On January 16, 2013, Alaska Governor Sean Parnell introduced proposed legislation that would significantly alter Alaska’s Oil and Gas Production Tax regime. The current law, known as Alaska’s Clear and Equitable Share Act (“ACES”), was enacted in 2007 and is located in Alaska Statutes 43.55.011 et seq. This tax is levied on the net profits of oil and gas production from leases or properties in the state, except for the federal and state royalty share and oil and gas used in drilling or production operations. In this context, the term “net profits” is essentially the gross value at the point of production, also known as wellhead value (market price less transportation costs) less upstream operating and capital costs.
The tax that is levied on net profit per Btu equivalent barrel of oil and gas is the sum of (1) a base tax rate of 25% and (2) a progressive surcharge that is calculated on a monthly basis and starts at 0.4% for every $1 by which net profit per barrel exceeds $30, up to $92.50. For net profits over $92.50, the progressive surcharge equals the sum of 25% (0.4% times $62.50) plus 0.1% per every additional $1 of profit per barrel, up to a maximum progressive surcharge of 50%. Thus, the maximum total nominal tax rate is 75%. The tax rates under ACES, particularly the progressive surcharge, have been and will continue to be hotly debated.
ACES also has several tax credits that were designed to encourage oil and gas exploration and investment. These credits include a 20% credit for qualified upstream capital expenditures and a credit for 25% of annual net losses, defined as upstream capital and operating expenditures that the explorer or producer was unable to deduct against revenues in the previous calendar year. Companies can transfer the credits, or, if the company produces an average of not more than 50,000 barrels per day and has no tax liability, it can apply to the State of Alaska for a cash purchase of 100% of the value of the credit.
As introduced, the governor’s tax proposal would dramatically change the rate and credit structures. In general, the most significant changes are:
- Repeal of the progressivity surcharge, while leaving the base rate at 25%;
- For North Slope (north of 68 degrees north latitude) leases or properties, the 20% credit for qualified upstream capital expenditures would only be available for expenditures incurred before January 1, 2014;
- For North Slope leases or properties, the 25% credit for annual net losses based on expenditures incurred after December 31, 2013 could be carried forward for a maximum of 10 years if certain reporting requirements are met – the explorer or producer would no longer be able to apply to the State of Alaska for a cash purchase of the credit;
- An extension of the sunset date of the small producer credit, a non-transferable credit of $12 million that can be applied annually for producers of less than 50,000 barrels per day, phased out at 100,000 barrels per day; and
- For North Slope leases or properties, a revenue exclusion of 20% of the gross value at the point of production for oil or gas that is (1) produced from a lease or property that was not in a unit on January 1, 2003; or (2) produced from a participating area formed after December 31, 2011 for leases or properties in a unit established before January 1, 2003.
The Alaska State Legislature is in session from January 15, 2013 to April 14, 2013, and the governor’s bill will receive a lot of attention as it moves through the committee process. The bill is HB 72 on the House side and SB 21 on the Senate side and can be found at http://www.legis.state.ak.us/basis/get_bill_text.asp?hsid=HB0072A&session=28.