State mulls new oil tax administration

Rep. Kerttula says details are crucial to overall revenue

Posted: Monday, January 29, 2007

FAIRBANKS - The Alaska Department of Revenue is figuring out how to administer a new oil production tax passed by the Legislature and the details will decide how much money flows into state coffers or stays in the pockets of producers.

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State lawmakers passed the new oil production tax five months ago. The Department of Revenue probably will not complete regulations for it before oil companies have to start paying the tax, said Revenue Commissioner Patrick Galvin.

Lawmakers say the details amount to big bucks.

"It's huge," said House Minority Leader Beth Kerttula, D-Juneau, who submitted comments to the department on a draft of the regulations.

She said the new tax law had "a lot of incredibly loose language" and did not specify which expenditures could be deducted or how transactions between subsidiary companies would be treated.

"If you don't plug those holes, the deductions and credits are going to work against Alaskans," she said.

An example comes in the treatment of overhead costs.

Draft regulations list three options. The first would let companies deduct as overhead an amount equal to 2.5 percent of their direct costs for exploration, development and production. If the company did not operate the lease, the figure would be .4 percent.

The second option would allow deductions of 7.5 percent or 1.2 percent, and the third, 12.5 percent or 2 percent.

Kerttula urged the department to pick the first option.

"The regulations should strictly limit overhead because the costs are too amorphous and subject to abuse," she wrote.

A tax attorney for ConocoPhillips called for clarification on the issue and urged the department to allow higher overhead deductions.

"ConocoPhillips believes that even the largest allowance suggested does not adequately cover the overhead expenses incurred by producers," read a written version of the comments.

Another issue relates to the partial shutdown last August at Prudhoe Bay and to what extent the repair and upgrade costs can be deducted.

Kerttula asked the department to block BP, which operates Prudhoe Bay, from deducting any of the costs or taking credits on them. Under the new tax, companies are allowed to deduct certain capital costs and to receive a 20 percent credit on them.

Galvin told lawmakers last week that the companies were "proceeding with the understanding that they will be able to deduct" the costs, but he said the state was still reviewing the issue.

In an e-mail, BP spokesman Daren Beaudo wrote that determining which costs were deductible would only be "speculative" before the regulations were finalized.

"We have said, and will continue to say that we will follow the law," he wrote.

Beaudo called the work at Prudhoe Bay a "capital project."

"The work being done on Prudhoe Bay is not a repair," he wrote. "It is a wholesale replacement of the system in order to meet the needs of Prudhoe Bay production for the next 30 years."

BP is estimating a total capital cost of $250 million, he wrote.

The Alaska Oil and Gas Association, an oil industry group, submitted comments to the department raising concerns about Cook Inlet tax rates, reporting requirements, and audits, and asked for clarity in the final regulations, citing battles over regulations during the 1970s, 1980s and 1990s.

"We want to avoid long years of court battles over the application and interpretation of the regulations," the group wrote.

"You'd rather have an answer you didn't like rather than no answer at all," said AOGA director Judy Brady.

The tax law spans 41 pages and the draft regulations are already 87 pages, with more to follow. Galvin told lawmakers that his department was hoping to complete a first set of regulations by the end of March and to work on a second set of more specific regulations this spring.



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