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Vol. 19, No. 19 Week of May 11, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

ELF tussle continues

Parnell administration defends 2005 tax change that cost industry dearly

Wesley Loy

For Petroleum News

Alaska Gov. Sean Parnell has taken plenty of criticism for promoting tax relief for the oil industry in hopes of spurring production.

But even the governor’s generosity is limited, apparently, as administration lawyers continue to defend a 2005 policy change that took away a lucrative tax break for North Slope crude producers.

At stake in the dispute, which began under former Gov. Frank Murkowski, is “several hundred million dollars of production tax revenue,” state lawyers told legislators during the recently completed 2014 session.

The matter is now lodged in Anchorage Superior Court, where oil companies are appealing an administrative law judge ruling that favored the state Department of Revenue.

‘Aggregating’ oil fields

The dispute centers on Alaska’s largest oil field, Prudhoe Bay, and some smaller “satellite” fields in the vicinity.

These satellites include Aurora, Borealis, Midnight Sun, Orion, Polaris and Point McIntyre.

For many years, oil produced from these satellite fields enjoyed a much lower tax rate, due to the application of a tax break calculation known as the “economic limit factor,” or ELF.

The purpose of the ELF was to prevent mature, marginal or small oil fields from being shut-in prematurely due to an excessive rate of taxation.

Department of Revenue officials began to question the ELF tax break for the six satellites. They concluded the satellites and Prudhoe, where most of the oil from all the fields was processed, were “economically interdependent.”

On Jan. 12, 2005, the Department of Revenue issued a decision informing the oil companies that the satellites and Prudhoe would be combined, or aggregated, for ELF calculation purposes.

The effect was a major tax increase.

Companies appeal

The decision didn’t sit well with oil companies, who lost administrative appeals and now are appealing in the Superior Court.

The companies include Chevron, ConocoPhillips, ExxonMobil and Forest Oil. Although BP, which operates the Prudhoe Bay field, also was affected by the department’s decision, it elected not to join the appeal.

On Oct. 13, 2012, an administrative law judge, Christopher Kennedy, ruled in the Department of Revenue’s favor.

A state legal brief filed recently in Superior Court argues the Department of Revenue correctly used its “statutory and regulatory discretion” to aggregate the oil fields.

The questions now before the court, the brief says, are whether the Department of Revenue was required to adopt a regulation for its aggregation decision — Kennedy said no — and whether the oil company taxpayers were denied due process.

The case covers only a limited tax period, from Feb. 1, 2005, to March 31, 2006. That’s because the ELF statute was repealed effective April 1, 2006, as part of state tax reform.

Nevertheless, the production tax revenue at stake is huge, in the hundreds of millions of dollars, according to a state litigation summary provided to legislators.

Superior Court Judge Sen Tan is presiding over the case.



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