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Vol. 12, No. 7 Week of February 18, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Bill would limit deductions under PPT

Legislators concerned about deductions BP might claim under net profits tax for work on corroded Prudhoe Bay transit lines

Kristen Nelson

Petroleum News

Repairs in the wake of the discovery of corroded transit lines at the BP-operated Prudhoe Bay field on Alaska’s North Slope have legislators looking at amending the Petroleum Profits Tax passed last year to specifically exclude deductions for costs related to “repair and replacement of improperly maintained property or equipment.”

Senate Bill 80, introduced Feb. 9 by Sen. Tom Wagoner, R-Kenai, has 15 co-sponsors. House Bill 128, the companion bill introduced Feb. 12 by Rep. Kurt Olson, R-Kenai, has 16 co-sponsors.

The bill has bipartisan support in both houses.

Wagoner, a member of the Republican minority in the Senate, has the support of three of the four other minority members and 12 members of the 15-member Senate majority, the Bipartisan Working Group, including Senate President Lyda Green.

Wagoner said Feb. 8 that the bill resulted from an amendment offered to the PPT bill last year, but not approved. PPT does include a 30-cents-per-barrel exclusion to cover maintenance costs, Wagoner said. The intent of SB 80, he said is to disallow costs that occur because of improper maintenance. “And a case in point,” Wagoner said, is “BP’s current situation on the North Slope” involving the corroded transit line.

“The State of Alaska should not be put in a position where the people of the State of Alaska and their state treasury are being penalized due to poor maintenance practices,” he said.

Commissioners would make the call

The bill would empower the commissioner of the Department of Revenue, in consultation with the commissioner of the Department of Environmental Conservation and the chair of the Alaska Oil and Gas Conservation Commission, “relying on the standard practices of the industry” to determine the costs or portions of costs related to repair and replacement of improperly maintained property or equipment; costs incurred to maintain operational capability of facilities or equipment shut down because of improper maintenance; or operating facilities or equipment at diminished capacity “in proportion to the amount of diminished capacity that is caused by the improper maintenance of property or equipment.” Those costs would be disallowed in determining the taxable value of oil and gas production.

Sen. Gene Therriault, R-North Pole, said the amendment offered last year was not adopted because the 30-cents-per-barrel exclusion was already in the bill. He said he thinks there should be a mechanism in place where a determination is made “whether in fact there are categories of costs that spring from an event that should not be allowed.”

As to the determination of proper maintenance, Therriault said that would have to be worked out in the regulations based on industry norms and standards.

Therriault said part of the discussion around this bill is whether the state should sit and wait to see what deductions are claimed “or if there’s a category of costs that spring from certain actions that should just be disallowed up front.” That, he said, is the tool which this bill would provide.

Costs due to negligence already disallowed

Rep. Ralph Samuels, R-Anchorage, the House majority leader, said Feb. 12 that he hadn’t yet read the bill, “and the devil will be in the details on it.” He said he thinks most Alaskans would agree that if BP “was negligent in their maintenance, then no, they should not be able to deduct that.”

Rep. Mike Hawker, R-Anchorage, chair of the House Special Committee on Ways and Means, said the state hasn’t yet seen the initial results of the PPT and said he thinks “it’s a bit premature to be going back and re-cutting that bill.” He said that when the bill was written “we did listen to folks who expressed all of these concerns.” The 30-cents-per-barrel exclusion was based on the premise of not allowing deductions for regular operating costs.

As for negligence, there is already a “100 percent negligence exclusion in the bill,” Hawker said, in addition to the 30 cents, whose purpose is to not allow deduction of “the first fundamental, routine maintenance costs.”

The bill does mandate a complete detailed report by the commissioner of Revenue to the 2011 Legislature on the effect of the bill on the desired outcomes — more exploration and mitigating production decline — as well as its revenue consequences, he said.

“Just because a taxpayer claims a deduction, does not mean they are either entitled to it or ultimately receive it,” Hawker said. “You know, the state still is in charge here. The Department of Revenue through our own audit process will still be looking at any claim made and evaluating it very carefully.”

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