Hilcorp warns Alaska Legislature that S corp tax will harm Cook Inlet natural gas

By SUZANNE DOWNING

July 23, 2026 – Hilcorp Alaska is warning lawmakers that a new income tax inserted into Alaska gasline legislation would strike directly at the company responsible for producing the natural gas needed to fill the proposed pipeline — while putting Southcentral Alaska’s existing energy supply at risk.

In a seven-page letter sent Thursday to members of the Alaska Legislature, Hilcorp Alaska Senior Vice President Luke Saugier urged lawmakers to abandon the pass-through entity tax contained in the failed conference committee version of House Bill 381 and return to a clean gasline bill.

“Legislation intended to improve the commercial viability of the Alaska LNG Project should not include a new targeted income tax that increases the cost of producing the natural gas upon which the project depends,” Saugier wrote.

The letter comes four days before lawmakers are supposed to return to Juneau for another special session on the Alaska LNG tax package. The conference committee version passed the Senate 11-8 on July 16 but failed in the House on a 19-19 vote. Gov. Mike Dunleavy had announced that he would have vetoed the bill because of the new tax and other provisions added after the House overwhelmingly approved a cleaner version in June.

There’s little chance that the Legislature will actually convene as scheduled on July 27; the Senate majority has stated it will not go back until Aug. 10.

At the center of the dispute is an income tax on certain oil and gas businesses organized as pass-through entities. Although more than 55,000 pass-through businesses operate in Alaska, Hilcorp said the proposal was constructed to single out the company and its owner.

“The intended target and punitive nature of it are clear: Hilcorp and its owner are being singled out for a new income tax that does not exist today,” Saugier wrote.

Hilcorp’s importance to the gasline extends far beyond its corporate structure. The company operates both Prudhoe Bay and Point Thomson, the North Slope fields expected to provide the gas for the Alaska LNG Project.

“Every molecule of natural gas expected to supply the project will originate from fields operated by Hilcorp,” Saugier wrote.

While Hilcorp holds minority ownership interests in Prudhoe Bay and Point Thomson, it is responsible for operating the fields, planning drilling programs, maintaining facilities and making the capital investments required to produce and deliver the gas.

Hilcorp has entered into a Gas Sale Precedent Agreement with the project developer and remains involved in negotiations intended to produce binding, long-term gas-sale contracts. The company said those negotiations require a reliable understanding of future production costs — something the proposed tax makes difficult.

Exempting the Alaska LNG Project itself from the tax, as conference committee negotiators attempted to do, does not solve the problem, Hilcorp said. The tax would still increase the cost of producing and delivering the gas before it enters the pipeline.

“It merely imposes them elsewhere in the value chain, and those costs will ultimately flow through to the economics of the Alaska LNG Project,” Saugier wrote.

Hilcorp also raised a more immediate warning for Southcentral Alaska, where utilities are confronting declining Cook Inlet gas supplies years before North Slope gas could become available.

The company currently invests between $400 million and $500 million each year in Cook Inlet drilling, construction, development and operations. A new state tax would reduce the capital available for additional wells, workovers, compression, storage and other projects needed to offset the natural decline of the mature basin, according to the letter.

This year is already one of Hilcorp’s busiest Cook Inlet drilling and construction seasons in recent history. The company said that activity is intended to sustain and increase the amount of gas available to Alaska consumers.

“If the new tax is enacted, Hilcorp will have less capital available to drill additional wells and develop future supplies,” Saugier wrote. “In practical terms, that means new volumes for utilities, consumers and critical facilities across Southcentral Alaska will be at risk.”

Most of Hilcorp’s Cook Inlet gas is committed under fixed-price, long-term contracts. The company said it has met or exceeded those commitments and is discussing additional supplies with utilities. Hilcorp also provides natural gas to Marathon Petroleum’s Kenai refinery, which the company said produces nearly 90% of the gasoline and diesel consumed throughout the Railbelt.

The letter argues that lawmakers could therefore reduce investment in Alaska’s existing gas supply before the proposed pipeline is capable of replacing it.

Hilcorp also challenged the mechanics of the tax, saying fundamental questions remain unanswered about taxable income, deductions, depreciation, affiliated companies, net operating losses and the allocation of income among business activities.

The company said those were not minor accounting details, but unresolved provisions that would determine how much tax is owed and influence investment decisions involving hundreds of millions — and sometimes billions — of dollars.

“As written, the proposed pass-through entity tax is more severe than Alaska’s existing corporate income tax,” Saugier wrote.

Hilcorp said the measure would disallow ordinary deductions, create new compliance requirements and force companies to construct hypothetical combined entities for tax purposes. It could also leave major policy decisions to future Department of Revenue officials because lawmakers have not provided a complete statutory framework.

The company further suggested the bill could face a constitutional challenge under Alaska’s single-subject rule. HB 381 began as legislation establishing an alternative volumetric tax structure for Alaska LNG property but expanded to include a major restructuring of state income tax law.

“Those subjects appear too disparate and insufficiently related to satisfy Alaska’s constitutional single-subject requirement,” the letter states.

Hilcorp included figures intended to counter years of claims that the privately held company does not pay its share in Alaska. The company said it invested $4 billion in the Alaska fields it operates in 2025, nearly double its annual investment since 2021, and contributes about $1 billion annually in state and local taxes and royalties.

It also supports more than 5,000 employees and contractors, according to the letter.

Hilcorp credited its investments with tripling production at Milne Point, reversing declines at Prudhoe Bay and producing about 90 million more barrels of oil than earlier state forecasts anticipated — the incremental production sometimes called the “Hilcorp Wedge.”

The company’s message to lawmakers is that Alaska cannot tax its way into greater investment.

“Tax policy should appropriately recognize those results and carefully consider the long-term impact of discouraging investment in Alaska,” Saugier wrote.

As the Legislature’s fourth special session is scheduled to begin Monday, July 27, Hilcorp is asking lawmakers to return to the approach that passed the House 34-5 in June: a focused bill replacing construction-period property taxes with a volumetric tax based on gas moving through the pipeline.

“We respectfully encourage the Legislature to advance a clean Alaska LNG Project bill that strengthens project economics, preserves Alaska’s near-term energy security, and encourages continued investment in Alaska,” Saugier concluded.