Bradners'

Alaska Legislative Digest

October 31, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

Senate Judiciary aims to complete work on tax bill by Friday

On track to complete Senate Judiciary Committee action on SB 2001 this Friday, Chairman Hollis French (D-Anch.) said he remains in favor of a “hybrid gross” type of oil severance tax but could not yet say how he wants to amend the bill. He said he is relying on the committee’s “gross-net smackdown,” starting at 9 a.m. today, to help him decide, and could not predict what the full committee would support. Thursday’s session of the Judiciary Committee meeting will be an issues “clean-up” meeting followed with action on amendments on Friday.

In Tuesday’s Judiciary Committee meeting the Department of Revenue defended language in Gov. Sarah Palin’s proposed tax bill the department says gives it greater flexibility on the use of “joint interest billing” (JIB) statements between companies during tax audits of production expenses. JIBs are the bills sent by a field operator to non-operating owners. Most fields on the North Slope are owned by several companies with one selected as operator. The partners routinely audit the operators’ expenses. The industry argues that owners scrutinize each other’s billings closely and provide a reliable record of expenses that state auditors can take advantage of. Industry argues that the governor’s language, which remains in the current versions of HB 2001 and SB 2001, would stop state auditors from using JIBs. The Alaska Oil and Gas Association also said the administration is mistaken in its view that the current PPT law mandates the use of JIBs in audits.

Jon Iversen, Tax Division director, said joint operating agreements, which set the billing rules for JIBs, are subject to changes the state may not be aware of, and this can affect JIBs. In making the change proposed in Palin’s bill the state is moving from a “trust but verify” approach to “trust but let us verify ourselves,” he explained. Gary Rogers, supervisor of the tax division’s oil and gas audit section, said reliance only on JIBs puts the state in the position of “auditing their (industry’s) auditors instead of auditing the tax returns.”

Uncertainty continues over corrosion cost deductions

Judiciary committee members also identified concerns with the governor’s bill, retained in SB 2001 as it came from Senate Resources Committee, to prevent oil field operators from taking tax deductions for oil facility repairs necessitated by “deficient” maintenance. Iversen said the administration terms provide a “brighter and broader line” than SB 80, a bill now pending in the Legislature but not before the special session. A key difference between what the governor proposes and SB 80 is that the Legislature’s bill requires state officials to make decisions, in the case of a shutdown, on whether maintenance was “deficient.” This is a subjective judgement that agencies are uncomfortable with. The governor’s approach gets around this problem in that it disallows deductions for all “unplanned” shutdowns.

The “incident-based” approach in the governor’s bill says repair and replacement costs necessitated by a reduction or arrest of oil flow are not deductible costs unless the work is part of scheduled maintenance. Work on wells is exempt from the provision because of the general uncertainty of remote, below-ground operations. Other exceptions are expenses related to intentional acts of third parties, acts of war, and natural disasters. Sen. Bill Wielechowski (D-Anch.) complained that the governor’s language allows an operator, in theory, to neglect maintenance for years and then “schedule” past due repairs to gain the deduction. Sen. Gene Therriault (R-North Pole) said the provision also allows an operator to take deductions for the increased operating cost of production that was reduced while repairs were underway. Iversen acknowledged several points raised had validity and said language changes may be needed.

Industry: Current tax already disallows deductions for maintenance

Tom Williams, chairman of the AOGA Tax Committee, argued that the language in the governor’s bill, like SB 80, is not necessary. Williams said a 30-cent per barrel “disallowance” now in the Petroleum Profits Tax statute was adopted to cover maintenance costs. With current North Slope production in the 640,000 barrel-per-day range Williams said the charge collects some $33 million in additional tax revenues. French called the fee “almost a gross tax floor expressed in a different way.”

Iversen challenged Williams’ contention. Decreases in production mean the fee would collect less than the $33 million annual estimate over time, he said. Whatever the total disallowance, it would be divided among all North Slope operators, not just an operator involved in an incident, and represents only a fraction of the revenue loss the state would experience from an incident like last year’s North Slope shutdown. Iversen said the state is still unable to independently confirm the cost of the Prudhoe Bay transmission line repairs. Sen. Wielechowski asked Williams, who is senior tax counsel for BP, about the costs but Williams said he was unable to answer because he could only represent AOGA on the specific tax questions at hand, not the broader issues of the spill cost. Later in the day BP’s production tax manager, Bernard Hajny, confirmed previous estimates by the company that the pipeline costs are projected at $260 million through 2008 would be claimed as deductions against the PPT.

Wednesday’s schedule

• 9 a.m. House Resources Committee: presentations by representatives of BP Exploration and ConocoPhillips Alaska.
• 9 a.m. Senate Judiciary Committee: discussion of net v. gross policy, progressivity, tax

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.