Energy

State wins case against oil companies worth an estimated $500 million

The Alaska Supreme Court ruled in favor of the state on Friday after an epic tax dispute with some of the major North Slope oil companies, a victory that means the state won't need to refund an estimated $500 million in taxes and interest, officials said.

"It's a huge decision," said Cori Mills, a spokesperson for the Alaska Department of Law.

The unanimous ruling by the court, written by Chief Justice Craig Stowers, means the state does not have to refund an estimated $100 million in tax payments collected from Slope oil producers in 2005 and 2006, state officials said. The refund would have included interest amounting to another $400 million.

Losing the case were ConocoPhillips Alaska, Exxon Mobil Alaska Production, Chevron U.S.A. and Forest Oil Corp., now Sabine Oil and Gas. BP, operator of the Prudhoe Bay oil field, was not part of the lawsuit.

In its ruling, the Supreme Court upheld an administrative decision by the state Department of Revenue in early 2005, under former Gov. Frank Murkowski, a Republican.

Concerned about declining tax revenue, the agency had decided to count Prudhoe and six smaller, newer oil fields as a single entity for production tax purposes. The so-called satellite fields affected by the decision were Aurora, Borealis, Midnight Sun, Orion, Polaris and Point McIntyre.

The agency said its decision was supported by the production tax in place at the time, the Economic Limit Factor or ELF, in part because the fields were economically dependent on each other. They even shared production facilities that processed the crude oil, removing the gas and other fluids before the oil is shipped.

The state's decision led to higher tax income for the state.

The companies began fighting the state's new approach immediately, appealing first within the division and later to the courts.

In the years before the change, the department had watched its tax revenue decline sharply under the ELF law, which the Legislature replaced in 2006 with a different production tax system, officials said.

The ELF law allowed smaller fields that produced less oil to be taxed at significantly lower rates than Prudhoe.

The Legislature had approved the incentive in 1989, under Gov. Steve Cowper, a Democrat, in order to encourage development at small, new fields considered less profitable. The smaller fields presumably had the same infrastructure requirements as large fields but yielded less oil, making them more economically challenging.

Oil companies had counted the new and large fields separately for tax purposes. They paid much lower tax rates for oil from the smaller fields, despite the shared processing facility, according to the decision.

Oil from the satellite fields paid less than a 0.5 percent rate, the decision said. Oil from Prudhoe was taxed at about 12.5 percent.

The oil companies began displacing, or "backing out," oil from Prudhoe with oil from the newer oil fields, since the shared processing facilities could not handle all the oil that could be produced from all them, the decision said.

As a result, the companies were displacing oil taxed at the higher rate, with oil taxed at the lower rate.

"This meant that the satellite (fields) received tax breaks that were designed to alleviate costs they did not face, and the satellite (fields) began to back out oil taxed at the higher rate," the decision said.

The amount of barrels displaced "increased substantially," from 218,000 in 2000 to 1.2 million in 2004, the court said.

The "tax implications were very favorable to them and very unfavorable to the state," said Dario Borghesan, an assistant attorney general in the Law Department's appeals section.

The oil companies argued before the Supreme Court that the 2005 rule was invalid because the state did not follow the Administrative Procedure Act requiring public comment, and other steps before new regulations are established.

The court dismissed that view, upholding the decision in March 2015 by Anchorage Superior Court Judge Michael D. Corey.

"We conclude that (the agency's) decision was not a regulation because it was a commonsense interpretation of the statute and, therefore, DOR was not required to comply with APA rulemaking requirements," the decision said.

Besides the financial implications, the court's ruling is important for the state because it recognizes the Revenue Department's expertise and upholds its ability to interpret tax laws created by the Legislature, officials said.

If the rule-making process was required every time agencies interpreted law, regulatory activity would slow to a "glacial" pace, said Borghesan.

The court agreed with that view in its decision, citing a 2006 Supreme Court opinion noting nearly every agency action is based on a statute interpretation. Requiring the rule-making procedure every time would lead to "complete ossification" of the state's regulatory abilities, the court said.

An Exxon Mobil official said the company would not provide comment for this article. ConocoPhillips did not respond to a request for comment Friday afternoon.

Alex DeMarban

Alex DeMarban is a longtime Alaska journalist who covers business, the oil and gas industries and general assignments. Reach him at 907-257-4317 or alex@adn.com.

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