Hilcorp loophole could be costing the state $100 million a year because of unequal treatment

Closing the enormous Hilcorp loophole, which could be costing the state $100 million a year, is long overdue.

SB 114, introduced by the Senate Rules Committee Friday, would do that, among other things.

I expect the Senate Finance Committee will give this important measure the review it deserves. The concepts in the bill are not new and the single committee of referral is a sign that Senate leaders are serious about this, which is good news.

The bill also would reduce the per barrel credit from a maximum of $8 to $5. Anchorage Sen. Bill Wielechowski says the reduction could mean the state would pay $450 million less in credits to the major oil companies. The credits are tied to the price of oil and peak at $8 per barrel when oil is about $90 a barrel.

A third provision of the bill would institute “ring fencing,” which would stop oil companies from writing off the expense of developing one field against the taxes owed on the profitable legacy North Slope oil fields. This is an issue in the proposed Willow development, especially if oil prices go higher than they are today.

I’ll deal with all of these topics in future columns.

Today, I’ll review the Hilcorp loophole, which I’ve written about before and is important to understand.

It was obvious in 2019 when Hilcorp announced plans to buy BP’s operations in Alaska that the state had to fix its income tax on oil companies to keep the playing field level.

Hilcorp is one of the largest private oil companies in the United States. It is the largest oil and gas operator in Alaska and the largest gas supplier in the state.

The Alaska oil company income tax, a product of an era when all major Alaska oil companies were C-corporations, does not apply to limited liability companies like Hilcorp.

But Gov. Mike Dunleavy did nothing to correct the problem, which made it easy for the Legislature to do nothing, a government failure that amounts to an annual gift of tens of millions or $100 million a year to HiIcorp owner Texas billionaire Jeff Hildebrand.

In 2019, Hildebrand donated $25,000 to the Dunleavy campaign group largely funded by Dunleavy’s brother and Bob Penney.

The state tax largesse to Hilcrop is not fair to Alaskans and it’s not fair to the oil companies that have to pay the tax simply because they are registered as C corporations and not something else.

Hilcorp registered in Alaska in 2011, as Hilcorp Alaska, LLC, 100 percent owned by Hilcorp Energy I.L.P., based in Houston. The tax doesn’t apply to those company structures.

In December 2021, the state Department of Revenue predicted the income tax on oil companies—paid by Exxon, ConocoPhillips and others—would bring in $240 million this fiscal year after years of low returns and losses.

“Corporate income tax is levied on oil and gas C-corporations as a percentage of their worldwide net income apportioned to Alaska,” the state’s revenue sources book says.

Now with higher oil prices and profits, the prediction is up to $270 million for this fiscal year and $300 million next year, with nothing from Hilcorp. It’s time to end this unequal treatment.

Meanwhile, Hildebrand is ranking higher on the billionaires list, with Forbes saying his net worth is up to $10.2 billion, the 176th richest person in the world.

Forbes estimated in 2015 that he was worth $5.9 billion and that he was believed to own all of Hilcorp. He stepped down as CEO of the company in 2018, remaining as executive chairman of one of the largest privately held oil companies in the nation.

Forbes said that Hildebrand denied every request for an interview and he was “among the most tight-lipped members of the Forbes 400.”

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