T?he 49th state is beckoning to explorers. In 2007, Alaska reworked its oil and gas production-tax structure, retroactive to mid-2006. “Effectively, the legislation turned the production tax into an income-based tax,” says Bill Van Dyke, Anchorage-based petroleum engineer with Petrotechnical Resources Alaska.
As part of the sweeping change, the Alaska legislature included several credits for explorers and producers. Basically, these are investment credits that can be used to offset production taxes.
The credits provide incentive for new spending, particularly on exploration. They are statewide, but regions have special provisions. The North Slope, Cook Inlet and Middle Earth (the term Alaskan oil and gas workers apply to areas not in the first two regions) each have individual tweaks.
Credits have two parts: one strictly focuses on exploration activities. Qualified wells receive a 30% to 40% credit on drilling and completion costs, and qualified seismic programs garner a 40% credit.
“These credits can be a substantial amount of money, and can help shift economics on a project,” says Van Dyke.
To qualify, exploration wells have to be drilled within a certain time frame at minimum specified distances from established production and preexisting wells, and test fresh geologic prospects.
A North Slope well that qualified for the full 40% exploration credit would be at least 25 miles from an existing unit and three miles from a preexisting well; would target a distinct, untested trap; and would have pre-approval of the target from state regulators.
In Cook Inlet, the distance is relaxed to 10 miles from an existing unit, and there is no requirement about distance from preexisting wells. The 30% exploration credit has lighter standards still.
Seismic qualifications are even less restrictive, and quite generous: The state grants a 40% credit for seismic shot outside of a unit boundary.
Credits are applied against production taxes, and once issued they do not expire. Producers can use credits against taxes owed and explorers can either keep credits for use against future production or sell credits to a producer. As a rule-of-thumb, sellers can expect to receive 85% to 95% of face value for their credits, says Van Dyke.
Additionally, explorers that make ongoing investments in the state can sell credits back to Alaska at 100% of face value.
Development and production activities have available credits as well. An extra capital credit of 20% for costs such as wells, roads, facilities and pipelines can be earned. And, if an exploration well or seismic program doesn’t meet criteria for the 30% to 40% credit, it can qualify for a 20% credit. Examples include wells drilled too close to existing production, or seismic shot within unit boundaries.
“As a fallback, on the exploration side companies can earn at least a 20% credit on these types of activities.”
On top of drilling and seismic credits, Alaska sweetened its menu with a third offering. Explorers with negative cash flow in their Alaska business entity can earn an additional 25% credit, based on annual negative spend. For exploratory seismic, a company can earn the initial 40% credit plus an additional 25%; on a qualified exploratory well, credits between 55% and 65% are possible; and on development work, credits can be up to 45% of capital spent prior to positive cash flow.
Furthermore, in Middle Earth, an additional tax credit of $6 million a year, not based on any spend amount, is available for nine years for new production starting prior to 2016. Small producers can earn $12 million a year in credits—again not based on any spend amount—under similar guidelines.
Certainly, Alaska’s tax credits can have a meaningful impact on decisions to work in the state. To date, the credits have been particularly helpful for seismic programs. “There’s no doubt the credits have played an important role on the seismic side,” Van Dyke says.
“The issue remains that it’s expensive to explore in Alaska relative to other parts of the U.S.,” he says. “Companies still have to come up with the money and spend it before they earn the credits. But in the long run, this program helps, and it’s not widely known. We’re trying to get the word out.”