By Timothy Puko 

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 but which have now ballooned beyond expectations. Alaska is now giving back more than $1 billion annually 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 $263 million on its oil production tax program in the last year, state estimates show.

Firms ranging from giants ConocoPhillips, Exxon Mobil Corp. and BP PLC to Australia's Linc Energy Ltd. 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% of a well's costs.

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

That cost adds to the state's financial troubles and is too high at a time when declining oil prices have drastically reduced the state budget, Gov. 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 in an interview. "We can no longer subsidize 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's deputies, janitors and laborers.

Alaska may be the hardest-hit state in the U.S. because it is so oil-dependent. Oil money usually makes up 90% of the state budget and funds dividend checks to every Alaskan, $2,072 a person this year. Part of the administration's plan announced Wednesday 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 startups and small wildcatters from as far away as Tennessee and Australia 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 totaled $947 million in the 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% from last year's highs. State officials hadn't anticipated that decline. They had to cut funding for schools, police and roads, cap health-care spending and dip into savings to close a deficit of more than $3 billion. 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, $492 million, 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% of the region's production that year, experts said.

Representatives at ConocoPhillips and BP said their companies no longer qualify for these subsidies because of limits in place for when oil prices fall. All three companies referred interview requests to industry groups.

Wall Street lenders also have benefited. Debt investors like Apollo Global Management LLC and banks like Bank of America Corp. have made short-term loans to cash-hungry oil companies using the tax breaks as a guarantee. Oil companies have been so eager for loans, their lenders have been able to get returns as high as 20%. But the returns can often be much smaller, and deals are sometimes as small as a few million dollars.

Australia's Linc was one of the companies that used this type of loan, working with Apollo. It sold the rights to $29.5 million in state rebates it was eligible for in 2013, giving up a 15% cut to Apollo, according to an investor prospectus from last year. Apollo lent Linc $50 million total over two years, with Apollo's returns in the "low teens," said Jude Rolfes, Linc's vice president for corporate development.

Linc's oil reserves are in a spot largely ignored for 30 years. Linc had to build an 80-mile ice road, ship its rig over it on two-ton trucks, drill in subzero temperatures and round-the-clock darkness and haul everything away within four months before the spring thaw.

"This is almost like found money for producers up there," said Mr. Rolfes. "It's why people are going to Alaska."

Matt Wirz contributed to this article.

 

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(END) Dow Jones Newswires

November 01, 2015 20:31 ET (01:31 GMT)

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