HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PETROLEUM NEWS BAKKEN MINING NEWS

Providing coverage of Alaska and northern Canada's oil and gas industry
March 2011

Vol. 16, No. 10 Week of March 06, 2011

State legislators hear two tax bills

Governor’s bill to change ACES moves out of House Resources; Senate Resources considering Wagoner’s bill for development credits

Kristen Nelson

Petroleum News

Two oil and gas tax bills are in play in the Alaska Legislature, one adding credits for development work at new fields and the other revamping the state’s production tax.

House Resources voted out an amended version of the governor’s bill making changes in ACES, Alaska’s Clear and Equitable Share, on March 28. That bill moves next to House Finance.

Senate Resources is hearing a bill by Sen. Tom Wagoner, R-Kenai, to provide credits for development work at new fields; the committee has additional hearings scheduled on the bill March 7 and 9.

Amendments to HB 110

While House Resources Co-chair Paul Seaton, R-Homer, and Reps. Berta Gardner, D-Anchorage, and Scott Kawasaki, D-Fairbanks, were unsuccessful in amendments which would have removed the major impact of the governor’s bill, House Bill 110, lowering the state’s production tax, the committee did pass a number of amendments.

Co-Chair Eric Feige, R-Chickaloon, proposed a change to language in the bill which would have excluded any lease in a unit at the end of 2010, or previously in a unit, from a lower tax rate offered for new developments.

As Deputy Commissioner of Natural Resources Joe Balash told the committee, many tracts of land have been in units over the past 35 years, and the change of language, by eliminating “or previously in a unit,” recognizes that once a tract comes back into the pool of leasable state land it would be available for re-unitizing and would be eligible for the 15 percent tax rate for new developments. The trigger date was also changed from Dec. 31, 2010, to Dec. 31, 2008, a date which would exclude Point Thomson tracts from the reduced production tax for new developments.

Seaton proposed a number of amendments which were adopted: A five-year extension of the small producer tax credit to 2021; an increase in the small producer credit from $12 million to $15 million per year; an extension of the sunset for exploration tax credits by five years.

An amendment to put an immediate effective date on the proposal in the governor’s bill to allow refundable tax credits for exploration to be used in one year instead of six was amended at the suggestion of Commissioner of Revenue Bryan Butcher who said it was difficult for the department to administer tax credit changes in the middle of the year; the change was made retroactive to Jan. 1, 2011.

Information an issue

The bill was amended as proposed by vice-chair Peggy Wilson, R-Wrangell, to allow the Department of Revenue to provide information to the Legislature related to how credits are used. Legislators have been frustrated because tax credit information they receive does not indicate whether credits were used for drilling or maintenance.

The amendment would allow Revenue to provide data to the Legislature, Legislative Legal Services attorney Donald Bullock told the committee. Other statutes feed this type of information to the department and the department can supplement with reasonable regulatory requirements for additional information, he said.

Lennie Dees, a master auditor with Revenue, told the committee he believes the wording in the amendment would allow the department to give legislators information in categories they requested by 2012.

Two amendments proposed by Gardner and Kawasaki were also adopted, one keeping the period the state has to audit taxes at 6 years (the governor’s bill proposed a reduction to 4 years), and one adding a tax credit to encourage Alaska hire. That amendment provides a tax credit for each percentage above 80 percent that producers increase their percent of Alaska workers. Butcher said the administration has constitutional concerns with the amendment.

Rep. Bob Herron, D-Bethel, said he wants to see the base tax rate in ACES reduced from 25 percent to 20 percent, and said he would work at that in the next committee.

The bill as amended passed the committee 7 to 2 on Feb. 28, with Gardner and Kawasaki voting nay.

A 5-year tax holiday

Wagoner’s bill, Senate Bill 85, proposes a five-year production tax holiday for new developments in the state, capped at 100 percent of the development cost.

The state offers exploration credits and there are credits for producing fields, but this bill, based on Alberta’s royalty tax holiday, is targeted at encouraging new developments.

Bullock told the committee that the bill establishes when the credit can be earned, which starts on a lease or property once a pool capable of production has been discovered and runs until the field goes into production. Costs included would be those to get the field into production, including additional drilling and facilities.

The credit is not transferable and cannot be used to reduce a tax liability below zero.

The Alaska Oil and Gas Conservation Commission would be tasked with certifying that a field met the requirement of capable of producing and calls for the Department of Natural Resources to certify when production begins.

After discussions with the departments, however, Wagoner said that probably AOGCC was the logical choice for both certifications.

Wagoner also said it would probably be appropriate do discuss a sunset for the credit.

Development issues

Division of Oil and Gas Director Kevin Banks told the committee at a Feb. 28 meeting that development usually takes at least four years and has taken as long as 11 or 12 years after exploration and seismic is completed.

The exploration well and any other exploration work, such as seismic, would not be eligible for the SB 85 credit, Banks said.

What is eligible for this credit would be “delineation, where further wells are drilled to get a better understanding of the extent of the prospect that has been discovered,” and the actual development, including construction of surface facilities, roads, pipelines, flowlines and processing facilities.

That period, between a discovery and production, typically ranges from four to seven years, Banks said.

There was some concern that operators might “gold plate” development costs because they were going to get a credit for them against production taxes.

Banks said there was always some concern about gold plating when the state is paying part of the cost, but the issue for the operator will be whether it can get enough production in the first five years to generate tax liability against which to take the credit. An operator would be “taking a chance inflating costs against production in the first five years,” Banks said.

AOGCC Commissioner Cathy Foerster said she thought gold plating could become an issue if an operator decided that while his initial projection was only 20,000 barrels per day, because of the credit he would go ahead and build facilities for the 80,000 bpd he hoped to achieve on expansion.

Foerster hypothesized that, with a sunset in the bill, the operator would see the end of the credits before he could expand, and so might build larger facilities in the belief that his expansion plans would work, thus securing maximum credits for his development costs.

Wagoner noted toward the end of the Feb. 28 meeting that the credit wasn’t meant to be something that pays total costs, “it’s something out there to incentivize and to help them get their financing” so they can go ahead with the project.






Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- http://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.