Measurement an issue in new oil tax law

Associated Press

Implementation of Alaska’s new oil tax law is getting complaints from the people it was designed to help.

Oil industry officials say proposed new rules are confusing and may not be practical to implement.

The Anchorage Daily News (http://bit.ly/12vLpi3 ) reports some of the difficulty is deciding what will be considered “new oil” that gives petroleum companies the biggest tax breaks.

Gov. Sean Parnell and Republicans controlling both houses in the Legislature pushed through the new tax system. They said lower rates and new incentives were needed to stop or slow a decline in North Slope oil production.

Critics called the measure a giveaway to petroleum companies already earning healthy profits. An effort is under way to let voters decide whether to repeal the law.

The new law features a 35 percent base tax rate and $5 allowance per taxable barrel of oil produced. The allowance would apply to what would be considered new oil and production that also would qualify for a 20 percent tax break. Certain units comprised exclusively of leases with higher royalty rates, and those not getting royalty relief from the state, could qualify for a 30 percent tax break.

Administration officials have said they expect the vast majority of Alaska’s legacy fields would be subject to a 35 percent base rate and a per-barrel allowance on a sliding scale, higher at lower prices, zero at higher prices, around $160.

For oil classified as “new” North Slope production, the revised law sets aside at least 20 percent of the oil’s gross value and exempts it from the profits tax. An analysis by Democrats in the state House concluded that will translate into a tax savings of $7 or more per barrel.

The Parnell administration has said it will not give tax breaks freely. One method proposed for measuring new oil is through a “multi-phase flow meter” on new wells that could calculate how much oil is in the mixture of oil, natural gas and water drawn up from reservoirs.

However, Marie Evans, ConocoPhillips’ tax counsel, said in August at a Department of Revenue hearing that a meter required to continuously measure oil at individual wells, before processing, can cost up to $750,000. She also said the accuracy varies depending on the mix of components.

The state should expect oil companies to demonstrate compliance “rather than setting forth an enormously daunting burden of proof that we have to overcome,” Evans said at the Aug. 13 meeting.

The department is asking industry how to measure new oil, and metering at every well is just one option, Deputy Revenue Commissioner Bruce Tangeman said. Industry will not write the rules, he said.

If accurate measurement is impossible, companies will not get the break for new production, he said.

“The whole point was for the state to set a high bar, a high standard and then have industry, the experts, the producers, the people who do this for a living, come to us and say, we can measure it this way with the technology we have,” Tangeman said.