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Eason urges care in crafting new tax Former DO&G director reviews history of major controversies for legislators; says vagueness in law will lead to disputes Kristen Nelson Petroleum News
We didn’t claim to have seen it all, but it was pretty obvious that Jim Eason, former director of the Alaska Division of Oil and Gas, has seen enough to be a little wary of some of the language in the administration’s proposed production profits tax, the PPT now before House and Senate Resources committees. Eason, a consultant for Legislative Budget and Audit, was with the Division of Oil and Gas from 1982, as director from 1984 to 1995.
He told the committees, meeting back-to-back in conjunction with House and Senate Finance on March 4, that he was trying to give them the benefit of his experience of where words turned out to be “important and costly.”
Some of the words in the bill are “problematic,” he said, and the choice of words can be very important in minimizing risk.
When Prudhoe Bay production began in 1977 and North Slope producers began paying the state for its royalty oil, it immediately became evident that lessees disagreed on how to interpret the state’s lease form on the value of the state’s oil: all the numbers were “very different.” The state sued, just one of a number of disagreements. Eason said milestones included the Alaska North Slope field cost allowance settlement in 1980, the trans-Alaska pipeline agreement in 1985 and royalty settlement agreements in the early 1990s. Examples of concerns Among Eason’s concerns is language allowing deductions for all qualified expenses for exploration, development and production. There’s “quite an array of ways” to look at costs, he said, and told legislators he would want to see a list of what people intend to include. He recommended an industry-state work group to develop a list of qualified deductions; saying it would be time consuming but worthwhile.
He was concerned about abandonment costs. He said the Department of Revenue has confirmed that the state would underwrite deductions for abandonment costs under the PPT, and possibly credits. This is a major change from where you are today, he said, when abandonment is fully the lessee’s responsibility.
There are no public costs for abandoning platforms in Cook Inlet, but Eason said costs for platforms off California have been estimated at from $10.3 million to $129 million, although some of the California platforms are very big compared to what’s in Cook Inlet.
BP proposed a $110 million cost for abandoning Endicott in 1995 under net profit share leases, which included island removal; Eason said he thought $60 million to $80 million was a better estimate for that work.
He said the state has oil and gas facilities from the Kenai Peninsula to the North Slope and suggested a quick survey be done to give legislators a better sense of the state’s exposure. Borrowing from industry Eason had another concern in the cost area: Using unit operating agreements as an indication of costs, and directing Revenue to give substantial weight to that is risky, he said. “We don’t understand the implications,” he said, telling legislators that unit operating agreements are between working interest owners and the state has no authority to change them or require re-negotiation. They can be amended and while they are submitted to the state as a matter of record there is no guarantee the state has all of the amendments.
The idea in the bill is to rely on the diversity of ownership in a unit to make sure costs are fair, but some units have very concentrated ownership.
Another concern of Eason’s was adoption of royalty settlement methodologies. The Department of Natural Resources does the royalty accounting, and Eason said that compared to DNR, Revenue is in a much stronger position. Settlement methodology involves arbitration and he said arbitration in tax setting would not provide the same protection that the state has now. In the administrative and judicial arenas Revenue has some deference, which it wouldn’t have in arbitration. Arbitration also allows for limited discovery and Eason said that in his experience it is also difficult to make a case on a highly technical issue in arbitration. Re-openers important An effective way to re-visit an agreement is also important.
Eason said he couldn’t point to any agreements the parties were happy with for the long term that didn’t have a methodology to re-visit the terms. He said older agreements between companies tend to be pretty well defined, but said he’s had discussions with producers recently who share the opinion that they don’t like to get into deals without some kind of opportunity to correct if they’ve made a wrong decision.
He also asked where DNR was in the process. The bulk of expertise over time, including commercial analysts, is in DNR, Eason said. The department has real-time knowledge from working with industry day in and day out that would complement the Legislature’s outside consultants.
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