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April 26, 2019

Budget problems may force fiscal regime changes affecting Alaska upstream industry

The US state of Alaska is facing budget pressures that are likely to continue to hamper its ability to repurchase tax credits in the short term and may prompt further fiscal changes.

By GlobalData

A reduction in tax credits, large long-term state budget liabilities and an inability to repay investment credits may force the US state of Alaska to modify its petroleum fiscal framework just a few years after the modification introduced by More Alaska Production Act (MAPA) in 2013.

Alaska oil and gas

The reduction in tax credits coupled with the difficulties in legally establishing the Alaska Tax Credit Certificate Bond Corporation and its bond repurchase programme may dampen investment sentiment across the state of Alaska despite the reduction at the federal level of corporate income tax to 21%.

The state of Alaska is facing budget pressures that are likely to continue to hamper its ability to repurchase tax credits in the short term and may prompt further fiscal changes. Official estimates point at an outstanding balance of about $1.4bn in 2019. Small producing licensees may have financial difficulties for the full-cycle development of some new projects as a result of the expiry of credits available for them until July 2017 for production out of the North Slope. Currently, there is an ongoing political debate about whether to repeal the tax-credit system and modify the fiscal framework, but presently there are no clear indications about the details of any legislative overhaul.

In February 2019, Governor Michael Dunleavy introduced two bills that, if approved, risk increasing conflict between the state of Alaska and the municipalities, potentially slowing petroleum activities. Senate Bill 57 and House Bill 59 call for erasing the possibility of levying oil and gas property taxes for municipalities in this way reducing the funds available to them.

In order to solve Alaska’s $1.6bn deficit without tax increases or modification to the Alaska Permanent Fund dividend, Alaska’s current administration is implementing budget cuts and the termination of several revenue sharing programmes with the municipalities. It is estimated that the two bills would reduce local administrations’ revenues by $420m per year, according to the legislature’s fiscal notes. If passed, the two bills will negatively impact the budget of the North Slope, Valdez, Kenai Peninsula and Fairbanks North Star boroughs.

Regime flow chart

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Source: GlobalData

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