Pipeline corrosion deduction issue a holdover from May

Posted: Sunday, November 11, 2007

JUNEAU - As the Alaska Legislature spends its last week of a special session wrangling over a tax hike to oil companies' net profits, there still is the matter of a certain $130 million tax break to resolve.

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That's essentially the amount current state laws says BP can legally deduct for replacing 16 miles of transit pipeline that sustained two corrosion-related leaks last year and caused a partial shutdown at Prudhoe Bay, the nation's largest oil field.

Many legislators say the law has a loophole that must be closed. Others say a hasty change could create more problems. More than one year later, the issue remains highly charged.

Corrosion was to blame for a leak that spilled more than 200,000 gallons in March 2006 in a section of the transit line. BP recently pleaded guilty to a misdemeanor violation of the federal Clean Water Act for that spill.

A second, much smaller spill in another part of the line occurred in August 2006, when state lawmakers were debating oil taxes. The event sent oil prices inching toward $80 per barrel, stirred fears of escalating gas prices and sent companies searching for other supply sources.

"The price of oil had gone up, so the shutdown wasn't leaving us destitute," said Sen. Gene Therriault, R-North Pole. "But what we immediately started talking about was, should they be able to deduct that expense. That debate continues."

Since then, two state lawmakers have pushed for a tax law change that would keep oil companies from passing repair costs stemming from improper maintenance back to the state through deductions and tax credits.

Bills sponsored by Sen. Tom Wagoner of Kenai and House Rep. Kurt Olson of Soldotna, both Republicans, were stalled in separate committees during the regular session that ended in May.

Last year Wagoner unsuccessfully tried to push this consideration into the state's new tax bill just a few days after the partial shutdown.

The two lawmakers are now pinning their hopes on similar provisions in Gov. Sarah Palin's bill being debated in a special legislative session scheduled to end Nov. 16.

"Bad maintenance or lack of maintenance should not be passed back to the citizens of Alaska. It's that simple," said Olson. "If they end up taking these deductions, then we end up paying for that poor maintenance, and that needs to be fixed."

BP spokesman Ronnie Chappell said lawmakers need to be mindful that BP's transit line is a $260 million investment into new infrastructure designed to last decades.

"This is a significant upgrade and capital investment in the future of that oil field," Chappell said. "We will continue to take any and all deductions we are allowed under the law."

The federal government hasn't missed its chance to hold BP accountable. Congress has held hearings on the corrosion, including one in May while Wagoner's bill languished in a House committee.

In late October, BP entered into a plea agreement on a misdemeanor violation of the federal Clean Water Act. The agreement with the U.S. Attorney's Office will cost BP more than $20 million.

State lawmakers, however, have been less successful than the federal government, a setback Wagoner deems, "an embarrassment."

"Big brother has got to take care of state of Alaska," Wagoner said. "That doesn't look very good to me."

BP's federal criminal negligence is not covered as a deduction exemption under the state's current tax law.

Palin's new bill proposes a change in who should pay for petroleum equipment maintenance repairs that stem from an "unscheduled interruption of, or reduction in the rate of, oil or gas production."

The plea agreement enhances the urgency to rewrite the law, Palin said.

"It's been clear by the evidence in this case as to why we need to close the loopholes," Palin said. "That's what this bill covers."

If lawmakers can't find room for provisions under Palin's plan, House Finance Committee Mike Chenault, R-Nikiski, said he would revisit Wagoner's bill.

That bill was referred to Chenault's committee with less than week remaining in the regular session last May. Chenault said there was no time to hold a hearing because the House was still dealing with other pressing matters, including a multibillion-dollar state budget.

"I think that some of the deductions need to be looked at and they need to be tightened," Chenault said. "I don't think they should be given a free ride. If they had shoddy maintenance, it shouldn't be deductible."

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