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Vol. 12, No. 8 Week of February 25, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Legislature revisits PPT deductions

Senate begins hearing bill which would exclude costs of repair or replacement of improperly maintained facilities

Kristen Nelson

Petroleum News

Both the Alaska House and Senate are considering bills to amend the credit allowance for the Petroleum Profits Tax passed last year so that companies cannot deduct costs of repair or replacement for improperly maintained facilities or for facilities that have not been maintained at all.

Senate Bill 80 had a hearing in Senate Resources Feb. 21.

Senate Resources adopted a committee substitute which adds the commissioner of the Department of Natural Resources to those the commissioner of Revenue will consult with under the bill on maintenance issues (others are the commissioner of the Department of Environmental Conservation and the Alaska Oil and Gas Conservation Commission).

The PPT contains 18 things that could not be deducted as lease expenditures. SB 80 adds a 19th: costs determined by the commissioner of Revenue (in consultation with the commissioners of DEC and DNR, and the Alaska Oil and Gas Conservation Commission) “and taking into consideration the standard practices of the industry” to be “(A) related to the repair and replacement of property or equipment that was not maintained or was improperly maintained; (B) incurred to maintain the operational capability of facilities or equipment shut down because of a lack of or improper maintenance of property or equipment; or (C) incremental operating expenses incurred as a result of operating facilities or equipment at diminished capacity when that diminished capacity is caused by the lack of or improper maintenance of property or equipment.”

Sen. Bert Stedman, R-Sitka, noted that the PPT already contains “a whole litany of deductions” including “costs arising from fraud … willful misconduct or gross negligence,” and asked how those items compared to items that were not maintained. “It sounds to me like it’s related to negligence.”

Bill sponsor Sen. Tom Wagoner, R-Kenai, said “a much higher level of proof” was required on those items already in the PPT than is required in the amendment.

The point of this is not punitive, Wagoner said, but to ensure that write-offs have a final review by a committee.

How BP proposes to handle repair and replacement work on the Prudhoe Bay transit lines has been a concern among legislators. Wagoner noted that BP has said it would write off $11 million in credits and they are only one of the owners. One of the reasons for the bill, he said, “is to give that a good review and see if that’s allowable or not.”

Regulations would have to be developed

Tom Bullock, the legislative drafter, said “everything that will be on the PPT returns will be subject to audit by the Department of Revenue.”

“What this bill does,” Bullock said, “is it sets up a standard that the departments will probably implement by regulations because this language — taking into account the standard practices of the industry — is intended to recognize that there are things that you would normally do when you’re maintaining a field, that it’s just prudent to do that to avoid repairs: fix something early on rather than wait for a significant failure later.” The commissioner, he said, will have to determine what the standards are vs. what was reported on returns.

Senate Resources Chair Charlie Huggins, R-Wasilla, asked Bullock if he was comfortable as a professional that the terms can be described. Bullock said “it’s not a matter of legal interpretation; plain meaning would apply to … these terms.”

Huggins said he wanted to make sure that the language used works for all parties.

Bullock said he had participated in a meeting with people from the departments named in the bill, “and we discussed the authority for them to define in regulations and to make the determinations as to what the standard practices are.” The language in the bill “is general authority to them to go out and figure out what those standard practices so they can apply them appropriately to their audits as they proceed.”

Norman: often no standard practices

John Norman, chair of the Alaska Oil and Gas Conservation Commission, said there are certain standards in place, “they’re generally voluntary guidelines” such as those of the American Petroleum Institute and professional societies. If the commission were given this task, Norman said, the commission would need to promulgate regulations and “flesh this out to give meaning.”

Often, he said, “there are no standard practices that apply across the board to refer to; in other cases they are evolving just as new technological innovations evolve.”

He said it would take “a fair amount of work” to develop regulations.

In a letter to Wagoner, Norman said the commission’s “main concern with the bill is the absence of a precise definition of improper maintenance.” In some instances, he said, it will be obvious that there has been improper maintenance, but in other cases the commission “will be required to consider design, installation, operation and maintenance … and, making some determinations will require detailed investigation … and application of expertise not readily available within this agency.”

Norman said the commission understands and agrees with the intent of the legislation “which is to prevent an operator from shifting financial responsibility to the State for costs resulting from the operator’s improper maintenance practices. We do, however, wish to point out some of the practical difficulties that may arise in determining whether maintenance has been improper.”

AOGA opposes bill

The committee only had time to take testimony from Judy Brady, the executive director of the Alaska Oil and Gas Association. Huggins said the committee would continue the hearing; it meets again Feb. 23.

Brady said the AOGA Tax Committee reached consensus opposing the bill.

In lengthy testimony she said AOGA opposes SB 80 for four reasons.

AOGA believes the state is already protected from inappropriate lease expenditure charges under current law.

The association also believes SB 80 “has unintended, but potentially significant, implications that could well extend far beyond the specific situation at Prudhoe Bay that was the impetus behind the Bill.”

AOGA also believes SB 80 is an ex post facto law, and as such is forbidden by both the federal and Alaska constitutions.

“Fourth,” she said, “SB 80, because of the ambiguity of its language creates ambiguity throughout the entire PPT legislation related to costs and credits.”

Brady said Cook Inlet AOGA members are concerned about the bill because facilities there will “eventually need to be replaced or significantly repaired in order to remain in operation. When those facilities and structures are eventually replaced, there is nothing in SB 80 to protect them from claims that they were ‘improperly’ maintained” and costs of doing that work could be disallowed. That uncertainty could, she said, lead to facilities or fields being shut-in rather than remaining in production longer.

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