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Oil and Gas Production Tax
2016 Annual Report


Oil and Gas Production Tax Reports





AS 43.55

Description

Alaska levies an annual tax on oil and gas produced in the state. The tax is based on the net value of oil and gas, which is the value at the point of production multiplied by the taxable volume, less all lease expenditures allowed under AS 43.55.165. Lease expenditures include certain qualified capital and operating expenditures. The most recent major change to the tax was in Senate Bill 21, passed in 2013 and effective Jan. 1, 2014.

Rate
For fiscal year 2015, the production tax rate as revised by SB 21, was 35% of the production tax value of the oil and gas. Tax rates for oil and gas produced from the Cook Inlet are effectively capped at the rate that was imposed on oil and gas produced from each lease or property during the period April 1, 2005, through March 31, 2006. Tax rates for North Slope Gas Used in State are capped at 17.7 cents per Mcf.

Returns

Taxpayers are required to report all values, volumes, transportation costs, expenditures, and credits used to calculate their estimated monthly installment payments in the monthly report. The monthly reports are due the last day of the month following the month of activity. Annually, on March 31, taxpayers submit an annual tax return that also “trues up” any tax liabilities or overpayments made throughout the year.

Exemptions

The tax on oil and gas is levied on all production except for state and federal royalty production. Oil and gas used on a lease or property for drilling, production, or repressuring is not taxed.

Credits

The following credits are available for use against the liability of this specific tax: Exploration Incentive, Assignable Exploration Incentive, Education, Qualified Capital Expenditure, Well Lease Expenditure, Carried-Forward Annual Loss, Transitional Investment Expenditure, New Area Development, Small Producer, Alternative Credit for Exploration, and Cook Inlet Jack-Up Rig Tax Credits. Some of these credits may also be redeemed by the State of Alaska for cash. For specific information concerning these credits, see the Description of Credits section.

Disposition of Revenue

All revenue derived from the oil and gas production tax is deposited in the General Fund, except that payments received as a consequence of an assessment or litigation are deposited in the Constitutional Budget Reserve Fund (CBRF).

History

1955 – The Territorial Legislature enacts an oil and gas production tax of 1% of production value.

1967 – A 1% disaster production tax is enacted to provide relief after the Fairbanks flood.

1968 – The Alaska Legislature increases oil and gas production tax from 1% to 3% of production value.

1970 – The Legislature repealed the disaster oil and gas production tax. The Legislature changes the oil production tax to a graduated tax with rates of 3% on the first 300 barrels per day per well, 5% on the next 700 barrels per day per well, 6% on the next 1,500 barrels per day per well and 8% on production exceeding 2,500 barrels per day per well.

1972 – The Legislature establishes a minimum oil production tax based on “cents per barrel” equivalent to percent of value tax on oil with wellhead value of $2.65 per barrel.

1973 – The Legislature revises the “stair step” rate schedule to lower production levels. The Legislature indexes the cents per barrel minimum to the wholesale price index for crude oil published by the U.S. Bureau of Labor Statistics.

1977 – The Legislature raises the nominal gas production tax rate to 10%. The Legislature raises the nominal oil production tax rate to 12.25% and adopts the oil and gas economic limit factors.

1981 – As part of legislation that repealed the separate accounting oil and gas corporation income tax, the nominal tax rate on oil produced prior to 1981 was raised to 15% and fields coming into production after 1981 are taxed at 12.25% for five years after which the rate increases to 15%. The oil economic limit factor is now subject to a rounding rule so that if the calculated factor is greater than or equal to 0.7 during the first 10 years of production, the factor is set to 1.0.

1989 – The Legislature changes the economic limit factor for oil production taxes to include a field size factor in the formula, fixes the production at the economic limit (not rebuttable) at 300 barrels per well per day, and drops the rounding rule. The Legislature fixes production at the economic limit for gas production at 3,000 mcf per well per day.

2002 – The Legislature authorized credits of up to 50% for contributions of not more than $100,000 and 75% of the next $100,000 in contributions made to the Alaska Veterans’ Memorial Endowment Fund. The tax credit expired July 1, 2003.

2003 – To encourage drilling for oil and gas within the state, AS 43.55.025 provided a new tax credit for exploration costs. The minimum credit is 20% and the maximum 40% for qualified expenditures.

2005 – Prudhoe Bay area oil fields are aggregated for purposes of calculating the economic limit factor, effective Feb. 1, 2005.

To expand the tax credit for exploration enacted the previous year, the deadline was extended until July 1, 2010, for qualifying work south of the Brooks Range (for instance, non-North Slope). New rules also changed the 3-mile and 25-mile rules for the Cook Inlet allowing closer distances between potential exploration targets and existing wells and production units.

The Legislature extended and amended the requirements applicable to the credit that may be claimed for certain oil and gas exploration expenses incurred in Cook Inlet against oil and gas production taxes. This legislation also amended the credit against those taxes for certain exploration expenditures from leases or properties in the state. The legislation was signed into law July 21, 2005, with an immediate effective date.

2006 – In August 2006, legislation was passed during a special session that made sweeping revisions to the oil and gas production tax. The Petroleum Production Tax (PPT) established new tax rates on oil and gas production; repealed the economic limit factor; and provided numerous credits for certain qualifying expenditures and taxpayers.

2007 – The Legislature amended PPT legislation in a special session that ended in November 2007. Like the PPT legislation enacted in 2006, the ACES tax is levied on the production tax value of oil and gas produced in the state. The base tax rate under ACES is 25% (it was 22.5% under PPT) and the progressive surcharge tax rate under ACES is 0.4% for every dollar the production tax value per barrel exceeds $30 (it was 0.25% on production tax values exceeding $40 per barrel under PPT). For production tax values greater than $92.50 per barrel, the progressivity rate changes to 0.1% for every additional dollar of production tax value.

2008 – The Legislature amended the Education Credit provisions to include cash contributions accepted for secondary-level vocational courses and programs by a school district in Alaska and by a state-operated vocational technical education and training school.

The Alternative Credit for Exploration was increased from 20% to 30% for certain projects, and an oil and gas tax credit fund was established for the cash purchases of tax credit certificates.

2010 – The Legislature amended the alternative tax credit provisions to add tax credits for drilling exploration wells using a jack-up rig in the Cook Inlet. The first three unaffiliated persons drilling wells that penetrate and evaluate prospects in the pre-Tertiary zone are entitled to credits of 100%, 90% or 80%, respectively, of the first $25 million of exploration expenditures. Other changes include a new 40% tax credit for well lease expenditures incurred south of 68 degrees north latitude, elimination of the splitting of tax credits for lease expenditures incurred in the state south of 68 degrees north latitude after June 30, 2010, and elimination of the future investment requirement for the purchase of transferable tax credit certificates by the state.

The Legislature amended the Education Credit by increasing the maximum credit allowed from $150,000 to $5 million effective Jan. 1, 2011. In addition, the Legislature expanded contributions eligible for the credit to include contributions made for construction and maintenance of facilities by state-operated vocational education schools and two- or four-year colleges. The increase in the credit from $150,000 to $5 million expires Dec. 31, 2013. The maximum credit allowed was to revert to $150,000 on Jan. 1, 2014. That date was extended in 2011 (see below).

2011 – The Legislature enacted legislation extending the date that the $5 million annual Education Credit limit expires from Jan. 1, 2014, to Jan. 1, 2021. It is then scheduled to return to $150,000. In addition, the Legislature expanded contributions eligible for the credit to include contributions made after June 30, 2011, to annual intercollegiate sports tournaments, Alaska Native cultural or heritage programs for public school staff and students, and a facility in the state that qualifies as a coastal ecosystem learning center under the Coastal American Partnership.

2012 – The Legislature enacted legislation that established a Corporate Income Tax Credit for a liquefied natural gas storage facility to be paid out of the Oil and Gas Credit fund. Also, it established a limitation on tax for oil and gas produced from leases or properties outside the Cook Inlet sedimentary basin that do not include land north of 68 degrees north latitude. The tax limitation is set to expire in 2022. Further, Exploration Tax Credits were established for drilling of exploration wells and seismic exploration expenditures in specific areas. These are referred to as the Middle Earth Basin Credits.

2013 – On May 21, 2013, SB 21 was signed into law. Major provisions of this law are:

  • The production tax rate amended to 35% of the annual PTV in AS 43.55.011(e), and eliminates the progressivity index under AS 43.55.011(g) effective Jan. 1, 2014.

  • Established AS 43.55.160(f), which defined production subject to the grow value reduction (GVR). The GVR is 20% of the Gross Value at the Point of Production (GVPP) for production that qualifies.

  • Establishes AS 43.55.160(g), which is an additional 10% reduction in GVPP for lease or properties qualifying under AS 43.55.160(f), which all leases have greater than a 12.5% royalty.

  • Amends Qualified Capital Expenditure (QCE) Credits for the area north of 68 degrees north latitude. The law eliminates credits for QCEs incurred after Dec. 21, 2013; however, QCE Credits for expenditures incurred south of 68 degrees north latitude remain. Amends qualified capital expenditures incurred south of 68 degrees north latitude are allowed to remain.

  • Changed the timing of applicability of credits so that 100% of credits based on expenditures incurred north of 68 degrees north latitude after Jan. 1, 2013, are available for immediate use.

  • Carry-Forward Annual Loss Credits incurred north of 68 degrees north latitude increase to 45% of excess lease expenditures beginning Jan. 1, 2014, through Dec. 31, 2015, and decrease to 35% of excess lease expenditures beginning Jan. 1, 2016. The credit for annual losses incurred south of 68 degrees north latitude remains at 25%.

  • Establishes new non-transferable tax credits based on oil production for lease or properties north of 68 degrees north latitude beginning Jan. 1, 2014. Under AS 43.55.024(i), established a $5 per barrel credit for oil that qualifies for the GVR under AS 43.55.160(f). The credit ranges from $8 to $0 based on the average GVPP per barrel each month.

  • Extended the sunset date for the Alternative Tax Credit for Oil and Gas Exploration from July 1, 2016, to Jan. 1, 2022, in AS 43.55.025(b) for exploration wells drilled outside of the Cook Inlet sedimentary basin and south of 68 degrees north latitude. This extension does not apply to the Basin Credits for exploration wells in AS 43.55.025(m) or the Basin Credits for seismic exploration in AS 43.55.025(n).

  • Extends the sunset of the tax limitation on production from leases or properties outside of the Cook Inlet Sedimentary Basin and do not include land that is north of 68 degrees north latitude in AS 43.55.011(p) from 2022 to 2027.

  • Reduces the interest on delinquent tax liabilities from 11 percentage points above to 3 percentage points above the rate charged member banks in the 12th Federal Reserve District, and interest is no longer compounded quarterly.


2014 – The Legislature passed SB 138, which is the enabling legislation to allow the State of Alaska to participate as an equity owner in the Alaska Liquefied Natural Gas (AKLNG) project. The goal of AKLNG is to commercialize North Slope natural gas reserves from the Prudhoe Bay and Point Thomson fields. Among the goals of AKLNG is for the state to receive its royalty gas in kind (RIK) and production tax as gas (TAG) in lieu of receiving royalty and tax payments from the producers supplying the gas to the project. The determination to receive the gas molecules in lieu of cash is subject to a best interest finding. The intent is that the state will receive an amount of gas that is commensurate with its equity ownership in AKLNG infrastructure. AKLNG infrastructure includes a gas treatment plant (GTP) located on the North Slope, an 800-mile natural gas pipeline and a natural gas liquefaction facility located in Nikiski. As an equity owner, and a recipient of the RIK and TAG, the State of Alaska will bear the burden of marketing and monetizing its portion of the gas. The legislation includes several changes to the oil and gas production tax statutes, which take effect on and after Jan. 1, 2022. A summary of the significant changes are:

  • The production tax for gas produced on and after Jan. 1, 2022, is equal to 13% of the gross value at the point of production of the taxable gas.

  • The production tax on oil produced on and after Jan. 1, 2022, is 35% of the annual production tax value of the taxable oil. The production tax value of the oil taxable under AS 43.55.011(e)(3) includes the producer’s lease expenditures under AS 43.55.165 for the calendar year incurred to explore for, develop, or produce oil and gas deposits in the state that includes land north of 68 degrees north latitude as adjusted under AS 43.55.170.

  • The minimum tax will only be applicable to oil produced on and after Jan. 1, 2022, from leases or properties that include land north of 68 degrees north latitude.

  • For gas produced on and after Jan. 1, 2022, a producer may make an election to pay the production tax as gas (TAG) for gas produced from oil and gas leases modified under AS 38.05.180(hh) in lieu of the tax otherwise levied for the gas by AS 43.55.011(e).




Click here for data with additional years.

  Collections Summary

Fiscal Year

2016 2015 2014 2013
   Total Tax

$244,127,946

$524,009,352

$2,727,066,796

$4,120,062,888

   General Fund

161,796,260 381,552,650 2,605,881,507 4,042,470,567

   CBR Fund

73,123,902 134,306,758 112,416,140 69,794,551

   Conservation Surcharges

9,207,784 8,149,944 8,769,150 7,797,770


  Filing Information

Fiscal Year

2016 2015 2014 2013

   Number of Returns

114 86 60 57

   Number of Taxpayers

60 64 55 53





Oil and Gas Production Tax Credits


Alternative Credit for Exploration – AS 43.55.025(a)(1)-(4) – Taxpayers who incur qualified exploration expenditures are eligible for this credit against oil and gas production tax. Credits earned for certain work performed on or after July 1, 2016, may be taken against corporate income tax.

The credit is 30% (20% for work performed prior to July 1, 2008) or 40%, depending on the qualifications of the exploration project. Taxpayers must obtain pre-approval from the Alaska Department of Natural Resources and submit certain data as part of the application process for exploration well projects. Credit applications under AS 43.55.025 are audited prior to issuance of the credit certificates. Certificates must be eventually issued, but the credit may also be applied to tax prior to the issuance of a certificate. The credit is transferable and eligible for state repurchase.

The credit is set to expire for Middle Earth Wells on Dec. 31, 2021. It expired for Middle Earth Seismic on Dec. 31, 2017, and the North Slope and Cook Inlet areas on June 30, 2016. This credit has been available since 2003 – pre-dating the oil and gas tax law revisions of 2006 and 2007. The scope of this credit is more specific than that provided for under AS 43.55.023.





Carried-Forward Annual Loss – AS 43.55.023(b) – Taxpayers who incurred lease expenditures that were not deductible in calculating production tax values generated a "loss carry forward" and they may have applied for a tax credit. The credit, which was transferable and applicable to oil and gas production tax, expired Dec. 31, 2017.

For the North Slope, the credit rate was 35% in 2016-2017, and 45% in 2014-2015. For Cook Inlet, and Middle Earth (outside Cook Inlet and the North Slope), it was 15% in 2017, and 25% in 2014-2016.

Only half of the 2017 loss was eligible for purchase under AS 43.55.028.





Cook Inlet Jack-Up Rig Credit – AS 43.55.025(a)(5) – This credit was a transferable and state repurchase-eligible credit applicable to oil and gas production tax for exploration expenses for the first three wells drilled by the first jack-up rig brought into Cook Inlet. The credit expired on June 30, 2016; all work must have occurred before that date.

The credit was only for expenses incurred in drilling wells that evaluate prospects in the pre-tertiary zone; all three wells had to be drilled by unaffiliated parties using the same rig. The credit was 100% of costs for the first well up to $25 million, 90% of costs for the second well up to $22.5 million, and 80% of costs for the third well up to $20 million. If the exploration well was brought into production, the operator was to repay 50% of the credit over 10 years following production start-up.





Education – AS 43.20.014, 43.75.018, 43.77.045, 43.55.019, 43.56.018 and 43.65.018 – The Education Credit is a nontransferable and nonrefundable credit applicable to the corporate income tax, fisheries business tax, fishery resource landing tax, oil and gas production tax, oil and gas property tax, and mining license tax.

Taxpayers can claim a credit for contributions to Alaska universities and accredited nonprofit Alaska two- or four-year colleges for facilities, direct instruction, research and educational support purposes.

The tax credit can also be taken for donations to a school district or state-operated vocational technical education and training school for vocational education courses, programs and facilities. Donations for Alaska Native cultural or heritage programs for public school staff and students, and a facility in the state that qualifies as a coastal ecosystem learning center under the Coastal American Partnership also qualify. Contributions to the Alaska Higher Education Investment Fund established in 2012 qualify as well.

The credit was set to end Dec. 31, 2018, but the Alaska Legislature in 2018 made changes to the law, and extended the credit to Dec. 31, 2024.

Before Jan. 1, 2019, the credit is only for cash contributions. As of Jan. 1, 2019, the credit will be for contributions of cash or equipment.

Before the year 2019, the credit allows the deduction of 50% of a business’s annual contributions up to $100,000, 100% of the next $200,000 in donations, then 50% of donations above $300,000. A business, for example, is able to have $250,000 deducted from its taxes by paying $300,000 in donations. A business is allowed to claim up to $5 million in Education Credits per year across all eligible tax types.

As of Jan. 1, 2019, the deduction amounts and cap will be reduced. The credit, including the contribution categories eligible for the credit, will remain the same as before 2019, with two exceptions. First, the contributions between $100,000 and $300,000 – those contributions will allow a deduction of 75% of the contribution, not 100% like before 2019. Second, a business will be allowed to claim up to $1 million in education credits per year across eligible tax types, not up to $5 million like before 2019.

On Jan. 1, 2021, the credit will be further reduced to 50% of all contributions. A business will still be allowed to claim up to $1 million in education credits per year across eligible tax types.

Qualifying Education Tax Credits include contributions by taxpayers to a public or private nonprofit elementary or secondary school in the state, a nonprofit regional training center recognized by the Alaska Department of Labor and Workforce Development, or an apprenticeship program in the state that is registered with the U.S. Department of Labor under 29 U.S.C. 50-50b for direct instruction, research and educational support purposes.

In addition, tax credits for certain taxpayers are available for contributions accepted for a facility by a public or private nonprofit elementary or secondary school in the state, for a scholarship awarded by a nonprofit organization to a dual-credit student for certain educational expenses, for a residential school in the state approved by the Alaska Department of Education and Early Development, or certain qualified childhood early learning and development programs.

Tax credits are also available for contributions by certain taxpayers for science, technology, engineering and math (STEM) programs by a nonprofit agency or school district for school staff and for students in grades kindergarten through 12 in the state and for the operation of a nonprofit organization dedicated to providing educational opportunities that foster public service leadership for future generations of residents of the state.






Exploration Incentive – AS 38.05.180(i) – Lessees of state land drilling an exploratory well or conducting certain seismic exploration on that land were eligible for this credit. The credit was repealed, effective Dec. 31, 2016. The credit was 50% of the cost of the exploration expenditures, and it could not have exceeded 50% of the production tax or state royalty against which it was applied. This credit was administered by the Alaska Department of Natural Resources, but it was also applicable to oil and gas production tax.





Exploration Incentive (Assignable) – AS 41.09.010 – This is a distinct incentive program administered by the Alaska Department of Natural Resources. The credit was repealed, effective Dec. 31, 2016.

The credit was available to be claimed against royalty obligations, corporate income tax and production tax. Taxpayers may have taken a credit up to 50% on state land (or 25% on non-state lands) of eligible oil and gas exploration expenditures. An approved incentive credit under this statute may not have exceeded $5 million per project and was limited to $30 million per taxpayer.





Frontier Basin Credits – AS 43.55.025(a)(6) and (7) – The Frontier Basin Credit provides a tax credit for exploration wells and seismic projects within six specific areas designated in AS 43.55.025(o), also called the “Frontier Basins.”

The credit for exploration wells expired on July 1, 2016, and expenses incurred prior to that time were eligible for the credit so long as the exploration well was spudded by June 30, 2017; the credit for seismic exploration projects expired June 30, 2016.

The first two exploration wells drilled inside each of the six frontier basins were eligible for an 80% credit for up to $25 million of qualified expenditures. For seismic projects, the first project performed inside each of the six frontier basins was eligible to receive a 75% credit for up to $7.5 million of qualified expenditures.

The credit became effective Jan. 1, 2013, and was amended in 2016. Many requirements had to be met with the Alaska Department of Natural Resources to qualify for the credit, including pre-qualifications. The credit itself was allowed to be applied against a producer’s tax liability in the year in which it was incurred and also before the certificate was issued. The credit certificate was allowed to be transferred, applied to tax liability, or cashed out with the state under AS 43.55.028 by the original applicant.





New Area Development – AS 43.55.024(a) – This credit is a tax credit of up to $6 million per company each year for oil and gas produced from Middle Earth (leases outside Cook Inlet and the North Slope). The credit sunsets the later of 2016 or the ninth calendar year after first year of production if the production started before May 1, 2016. The credit is not certificated and is not transferable.





Per Barrel Credit – AS 43.55.024(i) and (j) – The Per Barrel Credit is a production tax credit for each barrel of oil production on the North Slope. This credit is an integral part of the production tax calculation. It cannot be transferred or carried forward, and is not eligible for cash repurchase. The credit does not expire.

For “new areas” that qualify for a Gross Value Reduction (GVR), under AS 43.55.024(i), the credit is $5 per taxable barrel. Those areas are defined in AS 43.55.160(f) and (g). The $5 per barrel credit may not reduce the producer’s liability for that production below zero.

For areas that do not qualify for a GVR, under AS 43.55.024(j), the credit ranges from $0 to $8 per taxable barrel based on the average gross value at point of production (GVPP) per barrel produced in the tax year. The credit operates on a sliding scale ranging from $0 per barrel when the GVPP is more than $150 per barrel, to $8 per barrel when the GVPP is less than $80 per barrel. The sliding scale credit cannot be used to reduce tax liability to below the minimum tax under AS 43.55.011 (f).





Qualified Capital Expenditure Credit and Well Lease Expenditure Credit – AS 43.55.023(a) and 43.55.023(l) – These are transferable credits for qualified oil and gas capital expenditures in the state outside the North Slope. Credits that were earned for expenses incurred prior to July 1, 2017, were eligible for repurchase by the State of Alaska. The credits can be taken in lieu of Exploration Credits under as 43.55.025, but are in addition to any net-operating loss credits under AS 43.55.23(b).

Before Jan. 1, 2017, companies could have qualified for a credit of 20% of eligible capital expenditures, or 40% of qualified well lease expenditures. As of Jan. 1, 2017, the Qualified Capital Expenditure Credit was reduced from 20% to 10% and the Well Lease Expenditure Credit was reduced from 40% to 20%.

On Jan. 1, 2018, both credits were repealed for Cook Inlet. There is no expiration date for Middle Earth (outside Cook Inlet and the North Slope).





Small Producer – AS 43.55.024(c) – The Small-Producer Credit is a nontransferable credit for oil and gas produced by small producers, defined as having average taxable oil and gas production of less than 100,000 Btu-equivalent barrels per day.

For producers that had commercial production prior to April 1, 2006, the credit expired on Dec. 31, 2016. For producers that did not have commercial production prior to April 1, 2006, the credit is available until the ninth calendar year following the start of commercial production if the production started before May 1, 2016.

If the taxpayer produces less than 50,000 Btu-equivalent barrels per day, the taxpayer may take up to a $12 million credit per year.

For production between 50,000 and 100,000 Btu-equivalent barrels per day, the credit is prorated. The credit is zero for producers with 100,000 or more Btu-equivalent barrels per day.

The credit may not be carried forward or transferred. The credit may only be used against tax liability, and only if the producer has a positive tax liability before the application of credits.





Transitional Investment Expenditure – AS 43.55.023(i) – The Transitional Investment Expenditure Credit was a nontransferable credit for qualified oil and gas expenditures incurred between March 31, 2001, and April 1, 2006. It was available until Dec. 31, 2013.

The credit was for 20% of qualified oil and gas capital expenditures incurred during the above time period, not to exceed 10% of the capital expenditures incurred between March 31, 2006, and Jan. 1, 2008.






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