State revenue officials struggling to implement Alaska's new oil tax
law are getting complaints from the industry that their proposed new rules are
both bewildering and too demanding.
While the overall effective date was Monday, the big oil tax changes, including a flat tax on oil profits, become law on Jan. 1. As the Parnell administration tries to craft rules to implement the controversial law, Democrats who fought it all along are launching fresh attacks on it.
The oil companies want the broadest possible definition of "new oil" because new production will be entitled to the biggest tax breaks. That is intended as an incentive for the companies to invest and produce oil that wouldn't have been produced otherwise.
The Parnell administration insists it's not going to give the tax breaks freely and proposes that in some cases the flow of oil be metered from individual wells to prove that new oil is being produced. But industry officials are protesting, saying such metering is impractical.
Democrats in the Legislature warn that too loose a standard could allow vast volumes of oil that was going to be produced anyway to escape the oil profits tax, the state's main source of revenue.
For instance, in a document published Oct. 16 to explain its proposed new rules, the Department of Revenue says if water is injected into a newly installed well in a new area -- a common process to force out trapped crude oil -- and that water pushes through a reservoir and sweeps oil into existing, already producing wells, that counts as new oil.
"I understand that language. I know what they are trying to do. But in reality, it's a fool's errand," said Rep. Beth Kerttula, a Juneau Democrat who serves as House minority leader and who previously worked as a state oil and gas tax lawyer. She said she was outraged by the proposed rules.
"You will never be able to break those hydrocarbons apart. You will never be able to tell what's old versus new."
Democrats are especially upset because the Republican-controlled Legislature agreed to apply the extra tax break to certain new production from Alaska's aging but still highly profitable giant oil fields, including Prudhoe Bay and Kuparuk. Those fields accounted for about 90 percent of North Slope production last year.
It could all be treated as new oil before too long, Kerttula said.
"Couldn't be further from the truth," answered Bruce Tangeman, the state's deputy revenue commissioner. If accurate measurement ends up being impossible, the companies won't get the sought-after tax break for new production, he said.
"The whole point was for the state to set a high bar, a high standard and then have industry, the experts, the producers, the people who do this for a living, come to us and say, we can measure it this way with the technology we have," Tangeman said.
The department is asking industry how to measure new oil. Metering at every well is just one option. But the industry won't get to write the rules, Tangeman said.
TAX BREAK FOR NEW OIL
Even the tax break's name is hard: It's called the "gross value reduction," formerly known as the "gross revenue exclusion."
Gov. Sean Parnell and Republicans in the Legislature pushed through Senate Bill 21, the new tax system. They argued that lower tax rates and new financial
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