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One driver of PPT removing ambiguity
By Kristen Nelson Petroleum News
One driver behind the state’s profit sharing tax proposal is removing some of the ambiguity that has caused disputes, Larry Ostrovsky of the Department of Law’s oil, gas and mining section told House Finance Feb. 13.
Ostrovsky, the section head, was briefing the committee on what the oil, gas and mining section does.
In the oil area, he said, the section assists the Department of Natural Resources with documents for lease sales, particularly best interest findings. Litigation in the lease sale area has dropped off, he said, since the Legislature established 10-year best interest findings. Prior to that, he said, lease sales were often challenged, especially offshore sales.
The section also assists the DNR with unitization, where agreements between lessees have to be approved by DNR. Most disputes start after production Ostrovsky said disputes usually start after an area goes into production and they’re usually royalty or tax disputes.
The state can take royalties in-kind or in-value and both methods “have spawned significant disputes,” he said, with a long history of issues between the state and producers on how to properly value the state’s royalty share.
Value at destination is one issue, he said: “what’s the oil and gas actually sell for, what its value is.”
The other issue is the cost of transportation, mostly centered around tankering, “issues as arcane as the financing of the tankers and ... appropriate rates of return for tankers.”
The value at destination isn’t as simple as the sales price, he said: “producers tend to be vertically integrated companies. They’ll sell to themselves” and such sales often involve “complex swaps” with “an artificial price in consideration for a deal elsewhere.”
It can be difficult, he said, to understand true value, and disputes have historically “been very large and very protracted.” The disputes frequently resulted in royalty settlement agreements, which are formulas for payments and costs, he said, although sometimes there are negotiated settlements. Dollar volume determines approach The section handles a lot of royalty settlements and arbitration, and most royalty settlements are done in-house, he said.
But when there are significant amounts of money involved the producers retain major Lower 48 law firms. “And when they do, basically the state’s forced to do the same thing,” Ostrovsky said.
Big cases can involve tens of thousands or hundreds of thousands of documents and expert testimony. “They’re the types of cases that come up periodically and loom large,” and they’re not the type of things the state can be regularly staffed up to handle, he said.
Pipeline tariffs also take up a lot of the section’s time. The state’s royalties are based on netback, and the tariff is one of the costs of transportation which is subtracted. For trans-Alaska pipeline tariff cases, with proceedings in front of the Federal Energy Regulatory Commission, the state uses FERC lawyers. The money is large and it’s hard to keep a staff that big, Ostrovsky said. Production similar to royalty The state periodically has production tax issues with the producers, he said, and these are very similar to royalty issues.
In response to a question about whether taxes on industry for specific purposes would mean more litigation, Ostrovsky said there are two factors: the state tends to get litigation where there is ambiguity in statute or regulations; then it depends on the amount of money.
“Some pretty creative minds” will work on large amounts of money, he said.
Asked about the state’s proposed production profits tax, Ostrovsky said he couldn’t comment on it, but he did say that one of the drivers has been tax disputes and ambiguity. One of the things Pedro van Meurs and Dan Dickinson (both consultants to the administration on the profits tax) want to do, he said, is to remove ambiguity and make taxes easy to assess and collect.
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