expected to owe more than $770 million in the coming fiscal year.

Voices pro and con

Speaking after the House floor vote, Muñoz said she had an hourlong meeting with Walker staffers who indicated the governor supported the compromise bill. Shortly before her vote, she learned he had changed his mind.

Asked lated Monday about his switch, Walker said Muñoz’s explanation is accurate.

“Initial blush, it looked like it had gone quite a ways, then the more we looked at it on reconsideration, it hadn’t gone as far as we thought that it could have,” he said.

Walker declined to say whether he will veto the measure.

“What’s passed is passed, so we will look at that when we do our final review,” he said.

From her perspective, Muñoz said the bill is “not perfect, but it’s definitely a step in the right direction.”

She said the Senate’s firm stance against addressing the “net operating loss” issue meant this was the best deal that could be earned. More aggressive cuts risked the whole deal.

Sen. Peter Micciche, R-Soldotna, agreed with that statement. Speaking in the conference committee, he explained that the issue was in the Senate.

“I was probably willing to go a little bit farther, but you have to think about losing votes on our side (in the Senate). There were many people unwilling to talk about any of these issues,” he said.

Sen. Cathy Giessel, R-Anchorage and another member of the conference committee, said she believes North Slope oil companies will not deliberately seek “net operating loss” credits. If they are in a situation where they are losing money on the North Slope, they will shut down oil rigs, cut jobs and cut costs until they break even.

“While we agree it’s not perfect, it’s a very good bill,” she said.

Several legislators said they are open to the idea of raising the operating-loss credit issue in the next Legislative session.

Impact by the numbers

According to figures provided by the Alaska Department of Revenue, the Senate version of HB 247 would have saved the state approximately $265 million over the next three fiscal years. Amendments made in conference committee will reduce those savings by about $50 million, said Ken Alper, director of the tax division of the Alaska Department of Revenue.

That means the bill, as passed by the Legislature, will save the state about $215 million before the start of fiscal year 2020.

That timeline matters because without significant budget cuts, an unexpected rise in oil prices, or new taxes, the state will run out of available savings no later than 2020.

The alternative bill passed by the House and pushed by Seaton would have saved the state approximately $260 million before FY 2020, again, using figures from the Department of Revenue.

The biggest difference between the two bills in this period is the amount of outstanding “net operating loss” tax credits held but not used by oil companies.

According to Department of Revenue figures, the passed version of the bill would leave companies with about $680 million in outstanding credits at the start of FY 2020.

That figure may fall sharply, however. In this year’s budget, the Alaska Legislature included a $430 million down payment on that liability. That down payment was predicated upon passage of HB 247. No bill would have meant no payment.

If Gov. Bill Walker does not veto the money, it is expected that the payment would greatly reduce the state’s liability — as long as oil prices remain above the trigger point of $46 per barrel.