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Are oil companies claiming higher expenses to lower their tax bill to Alaska?

Alex DeMarban
Stephen Nowers illustration

A pair of Alaska Democrats said they’re increasingly concerned about why the spending reported by North Slope oil companies has soared in recent years, a circumstance that has contributed to the huge drop in revenues that suddenly has Alaska spiraling toward a fiscal abyss of $2 billion.

One of those Democrats, Rep. Jonathan Kreiss-Tomkins of Sitka, went so far as to suggest in a recent newsletter that oil companies may be artificially inflating their expenses to reduce what they owe to the state in taxes.

A state Revenue official said that’s highly unlikely because it would be a serious breach of federal tax law. And two major oil companies -- BP and ConocoPhillips -- said reported expenses are up because they spending more, especially this year after the Legislature cut production taxes.

Unfortunately, few people know what the oil companies are spending their money on in Alaska. Only a small group of Revenue Department officials and the oil companies themselves have access to that information.

And how much those auditors actually know is impossible to verify. The department will not let the media or public view things as basic as budget documents submitted by oil companies -- even if they’re redacted -- or summaries of state audits of the spending.

Even what state lawmakers can see is limited. Such information is kept under strict lock and key thanks to a state law that includes the possibility of jail time for state employees who divulge too much information.

Whether companies have actually spent what they say they have is a critical question in a state that relies almost entirely on oil and gas production for its state revenues.

Recent audits of oil and gas companies in Louisiana and Colorado, states with significantly less oil production than Alaska, have identified millions of dollars in revenue lost and potentially lost to the oil industry because taxes weren’t properly collected or refunded since 2009.

Alaska has not conducted full audits under the state’s existing oil-production tax law that was approved in 2007. That law is set to be replaced by a tax cut on oil producers starting with the new year on Wednesday, though voters will have an opportunity to potentially repeal it in August. Instead of the full audits, analysts have been conducting what are called monthly “desk audits” as expense and production data is submitted by the oil producers, who pay taxes monthly.

Instead of providing lawmakers with specific details on spending, the state has released generalized, aggregate information, such as an analysis sent to this reporter that breaks down capital and operating expenditures by large fields. That summary shows spending in recent years was most significant at Prudhoe Bay and Kuparuk, the nation’s two largest oil fields, amounting to $4.7 billion in 2010 and growing to $6 billion in 2013.

The lack of detail has frustrated lawmakers hoping to learn more.

“Healthily concerned” about the rising expenses and lack of data is Rep. Beth Kerttula of Juneau, a former oil and gas attorney.

“I'm suspicious and would like to see more explanation as to why all of a sudden those costs went up and came out of Alaskans’ hides,” said Kerttula.

Producer costs have tripled per barrel

More pointed was freshman lawmaker Kreiss-Tomkins of Sitka, who noted in his newsletter that oil companies have dramatically increased the expenses they report. It began after the state began to tax only producers’ profits after deducting qualifying expenses, he said.

“Curiously,” he notes, the collective costs claimed by oil companies to produce a barrel of oil have risen sharply, nearly tripling in a seven-year period.

They rose from $15 a barrel in 2007 to $41 in the current fiscal year that ends next June. Alaska’s oil has lately been selling above $105 a barrel. The larger the deducted expenses, the less the state gets.

“Over the last seven years -- ever since Alaska adopted a profits-based tax in 2006 -- oil companies have claimed that Alaska oil is increasingly more expensive to produce and therefore increasingly less profitable,” he wrote. “Incidentally, this means BP, Conoco, and Exxon pay billions less in taxes to Alaska. Surprise!”

The huge jump in expenses for the current fiscal year that ends in June are the main reason the state now expects its budget to fall short by $2 billion, he argued.

Kreiss-Tomkins, in his newsletter, said he’s skeptical because Alaska has found itself in this situation twice before. In the 1980s, oil companies artificially inflated the cost of transporting oil.

“The transportation figures continued to be manipulated by oil companies and the state of Alaska finally took the oil companies to court -- and won billions in back taxes,” he wrote.

In a second instance culminating in 2012, oil companies underestimated the value of the trans-Alaska pipeline by saying it was worth less than $1 billion. After reviewing internal company data saying the oil would flow for much longer than the producers publicly claimed, U.S. District Court Judge Sharon Gleason determined the line was worth $10 billion. Again, the oil companies had to pay up, he writes.

“Fool me once, fool me twice ... ” Kreiss-Tomkins wrote, ending the analysis.

In an interview, Kreiss-Tomkins stopped short of accusing the oil companies of fudging the numbers.

“There's this unfortunate track record of cost inflation and accounting manipulation which immediately makes me very worried,” he said. “Looking at the last six years of data makes me further worried. But though there is smoke, that doesn't mean there is fire per se. It seems like something that needs a lot of attention.”

Asked if the oil giant is artificially inflating expenses, a spokesperson with ExxonMobil, which has said it is spending hundreds of millions of dollars to develop Point Thomson, said she would defer questions to the state.

Spokespeople with BP and ConocoPhillips were asked the same question. They said the companies in fact are spending more, and they restated previously-made announcements about expanded development plans in the wake of the tax cut.

“The Alaska oil tax reform is an important step forward and BP is investing $1 billion in two new rigs and 200 jobs at Prudhoe Bay over five years,” said BP spokesperson Dawn Patience.

Natalie Lowman, with Conoco, said the company is not artificially inflating its reported costs. She noted that falling production -- a long-term problem for Alaska’s aging fields -- also drives up the per-barrel cost of oil.

She also noted that capital spending is increasing significantly in the current fiscal year, with Conoco planning to spend $1.7 billion, the same amount Conoco had spent in the previous two years combined.

Audits undone under new tax law

Most oil and gas jurisdictions in North America use a gross-revenue production tax. Revenue officials have defended the net-profits tax in part because it provides detailed information on oilfield expenses and production that other states don’t see.

Yet outside of the oil companies, that detailed information is seen only by about 20 officials in the state’s tax division. That’s according to Bruce Tangeman, deputy commissioner of the state Revenue Department that oversees the tax division.

Not even he sees that information, he said, though he could. It’s not available to anyone else in the Parnell administration either, he said.

“It’s held very, very strictly confidential,” he said. “It’s the same as if I called the IRS and said I want to look at your personal income tax information from 2012. They won’t allow that.”

Even lawmakers have only limited access to the information, and only after they sign a confidentiality agreement, Tangeman said. He said in the last three years he’s publicly offered several times to privately provide lawmakers with a deeper level of detail on the spending than Revenue officials have provided in legislative hearings. But no lawmaker has ever taken him up on the offer.

What could they see if they signed the agreement? He’s not sure. That would have to be decided by the state’s legal department, he said.

Tangeman also denied requests from this reporter to view summaries of the monthly “desk audits” the state conducts after information is submitted by oil companies, or to look at budget documents submitted by oil companies with telltale information, such as company names, blacked out.  

It’s all confidential, Tangeman said.

So how does Tangeman reassure concerned Alaskans, who can trust but not verify? He noted that state auditors review a variety of information from oil companies, including canceled checks, receipts of bills and federal tax documents.

“We as the Department of Revenue can ask them for anything we need to see to verify an audit,” he said. “So we can get down into great detail, and we do, we audit every single oil and gas taxpayer and company that receives tax credit.”

Strict laws are also on the books to prevent wrongdoing.  

“There are federal laws in place that severely penalize companies from doing things inappropriately,” he said. “So just like you, if you filed a false personal income tax return to the federal government and you were caught, serious penalties would apply. Same thing is in place for companies, no matter what kind of company it is.”  

As for the full audits that have never been conducted since the existing tax law was passed in 2007, state auditors are currently conducting company-by-company reviews covering the years 2007 to 2009.

Those full audits are behind schedule for a variety of reasons, including the complexity of the existing tax law, a limited amount of staff, and an archaic system now being overhauled, but which previously relied heavily on spreadsheets and manual entry, he said.

Tangeman wouldn’t say when those full audits would be completed. But those will not be public either, he said. And it’s possible that not even lawmakers will get the chance to see them.

Contact Alex DeMarban at alex(at)alaskadispatch.com

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