After a bill gets signed into law, coming up with the regulations to implement it is supposed to be the boring part. But when it comes to oil taxes, the way regulations are written could mean millions of dollars for either the state, or for oil companies.
Both supporters and opponents of the recently passed tax overhaul aren’t totally pleased with how the regulatory process is going.
One of the major goals of Gov. Sean Parnell’s tax package was to get new oil into the pipeline. On top of basically lowering the overall rate, the law that passed this spring also included a provision that would exempt 20 percent of new oil from taxes period.
Sounds like a major incentive, right? Except right now, the oil industry isn’t satisfied with how the state’s trying to define new oil or measure it.
“The law was designed to provide a benefit for new oil coming down the pipeline, and that is the goal of all of us. And to the extent that confusion and conflicting regulations cause a problem with that and make some things less economic of uneconomic, it’s not satisfying that goal,” says Michael Hurley, who handles government relations for ConocoPhillips.
Hurley says the Department of Revenue’s proposed regulations don’t match the intent behind the new oil tax law.
“Some of the rules we couldn’t even comply with the way they’re currently written.”
Conoco’s biggest concern is over what’s known as “metering” in industry speak — basically, figuring out just how much oil is coming out of the ground and going into production. State regulators want measurements to come at the wellhead so you know you’re not accidentally counting oil from spots that have already been in production. Which would require producers to spend a lot of money on new equipment.
Other producers also want the regulatory language changed.
“It’s really cumbersome,” says Kara Moriarty, who represents the Alaska Oil and Gas Association (AOGA). “It’s a really hard read.”
In a 20-page letter to the state, AOGA even asked if the regulations could be changed so producers can opt out of the incentive for new oil — known as the “gross value reduction” — altogether.
“If the incentive is so hard and so expensive to achieve, it may not be a cost-benefit to go through the process to determine whether it’s new oil or not or whether we just want it to be treated as legacy production.”
It’s not just oil companies who are worried about how the state is defining new oil. A group of Democratic lawmakers who strongly opposed the new oil tax package when it made its way through the legislature this spring have called the regulations “problematic” in their own written testimony. While they’re on opposite sides of the issue as the oil companies, the Democratic caucus has some of the same overarching complaints about clarity.
“It is an irony,” says Rep. Beth Kerttula of Juneau.
Kerttula says that if the regulations are written too broadly, everything — even oil that’s already being produced — could count as new. At current prices, that could mean a $7 tax break on every qualifying barrel. And that money stacks up. But as far as whether it adds up to millions, tens of millions, or more:
“Now no one knows how much money how much money the state is going to be given away, and we don’t know why or what for because we don’t have this good definition of what really needs to be incentivized.”
And she adds, if the definition’s vague, the state could also face lawsuits on top of forgoing revenue.
Kerttula says the problem isn’t with the regulators. She has nice things to say about them doing what they can with the statutes they were given, something echoed by the oil industry.
Kerttula says the issue is with the underlying law. The final exemption for new oil was decided pretty late in the legislative process, and she says it wasn’t defined narrowly enough.
“I don’t understand very well how people could have not seen this coming, when again and again and again, we put it out there and talked about it, and said, ‘Why would you be giving these incentives when we’re being unclear where they’re going to be given, how it’s going to work, and what’s going to happen to the state.”
So now, all that is in the hands of regulators. The Department of Revenue couldn’t comment on the public input they received on their rules as a policy, but Commissioner Bruce Tangeman says his agency is going through the input now. The Department of Law will go over the regulations this fall, and then the legislature will have a chance in the spring to review the rules and see if they match up with lawmaker’s intent.