North Slope

North Slope oil producer Caelus Energy announced Friday it will lay off 25 percent of its 80-person workforce and suspend drilling at the Oooguruk oil field, potentially affecting hundreds more contractor jobs.

In a sharply-worded letter to Governor Bill Walker, Caelus CEO James Musselman blamed not only low oil prices — but also the governor’s efforts to reform Alaska’s oil tax system.

Musselman said the Walker administration’s proposals to scale back subsidies for smaller companies like Caelus — and to raise the minimum oil tax — have “significantly damaged investor confidence in Alaska.”

“We feel like the proverbial canary in the coal mine,” Musselman wrote.

On Saturday morning, Caelus senior vice president Pat Foley testified emotionally before the Senate Resources committee, which is considering the governor’s oil tax bill.

“On Monday I’m going to have the very unpleasant task of sitting across the table from smart, hardworking, caring, dedicated, hopeful people, my companions, many of whom I’m honored to call my friends,” Foley told the committee, speaking via phone from Caelus headquarters in Dallas. “And I’m going to explain to them that within a matter of days, their employment will end. And I can assure you, no matter what side of that table you find yourself, it’ll be simply horrible.”

Some lawmakers bristled at the suggestion that the state is responsible for the company’s struggles.

Anchorage Democrat Bill Wielechowski asked Foley whether it was state policy or oil prices driving Caelus’s decision.

“If the state were to make no changes to our oil tax structure, or our tax credit system, are you prepared to reverse your decision?” Wielechowski asked.

“It is price that has forced us to make the decision that we’ve made,” Foley said. “But I’ve also testified that we hope for price recovery. And if the tax system becomes less favorable, it’s going to take a higher price in the future for us to re-initiate our drilling activities.”

The announcement is the latest in a string of layoffs and reductions in Alaska’s oil and gas industry, as the price of oil remains stuck near $40 a barrel.

BP and ConocoPhillips both announced layoffs in the past year, as have several oilfield contractors.

Former Fairbanks North Star Borough Mayor Luke Hopkins’ appointment to the Alaska Gasline Development Corporation board of trustees was met with skepticism Monday.

The Senate Resources Committee questioned whether Hopkins and other board members have the experience needed to make important decisions about the proposed AKLNG pipeline.

Soldotna Republican Sen. Peter Micciche praised Hopkins’ devotion to the state. But he expressed concern that Hopkins and other board members would make pipeline decisions that weren’t in the state’s best interest.

“At some point, there has to be someone on the board that can call – I’ll try to think of a nice way for the word I would use – but I would say, could just call hogwash on something, when it comes to operational, marketing and direct natural gas and LNG experience,” Micciche said. “And I worry about that.”

Committee members noted that Hopkins was involved with Alaska Gasline Port Authority, which wasn’t successful in completing some of the natural gas projects it pursued.

But Hopkins said it wasn’t the authority’s decisions that stopped these projects, but market conditions.

Hopkins attempted to defend his background, as well as that of other board members. He said the board makes decisions drawing on the corporation management’s knowledge.

“Right now, I’m not sure anyone on the board has built a pipeline, that I’m aware of,” he said. “But we have the expertise, and that’s what we delve into, the same as when I was an elected official. I didn’t know everything about those actions that are coming forward, but you have a team that works on it.”

Hopkins joined the board in November when Gov. Bill Walker completed an overhaul of the AGDC board. It coincided with former AGDC President Dan Fauske’s ouster.

Sen. Bill Wielechowski, the committee’s only Democrat, said Hopkins brings a good perspective to the board.

“We’ve had this debate now for several years,” Wielechowski said. “Do you want a board stacked with oil company executives, who are making decisions possibly that are going to favor their old employers, or do you want a board who are making decisions who are going to favor Alaskans?”

Since Hopkins’ appointment was made outside of the legislative session, the Legislature now has the opportunity to refuse the appointment.

The Resources Committee members decided to forward Hopkins’ appointment to a joint session of the Legislature without making a recommendation.

A bill to revise oil and gas tax credits from the House Resources Committee includes only a fraction of the savings Gov. Bill Walker proposed.

The Department of Revenue estimates the committee’s version of House Bill 247 would save the state roughly $160 million over the next three years. That compares with $1.175 billion dollars in savings under Walker’s proposal.

The committee rejected a series of amendments Tuesday that would have raised costs for oil and gas companies.

For example, Homer Republican Rep. Paul Seaton proposed cutting the share of losses that North Shore producers can receive. The Net Operating Loss tax credits would have fallen from 35 to 25 percent.

Anchorage Democratic Rep. Andy Josephson supported the amendment, which was defeated 3-6.

“The credit system we’ve devised is not sustainable in this economic climate and this would be a way to rein it in,” Josephson said.

But Rena Delbridge said the credits help smaller and newer companies operate on the North Slope. She’s an aide to Anchorage Republican Rep. Mike Hawker who worked on the bill.

“The Net Operating Loss credit … can also be thought of as a part of the fundamental tax calculation, in the sense that the state wants you to keep spending money, even if you are losing money, because that spend is potentially that future production,” Delbridge said.

Walker’s plan would prevent companies from using past losses to reduce their taxes below the minimum, like they can now. It also would raise that minimum tax from 4 to 5 percent.

The House Resources bill drops those provisions and scales back Walker’s proposal to cut tax credits.

Both plans are offset by at least $1 billion in tax credits that have already been promised to oil and gas companies.

The debate over the bill is happening the same week the state forecast that for the first time it will pay out more in oil and gas tax credits next year than it will receive in royalty revenue.

Despite the gulf between Walker’s proposal and the committee bill, Tax Division Director Ken Alper credits the Resources Committee with its work over more than 20 hearings on the bill.

“It was a respectful process,” he said. “It was informative. They fixed a number of the technical issues that were in our original bill, and that makes things easier going forward. And even if we disagree with where they went on some of the larger dollar-value changes, we’re going to continue the conversation.”

The bill must go through more steps before it reaches Walker’s desk. Next up is the House Finance Committee.

And it will face scrutiny in the Senate Finance Committee. Last year, Soldotna Republican Sen. Peter Micciche was a member of a working group that recommended the state prevent companies from paying less than the 4 percent minimum.

The Department of Revenue released a forecast today showing the state will bring in $800 million dollars less in oil revenue this year and next than the department projected in the fall.

Gov. Bill Walker said the 17-percent drop in the oil revenue forecast reinforces the importance of his fiscal plan. The plan would draw money from Permanent Fund earnings to pay for state government. It also would introduce an income tax and raise other taxes, while cutting state spending.

“It just underscores that the reason to make the shifts we have (in) the plan we’ve submitted — the New Sustainable Alaska Plan, with the Permanent Fund Protection Act,” Walker said, noting his goal of moving from 90 percent of state revenue from oil to 21 percent. “And also underscores the urgency of doing it yet this year.”

Walker added that putting a fiscal plan in place this year would reduce the uncertainty that surrounds the state’s future – as well as its ability to attract investors.

The governor says he’ll call a special session if the Legislature doesn’t pass any revenue measures this session.

Revenue Commissioner Randall Hoffbeck says the lowered forecast doesn’t call into question the basic elements of Walker’s fiscal plan.

“The Permanent Fund Protection Act actually models a range of oil prices through a 25-year period,” he said. “It assumes years of low oil price and years of high oil price. We had the staff go back to look to make sure this oil price environment was within the parameters of the assumptions. It was. And so this would not affect the draw under the Permanent Fund Protection Act.”

Soldotna Republican Sen. Peter Micciche acknowledges that the lower forecast will focus legislators’ attention on bills that would raise revenue.

“We have to have those other discussions about revenue,” he said. “We’ve cut deeply… over two years, we’ve cut about 17 percent in agency operations. This year alone we cut about $335 million.”

Oil and gas industry expert Larry Persily doesn’t blame the Department of Revenue for the incorrect forecast.

“It’s no one’s fault. It’s not like Alaska got it wrong last fall, with the Revenue Department forecast. Prices dropped further than most analysts expected and stayed lower longer than most analysts expected,” Persily said, adding that prices have increased some recently.

Persily said the governor is right to focus on moving state revenue away from volatile oil prices. But he said the state has a larger task as it tries to balance the budget.

“We have to accept we’re not the oil and gas state that we once thought we were, and we’re never going to be the oil and gas state that we once were,” Persily said.

“Because this isn’t just prices. This is production. We’re down three-quarters from the peak. And no one out there claims to have another Prudhoe Bay in their back pocket. So, it is going to be an adjustment for Alaska.”

Since both legislative houses passed their budgets in the past two weeks, they’ve started to focus on revenue-generating measures.

The House Resources Committee unveiled  on Saturday its version of House Bill 247, an overhaul of the state’s oil and gas tax credits.

The new version removes one of the key changes proposed by Gov. Bill Walker — raising the minimum tax paid by companies from 4 percent to 5 percent.

The bill would trim the amount of tax credits paid to companies operating in the Cook Inlet.

But Homer Republican Rep. Paul Seaton said the new version would leave credits for companies operating on the North Slope unscathed.

“It’s a huge budgetary expense and we’re talking about how we need to do budget cuts in here,” Seaton said of the legislature. “I see almost no budget cuts.”

But Rena Delbridge, an aide to Anchorage Republican Rep. Mike Hawker, said the sponsors of the new version were concerned about cutting credits deeper. Delbridge worked on the changes.

“The potential impacts to industry of immediate and dramatic changes, in order to resolve a short-term – hopefully short-term or intermediate-term – budget problem, could have fairly significant effects to our production in three years and in five years and in 10 years,” she said.

Walker had proposed eliminating credits based on how much companies spend on drilling and exploration. But he would have allowed companies to continue to get tax credits based on their operating losses.

The new version would scale back both types of credits – for spending and for losses — but wouldn’t eliminate either type.

Walker’s state budget proposal included $500 million from the tax changes. Until a fiscal analysis is complete, it’s not clear how much less the state budget would receive from the committee’s changes.

Ken Alper, state Tax Division director, said the changes will affect the state’s ability to balance its budget. He noted that eight other bills designed to raise revenue haven’t passed.

Walker’s expected to announce Monday that state revenue hasn’t been meeting forecasts, further deepening the budget problem.

The bill also would establish a legislative working group that would make recommendations on broader changes to the tax system for companies in the Cook Inlet and the area south of the North Slope known as “Middle Earth.”

These recommendations would be due in time for the next legislative session.

Rural Alaskans can pay three to five times more for electricity than those in urban areas. That’s why the state launched the Power Cost Equalization Endowment Fund in 2000. It’s paid roughly $40 million annually to subsidize rural energy bills.

But some are questioning if the fund, now worth $900 million, should be committed to benefit only about one in nine Alaskans.

Senate Finance Committee Co-Chairwoman Anna MacKinnon, an Eagle River Republican, said the state government could consider tapping the fund.

“You’ll see Power Cost Equalization come before us. There’s a billion dollars in that fund,” she said. “That billion dollars has been benefiting a selected group of Alaskans with Power Cost Equalization. But is that the highest and best use of those dollars now?”

MacKinnon is a sponsor of Senate Bill 196, which would rebudget fund earnings for other purposes. In years where fund earnings are greater than what’s needed for the Power Cost Equalization program, 60 percent of the excess earnings would go to the state government, 30 percent would go to renewable energy projects, and 10 percent would build up the endowment.

The fund lost money this year, so no excess money is available. It’s not clear whether MacKinnon and other lawmakers are looking beyond Senate Bill 196, to use the fund itself to help close the state’s budget shortfall.

Bethel Democratic Sen. Lyman Hoffman – another sponsor of the bill – sees Senate Bill 196 as a way to protect the fund’s principal while helping the state.

“So what we’re trying to do with this bill is to assure that during those high years, the fund only pay for its intended purpose – and if there are excess earnings, that those earnings be sent back to two different programs,” Hoffman said.

Rep. Bob Herron, another Bethel Democrat, said power cost equalization is fair to rural residents. He notes the endowment was started after the government paid for dams that provide power to cities.

Gov. Bill Walker wants to make sure that if changes are made to the fund, they’re considered along with his plan to close the budget shortfall. He wants to ensure everyone in the state shares the burden.

Walker expressed concern that the combined impact of Power Cost Equalization changes with Permanent Fund dividend changes would put too much of the burden on rural Alaskans.

“That’s why we have focused on a sustainable plan that is a broad-based plan, so that we take into consideration rural Alaska’s situation, which is unique versus urban Alaska,” Walker said. “We’ve tried to take all of that into consideration. That’s why one piece at a time doesn’t really work.”

The Senate Finance Committee heard testimony supporting Senate Bill 196 on Wednesday, but didn’t vote on the bill.