A Citizen’s Guide

Oil companies may be able to get a credit for repairing corroded pipelines at Prudhoe Bay under oil tax changes being considered by the Legislature, a revelation that has some members saying the bill needs clarification to eliminate the possibility of such credit.

Under current law, no construction in the Prudhoe Bay field is deductible from the state’s 15 percent tax on oil production.

The governor and Legislature are pondering a change in that policy to encourage investment in oil production facilities.

At the same time, BP Exploration Alaska has announced that it will shut down Prudhoe Bay to repair corroded pipes. A state official said Tuesday that the expense could be deducted and taken as a tax credit under both the House-passed bill and the governor’s original version, though the extent of the benefit would depend on whether the work is considered a “maintenance” or “capital” cost.

Giving credit for the repair of existing pipelines doesn’t sit well with some legislators, particularly if the necessary repairs turn out to be the result of oil company negligence.

“I’m not very excited about giving credits for the type of situation where we’re talking about extraordinary maintenance and repair,” said Rep. Mike Kelly, R-Fairbanks and an advocate of the House bill. “I don’t see how that ties very directly to the very reason for the credits, which is getting the extra barrel to the pipeline.”

To prevent such credits, Kelly said, the Legislature probably needs to add “some kind of amendment or exclusion” to the legislation. He said such an amendment appeared to be under formation Tuesday evening.

The bill offered by the governor, and modified by the House last week, would allow oil companies to deduct maintenance and capital spending from the taxable value of their oil before paying the state production tax. The House production tax would start at 25 percent; the governor proposed 20 percent, both well above current law.

Kelly said he had no problem with allowing such a deduction. He called it standard tax policy.

Both bills go farther, though, by allowing companies to reduce their tax payments by applying 20 percent of capital spending alone as a credit against their final production tax bills.

The House bill also would gradually lower a company’s production tax rate, from 25 percent down to a minimum of 20 percent, as the company’s level of capital spending in Alaska increased.

Such offers make the definition of “capital spending” a critical factor in determining what kind of work will trigger the 20 percent tax credits under both bills and, under the House bill, the lower production tax rate.

Robynn Wilson, director of the Department of Revenue’s tax division, said BP’s coming work at Prudhoe Bay, whether considered maintenance or capital spending, would be deductible from the taxable value of the oil under both bills.

She could not say whether the Prudhoe work also could be used as a credit against the production tax bill under both bills or as a trigger, under the House version, to reduce the overall production tax rate. That will depend on whether the work is considered a “maintenance” expense or a “capital” expense, she said.

Sen. Gene Therriault, R-North Pole, said he was working on an amendment Tuesday that would exclude tax credits for repairs due to poor maintenance.

An administration consultant, Pedro van Meurs, also said he had offered some clarifying language.

Rep. Ralph Samuels, R-Anchorage and another advocate of passing the House bill, said he expected to leave the definition questions to the administration. He said he wants the bill to encourage maintenance but doesn’t want the state to pay for any oil company mistakes at Prudhoe Bay.

“If it was negligence on their part, then of course we shouldn’t pay for it,” he said.

Kelly said it’s important to get the issue clarified so the Legislature can wrap up the oil tax changes and start collecting an additional $5 million to $6 million a day.

Staff writer Sam Bishop can be reached at 459-7504 or sbishop@newsminer.com. Staff writer Stefan Milkowski in Juneau contributed to this report.