Lawsuit by Juneau man could derail oil and gas tax plan

State officials hope to get $700 million in new oil and gas work underway on North Slope and Cook Inlet later this year, but a lawsuit filed last Monday, May 14, by a Juneau individual could delay things.

Eric Forrer, a Juneau commercial fisherman, filed suit in state court raising constitutional issues with a state bond program approved by the Legislature to purchase unpaid oil and gas exploration incentive tax credits.

State tax director Ken Alper said he hopes the state can deal with the issues quickly so the program can be established and bonds sold in time to get money to companies, mostly small independent explorers, so they can resume work on new discoveries.

Forrer, who is also a former University of Alaska Regent, asked the court for an injunction against the state to stop bonds being issued, so the first test of the lawsuit may come relatively quickly.

The state will ask for Forrer’s request for injunction to be dismissed. Either that will happen or, if the court believes are are merits in the legal arguments, the injunction will be ordered.

Forrer argues that the state constitution prohibits the issuance of state general obligation debt for only certain purposes, such as construction, and it must then we authorized by voters in a state general election.

There are exceptions for revenue bonds, which are special-purpose, usually for development projects, and have a dedicated stream or revenue from the projects for repayment. Juneau attorney Joe Geldhof is representing Forrer.

In testimony to the Legislature revenue commissioner Sheldon Fisher said bonds to be issued by the proposed new Alaska Tax Credit Certificate Bond Corporation authorized under HB 331 are not revenue bonds and will be paid for by state general funds, Forrer argued in his lawsuit.

Therefore, they are more similar to state general obligation bonds than revenue bonds and, under the state Constitution, must secure voter approval.

The money is owed to companies who invested in drilling, made discoveries and in some cases initiated development work but who had to stop work on projects when the state was unable to pay the credits in 2016 and 2017, Alper said.

Companies are holding about $730 million in unpaid tax credits for work done in 2015 and 2016, when the total will climb when tax credits for work in 2017 are included. The incentive program ended in last 2017 but payment.

More will be paid when tax credits issues for work in 2017 is included, he said.

House Bill 331, which will allow the state to issue the bonds, is on Gov. Bill Walker’s desk for approval.

Major Alaska oil producers were not eligible for the exploration incentives, so ConocoPhillips, the one major North Slope operator that has been exploring, did not receive tax credits for its drilling and development of new discoveries.

“We hope to be able to pay about $738 million this year and we believe most, if not all, of this will be put to work on the North Slope and Cook Inlet, Alper said.

Bart Armfield, COO of Brooks Range Petroleum, one independent that has been affected, said he is still waiting for details as to how the bond program will be set up but that he is optimistic.

“This will put new oil intro the Trans Alaska Pipeline System,” Alper said. TAPS is moving about 500,000 b/d, one-fourth of its original design capacity.

The state has a more gradual payout program that would have paid off the tax credit liability after 10 years but the bond financing will allow companies to paid more quickly.

To get that, however, the explorers have to agree to discount what they are owed by 10 percent, although that is reduced to a 5 percent if the money is invested in new exploration or development within two years, Alper said.

Once the governor signs the bill, which he is expected to do, the Department of Revenue will set up the state bonds for sale by late summer.

While the immediate payoff program is optional for companies, “we expect everyone who is owed money to take advantage of it because they are paid off sooner,” Alper said. “We also

State revenue commissioner Sheldon Fisher said the discounts basically pay the state’s cost of borrowing with the bonds. ”It’s worth it to the companies because they are paid sooner than later. This is a ‘win-win’ for everyone,” Fisher said in briefings to state legislators last week.

The companies can also get the lower discount by agreeing to pay the state a higher royalty on oil and gas leases, but Fisher said he believes most will opt for putting the money to work.

There are also seismic companies owed substantial sums and these firms can secure a lower discount and be paid if they agree to a public release of data from seismic work paid for under the incentive program, Fisher told the legislators.

Having more geophysical data in the public domain will stimulate new exploration, the commissioner said.

The identifies of companies holding the tax credits are confidential but four independents acknowledging they hold credits and have been stymied in their work are Alaska-based Brooks Range; Dallas-based Caelus Energy, which has two North Slope discoveries; BlueCrest Exploration of Fort Worth, which has been slowed in its development of a Cook Inlet oil deposit, and Furie Operating Alaska, which has impeded in developing a Cook Inlet gas discovery.

Caelius’ small “Nuna” project on the slope is partly built and could be completed and brought on line quickly, with expected production of 25,000 barrels per day. The company also has a significant discovery at Smith Bay, on offshore prospect, which needs more evalution but which could possibly produce 200,000 barrels per day, Caelus has said in the past.

BlueCrest is developing Cosmopolitan, an offshore Cook Inlet discovery, and completed two wells before drilling was halted due to the tax credit payment delays. Furie has more wells planned at its Kitchen Lights gas discovery.

Brooks Range is developing Mustang, a small North Slope discovery that will be capable of producing 12,000 barrels per day.

The payoff of the tax credits brings to a close an innovative but ultimately unaffordable exploration incentive program Alaska began several years ago. Although it has been shut down now Alper and other state officials said the program met its objectives of bringing new companies, mainly indepedents, to Alaska and in particular finding and developing new gas reserves in Cook Inlet, for regional power generation and space heating.

Most of the state’s population lives in Southcentral Alaska, mainly in Anchorage.