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BP's problems could cost state twice

New tax plan may allow operator to shift repair bill to taxpayers

Posted: Friday, February 02, 2007

British Petroleum's oil spill and the resulting shutdown of Prudhoe Bay last August may cost the state more than expected.

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A controversial change in the way oil taxes are calculated may allow BP to pocket the savings from years of failing to adequately maintain its pipelines, while getting tax breaks for repair costs, according to legislators and state officials.

The shift from a gross tax to a net tax was part of the petroleum profits tax law adopted last year. The law is intended to encourage oil companies to spend money on their facilities to extract more oil. The tax system helps subsidize those investments with tax breaks for improvements that will make Alaska oil fields more productive.

"Clearly, the taxpayers of Alaska are going to be helping to pay for the cost of the deferred maintenance," said Sen. Kim Elton, D-Juneau.

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Neglected upkeep was blamed for corrosion that let 200,000 gallons of oil leak out of a corroded 30-inch pipeline onto Arctic tundra last August. Operator BP had to shut down the huge Prudhoe Bay field.

The state missed out on selling oil at prices that reached record highs of more than $75 a barrel. Prices for North Slope crude have since plunged to less than $50 a barrel, and the state's budget surplus is rapidly shrinking.

The cost of replacing the corroded facilities will likely be a quarter of a billion dollars over two years, said BP spokesman Daren Beaudo.

"With regard to the expenditures with regard to the corrosion issue, we recognize that the companies are proceeding with the understanding that they will be able to deduct them," Patrick Galvin, commissioner of the Department of Revenue, said in legislative testimony.

"We are still in the process of looking at that. At this point we do not have a definitive resolution," Galvin said in response to a question from Elton.

Michael Williams, the state's chief economist, said that as he does his revenue planning, he also assumes the deductions will be made.

Regulations implementing the tax are now being developed. Beaudo said BP will abide by the rules, whatever they are.

"We're participating in the development of the regulations," he said. "We'll fully comply with the law."

Deductions, credits or nothing?

Had the pipelines been repaired before the petroleum tax was adopted - and before they leaked - BP would have had to pay. The tax adopted last year allows both deductions and tax credits of different values.

Beaudo said work on the leaky lines would have to be done in any case. That could make the company eligible for an even more valuable tax credit rather than a deduction.

"This is not a repair," Beaudo said. "This is a fully new engineered, redesigned system."

He said It includes many meter houses, corrosion inhibitor injection stations and downsized pipelines to safely handle the declining Prudhoe Bay production.

"Alaskans should not pay for any of these costs and the regulations should specifically exclude them (BP) from eligibility for deductions or credits under PPT," House minority leader Beth Kerttula, D-Juneau, wrote in a filing with the Department of Revenue's Tax Division.

The department is drafting the new regulations.

Kerttula, a former oil and gas attorney for the state Department of Law, said nothing now prevents BP from getting a tax break on the upgrades.

In her State of the State speech, Gov. Sarah Palin warned that the government would be watching closely to see how fair the new tax proved to be for Alaska.

"I would have preferred to stick with our proven method of taxing oil and gas based on its gross value, rather than the much more complicated system, basing taxes on an oil company's claimed expenses and profits," she said.

Elton, who opposed adoption of the tax last year, has been using his seat on the Senate Finance Committee to monitor the company. He agreed with the governor.

"I think we made a mistake. I'd like to go back to gross," he said.

Still, Elton said there didn't appear to be enough votes in the Legislature to overturn the law.

If Palin does call for overturning or changing the petroleum tax, "I'll be right in line behind her," he said.

Questions about the change

Some Republicans also opposed the change. Sen. Fred Dyson, R-Eagle River, questioned the integrity of the process of enacting the tax.

"I watched people apparently radically change their perspective on the PPT tax and the gas pipeline contract very suddenly, often between one committee meeting and another, or over a weekend," he said.

He said he had no evidence of wrongdoing but was suspicious nevertheless.

"I just had alarm bells going off in the back of my head. I would guess here in the next couple of years we will learn as these investigations continue that there may have been some substance to that," Dyson said.

FBI agents last August served search warrants in legislators' offices and elsewhere, looking into connections between oil companies and lawmakers.

Dyson said he saw an apparent correlation between how some legislators voted on oil and tax issues and how well their districts did in then-Gov. Frank Murkowski's capital budget. Murkowski is on an ocean liner trip around the world and unavailable for comment.

BP officials have their own criticisms of the law.

Company Vice President Angus Walker said the tax on net profits was a good idea because it taxed the "reality" of a business. But the company thinks the rate is too high. Walker said a lower rate would spur crucial investment in Alaska.

• Pat Forgey can be reached at patrick.forgey@juneauempire.com.



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