Timothy Puko, 03 November 2015

For its entire history as a state, Alaska has made money, sometimes billions of dollars a year, by taxing the oil pumped from its wells. That 56-year winning streak is over.

Alaskan leaders want to scale back subsidies designed to spur production by oil companies that have ballooned beyond expectations. Alaska is giving back more than $US1 billion ($1.4bn) a year in tax credits and rebates to oil companies and Wall Street lenders, wiping out what had often been its largest source of income. In all, Alaska likely lost $US263 million on its oil production tax program in the past year, state estimates show.

Firms ranging from giants ­ConocoPhillips, Exxon Mobil and BP to Australia’s Linc Energy have benefited from the tax breaks. Alaska enacted them about 20 years ago to stop a ­decline in production and expanded them in recent years as the oil boom increasingly lured drillers to North Dakota and elsewhere. The tax breaks now include cash payments covering as much as 85 per cent of a well’s costs.

While the subsidies have succeeded in drawing in exploration and production work, their costs began rocketing just before oil prices started plunging in mid-2014.

That cost added to the state’s ­financial troubles and was too high at a time when declining oil prices had dramatically reduced the state budget, Governor Bill Walker said last week.

The subsidy program “began for all the right reasons, and it’s reached a point beyond our fiscal appetite”, Mr Walker, an independent, said. “We can no longer subsidise exploration.”

Alaska joins governments far and wide struggling to adjust to shortfalls in oil, gas and coal money during a crash in commodity prices. Venezuela is suffering from triple-digit inflation. Mexico suspended a high-speed-train project this year. Louisiana’s state universities have been facing state funding cuts. West Virginia counties have laid off sheriff deputies, janitors and labourers.

Alaska may be the hardest-hit state in the US because it is so oil-dependent. Oil money usually makes up 90 per cent of the state budget and funds dividend cheques to every Alaskan, $US2072 a person this year. Part of the administration’s plan would remodel the state’s oil fund after other countries’ sovereign wealth funds, which could lower that dividend by half.

While Mr Walker hasn’t detailed changes for the tax breaks, industry officials are wary about his intentions to cut them. Local start-ups have started exploring the state. Several openly credit the tax breaks for their interest.

“We have increased credits ­because there’s been increased ­investments — and that’s exactly what the state wanted,” said Kara Moriarty, leader of the Alaska Oil and Gas Association. Smaller subsidies would likely lead to smaller investments from oil companies, industry officials said. That could create a conundrum for the state. Unlike other states, Alaska owns its oil reserves, entitling it to royalties on production.

That likely totalled $US947m last year, more than half the state’s oil income, according to state estimates. Even if it cuts back subsidies and increases oil tax revenue, it could lose money in the long run if that discourages drillers from tapping Alaska’s reserves.

The state may have to take that risk to fix its immediate problems, said Gunnar Knapp, an economist at the University of Alaska Anchorage. “In the short term … we’re scrambling for cash,” he said. “We are in a major fiscal crisis.”

Because Alaska is so reliant on oil money, its income has fallen in concert with global oil prices that are down 57 per cent from last year’s highs. State officials did not anticipate that decline. They had to cut funding for schools, police and roads, cap healthcare spending and dip into savings to close a deficit of more than $US3bn. Mr Walker’s administration is rolling out long-term changes, too, which include the push for lower subsidies and changes to the dividend.

The oil industry has become a target in part because some of the world’s biggest companies benefit from the subsidies. The companies and state officials declined to detail how much each recipient gets. But many across Alaska roughly know the biggest beneficiaries because subsidies are often based on production and spending.

The state’s largest oil tax break in 2014, $US492m, was divided based on production in the North Slope. That likely makes ConocoPhillips, Exxon Mobil and BP the biggest recipients because they controlled about 85 per cent of the region’s production that year.

All three companies referred interview requests to industry groups.

Extracted in full from The Australian.