Gov. Bill Walker vetoed $200 million in funding for oil exploration and development tax credits in a budget action on June 30, in effect capping the program at $500 million for state fiscal year 2016 that began July 1.

The program was previously budgeted at $700 million.

“This has been a tough budget year and no sector, from senior citizens to low-income Alaskans, or oil and gas explorers, is left untouched,” Walker said in a July 1 press conference.

The $200 million reduction, made through the governor’s veto authority, was the only noteworthy veto Walker made. State spending will total $4.954 billion in fiscal year 2016, a $1.15 billion reduction from $6.1 billion spent in fiscal year 2015, the budget year that ended June 30.

Much of the reduction was in state capital spending, which is a one-time savings.

The cut to the oil tax credit incentive program does not end the program but only defers the payments on some tax credits that have been applied for, the governor said. Five hundred million dollars left in the incentive fund is expected to pay the tax credit applications that have been received to date, Walker said.

The action affects only tax credits that result in direct payments by the state to companies that are not producing. It does not affect production tax credits allowed to major producing companies.

Dawn Patience, spokeswoman for BP, said her company is now paying the minimum state production tax and because of that is not eligible for tax credits. According to its most recent financial report, BP was getting about $51 per barrel for Alaska North Slope crude during the first quarter of 2015 compared to $108 per barrel at the same time in 2014.

Also, oil firms producing more than 50,000 barrels per day are also not eligible, which eliminates the current major producers.

Major producers do get a per-barrel production tax credit that is applied against the companies’ production tax obligation, but because this is not paid by a state appropriation, as are the explorer and small producers’ tax credits, it is not affected by the governor’s action.

Walker said he had to take action because the tax credit payment program is projected to grow and would have been $1.3 billion next year and continue to climb.

“It would quickly be the largest cost in the state budget. Clearly, that is not sustainable,” in these lean times of oil revenues, the governor said.

The intention is not to end the incentive program but to restructure it, he said.

“This is the start of a discussion with the companies on how to do that,” Walker said.

Separately, Alaska Revenue Commissioner Randy Hoffbeck said, “It’s not our intention to cut out anyone who has already invested,” in exploration or small fields.

“They will get paid. But clearly, at $60-per-barrel oil the program as currently configured can’t be sustained. We have to relook at how we invest.”

There will be money available for the bulk of the applications that have come in and the firms who have to accept a deferral of payment do have the option of selling the tax credits to producing companies who do have production tax liability, and where the credits can be used to offset payments.

Alternatively, the companies can hold the tax credits until they do develop production and can then apply them, Hoffbeck said.

Meanwhile, state statutes set out criteria on who gets paid from the money available. The priority is given as to when the applications are filed on a first-come, first served basis, as well as for companies that face statutory deadlines in using the tax credits, or other deadlines.

Casey Sullivan, spokesman for Caelus Energy, a small company now developing Nuna, a new North Slope project, said his company may not be greatly affected, for now.

“Historically, we’ve been a small user of the tax credits and for what we have used so far, we hope we’ll be in the first bucket to be paid,” he said. “Still, I think we’ll be looking for guidance from the governor on how the state can assure payments can be made, for future years.”

Caelus is currently developing Nuna, an approximately $1.5 billion new production project that is expected to produce between 15,000 to 20,000 barrels per day beginning in 2017.

An official with another small independent, asking to remain unidentified for now, said his major concern is that any move that affects tax stability can have immediate impact on potential investors.

“People need to know that if they come up here and invest their money they will get a return,” he said.

Hoffbeck said the state administration is already mulling ideas for what can replace the tax credits. One approach is a direct state equity investment in a development, or its related infrastructure, such as investments the state’s Alaska Industrial Development and Export Authority has already done with Brooks Range Petroleum, a company now developing the small Mustang field on the Slope.

Another idea is to preserve the tax credit structure but with pre-approvals, so the state can better forecast future obligations, he said.

Speaking for the oil and gas industry, Alaska Oil and Gas Association president Kara Moriarty said, “We take Governor Walker at his word when he says the state will honor its commitment to pay the oil tax credits, which represents a delay more than a reduction.

“The state’s policy of encouraging small or new oil companies to pursue tax credits by spending billions of dollars in Alaska remains wise, and new oil will result from the increased activity. We agree with the governor when he says he wants to see more oil and gas companies operating in Alaska, and we believe credits have already proven to be effective in reaching that goal.”

Tim Bradner is a reporter for the Alaska Journal of Commerce.