TAX CREDITS VETO REVERBERATES ACROSS NORTH SLOPE
It was October of 2013, and then-Gov. Sean Parnell was welcoming the news that Caelus Energy had signed an agreement to buy up Pioneer Natural Resources’ Alaska subsidiary. A big exploration project was ahead.
Not many in Alaska had heard of Caelus. No one even knew how to pronounce the name. But the company said it was ready to spend $1.5 billion in Alaska in the next six years, and it had solid investors behind it, such as private equity behemoth Apollo Global Management LLC. This was several steps up from merely a wildcat operation.
Other companies were also coming north: Brooks Range Petroleum and Great Bear Petroleum applied for the tax incentives, which helped them with financing their exploration.
“The More Alaska Production Act is already leading to new jobs and opportunities for Alaskans. Simply put, it’s working,” said Parnell.
Caelus President James C. Musselman in 2013 cited MAPA, Senate Bill 21, as a big reason for the investment.
“We are attracted to Alaska because of the enormous geologic opportunity as well as the incentives, such as SB 21, that the state has put in place to encourage energy investment by independent oil and gas companies,” he said.
At that point, SB 21 was being vilified by oil-industry critics like Sen. Bill Wielechowski, who wanted to go back to the higher taxation model, of Sarah Palin’s “Alaska’s Clear and Equitable Share” or ACES model.
Gubernatorial candidate Bill Walker, who became Alaska’s next governor, also criticized it, but said he would follow the will of the people. Democrats gathered signatures and put the entire matter to the voters, which was a battle that took place through the primary in 2014.
Ballot Measure 1 did not pass, and SB 21 remained law, giving explorers and producers confidence that Alaska had finally achieved tax stability. Alaska voters realized that ever-higher taxes had driven away the industry and more competitive taxes would bring it back.
Fast forward to 2016. Gov. Bill Walker has, for two years, cancelled the tax credits that had been put in place to draw in the smaller exploration companies like Caelus.
Caelus owner Jim Musselman was, no doubt, furious when the first set of tax credit obligations were not paid. A serious businessman with a strong portfolio going into the Alaska energy market, his investors and his contractors were counting on that money so they could drill more wells this winter.
It’s not a stretch of the imagination to think that Musselman called the governor directly and chewed him out when Walker did it again this year.
What happened next was that the governor’s attorney general and former law partner Craig Richards quickly exited his prestigious job, with just one day’s notice, and immediately began working on contract for the governor.
And when the writer says immediately, she means just that: Richards ended his career as attorney general on June 23, and by July 5 was deeply embedded in the Executive Office of the Governor.
And what did Richards work on? Matters pertaining to Caelus. Here’s the July billing to the state from Craig Richards Services:
It appears from Richards’ invoice that he met with Caelus representatives numerous times and also prepared and met with bankers from ING and Bank of America.
WHY DID RICHARDS MEET WITH ING AND BOA?
Investors get involved with energy tax credit plays because they can get as much as 20% return on investments. But with big rewards come big risks: Last year, Apollo Global Management’s fourth-quarter profits tanked, as unpaid tax credits took their toll on their investments. Apollo has a big stake in Caelus.
Banks such as ING and Bank of America have gotten into the market lately, but for them as well risk is a factor in their decisions. They know their investments could end up in bankruptcy if the tax credits are not paid.
Let’s say, for argument’s sake, that Caelus was not happy with the tax credits being pulled out from under them. It knew it had a big play at Smith Bay, and it needed to get drilling going this winter to prove up some additional wells. That was the plan.
But without those tax credits, the drilling had to be put on ice. Everything is delayed, and the entire financial model is structurally shattered.
This was a case of Governor Walker lighting the house on fire, and hiring former law partner Richards to put out the fire.
Part of the arsenal that Richards employed was his recent membership on the Permanent Fund Corporation Board of Directors. He was in front of the board by the end of August, asking them to pay the tax credits to the companies and let the State of Alaska owe that money to the Corporation.
That didn’t work.
THE BIG ANNOUNCEMENT
Then comes early October. Caelus put out a press release announcing a massive find at Smith Bay. It’s a story so big that the Wall Street Journal picks it up nicely.
Caelus announced that it can recover between 1.8 billion and 2.4 billion barrels of oil at Smith Bay, which could put 200,000 barrels a day through the Trans Alaska Pipeline System. The whole find, Caelus estimates, is 6 billion barrels. To put that in perspective, since TAPS started up in 1977, the total throughput has been nearly 17 billion barrels.
That’s great news for Alaska, because taxes and royalties comes from what flows through TAPS, and the more the merrier. With its current throughput of 513,000 barrels a day, another 200,000 is nothing to scoff at.
Governor Walker put out a press release applauding the announcement with this three-line statement:
“With an oil pipeline that is three-quarters empty, this is good news for the state of Alaska. I applaud Caelus for this major discovery, and for the company’s commitment to do business in our state. My administration will continue to work with the industry to identify new development opportunities in Alaska’s oil and gas sector, and provide appropriate investment incentives given our current fiscal climate.”
Caelus has likely been sitting on the information about Smith Bay for months, as it’s a company that typically holds its cards close. A press release of this magnitude probably means it’s trying to entice investors to come play, because there is real money to be made.
Now that Caelus has been burned by the State of Alaska, the company is doing the next best thing: Looking for new money in the private equity market so it can finish the work on the first two wells and drill another one this winter.
Caelus the company came to Alaska strong. It had its ducks in a row to do the work near the North Slope, one of the most trying places on earth to operate. The company earned the money from tax credits. It’s the law that the credits must be paid.
Governor Walker has been a squirrely teammate for Caelus, so Musselman had to pivot and throw the pass elsewhere with seconds on the clock, since drilling can only be done in the winter up on the North Slope. Alaskans might want to hope there’s a receiver there to catch it.