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Alaska works on exploration credit rules Industry ‘disappointed’ with several provisions in draft production tax regulations, but compliment others Larry Persily Petroleum News Juneau Correspondent
The Alaska Department of Revenue is working its way through 18 pages of comments from the Alaska Oil and Gas Association on draft changes in state production tax regulations, including rules for the exploration tax credits adopted by legislators this past session.
Association officials testified at the department’s first public hearing on the regulations that the group was “disappointed” at some of the provisions, though the written testimony also complimented several of the proposals.
The department was scheduled to issue a revised set of draft regulations Aug. 22, with a second public hearing set for Sept. 5.
The regulations are a “work in progress,” said Dan Dickinson, director of the department’s Tax Division. “As usual, AOGA has done a thorough job of analyzing the regulations,” he said. “There are some areas where they made useful suggestions we are considering.”
Dickinson said he hopes to have final regulations ready this fall, to take effect at the start of the new tax year Jan. 1. AOGA focus on tax credits Much of the association’s attention is focused on the regulations for implementing the tax credits of Senate Bill 185, which is heavily touted by the Murkowski administration as key to attracting increased oil and gas exploration dollars to the state. The measure allows companies to deduct from their production taxes to the state up to 40 percent of the cost of exploration work.
Gov. Frank Murkowski has pointed to the incentives as essential to Alaska’s economic future. “We don’t see the capital being invested here because other oil regions are offering better incentives,” he told the Kenai Chamber of Commerce when he signed the bill into law in June.
The association referred to the political and financial intent of the tax credit legislation in its comments on the draft regulations.
“It is now politically safe, and fiscally appropriate, for the Department of Revenue, in implementing that policy decision, to take a generous approach in sowing the seeds today for the harvest to be reaped tomorrow,” the industry association testified at the Aug. 15 hearing in Anchorage. Expenses eligible for credits at issue “AOGA had hoped the regulations would interpret even the occasionally awkward provisions in (the statute) … in a way that would further the paramount goals and objectives of that legislation,” according to the association’s written testimony.
“We were therefore disappointed to find that the proposed regulations fall short,” AOGA said, listing its concerns:
• The draft regulations set limits on the kinds of expenses that may be eligible for credits, as opposed to “viewing the statute as setting a minimum for the kinds of costs that must be allowed.”
• Disallowances for the credits are too broad.
• The regulations do not clear up all of the potentially ambiguous terms in statute.
“When the department is held accountable by the Legislature and by the governor for how it implements (the law),” the association said, “the appropriate criterion for judging the department’s success or failure will be how much exploration actually occurs over the coming years, and not how much production tax revenue the department manages to preserve by the way it administers the tax credit.” Credits could cost state $50 million The department’s fiscal analysis of the tax legislation that was requested by the governor shows the credits could cost the state $50 million a year in reduced tax revenues for the four years it will be in effect, through 2007.
Based on Fiscal 2002 tax revenues, $50 million in credits would equal 10 percent of the state’s annual oil and gas production tax income. If exploration activity doubles under the credit provisions, it could cost the state $100 million a year, the department estimated.
“During the four years the exploration credit in this legislation would be available, there likely would be minimal new revenues to offset the revenue loss,” the department stated in its May 11 analysis, explaining that any increased production from wells drilled during that period would not produce significant revenue until after 2007.
Much of the association’s testimony dealt with the need for defining terms used in determining what expenses are eligible for the exploration credits.
Dickinson said Aug. 20 he was waiting for AOGA to provide suggested definitions for the regulations, to help address many of the group’s concerns.
Not all of the comments were critical. The association complimented the department on its move to simplify reporting and auditing of capital investment in new tankers. “We applaud the Department of Revenue for taking pragmatic approach here.”
Forests would be felled A couple of the association’s other comments were less gracious.
Regarding a draft regulation that each participant in a well must keep copies of all documents, rig logs and drilling logs, the written testimony said: “Whole forests would have to be felled in order to get the paper to make separate copies of all that material.”
The association suggested that companies be allowed instead to make available any documents at the department’s request.
The proposed regulations also cover:
• Expanding the number of reporting sources used in determining the prevailing value of North Slope oil.
• Determining prevailing value for Cook Inlet oil.
• How parties in an exploration project may divide the tax credits. The association responded: “The parties should be able to decide for themselves whether that division is on the basis of costs incurred, ownership percentages, or something else.”
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