The Alaska Oil and Gas Production Tax has been changed multiple times, particularly over the last 12 years. And each change in the statutes brings additional changes—and complications—to the regulations that the Alaska Department of Revenue (DOR) issues to implement the tax. Even the last few years are telling, with overhauls of the tax structure in 2013, 2016 and again in 2017, and debate about several production tax bills this legislative session. This uncertainty dramatically impacts the oil and gas industry in Alaska and investment in the state.
The oil and gas production tax structure is a critical consideration for oil and gas explorers and producers in Alaska due to its impact on project economics. It has been and will likely continue to be an area of uncertainty, and the Department of Revenue has finalized one set of regulations to implement House Bill 111, which passed last year, and has published a second set of draft regulations that govern carried-forward annual production tax losses that can be accrued starting in 2018.
Alaska’s oil and gas production tax regime is found at AS 43.55.011-AS 43.55.900. The production tax structure, including production tax rates, tax limitations, credits and other incentives varies depending on the area of the state that is the focus of the exploration, development or production activity.
Unlike other states that levy a severance tax on the gross value at the “wellhead,” Alaska’s production tax is levied on the net revenues 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, or for repressuring. At a high level, the calculation starts with destination value, generally the higher of the sales price or a calculated prevailing value. The costs of pipeline and marine transportation are subtracted from the destination value to obtain the gross value at the point of production—the wellhead value.