Alaska proposes to spell out drilling costs left out of oil and gas property valuation

The Alaska Department of Revenue proposed Thursday to expand and spell out which drilling costs oil and gas companies may exclude when the state values their property for tax. Written comments are due Nov. 30.

The state levies the tax at 20 mills, or 2 percent of assessed value. The existing regulation excludes "intangible drilling expenses" when property is valued at actual or replacement cost. Those are costs for items with no salvage value, such as labor, fuel and hauling. The definition is tied to the federal tax code as it stood on Jan. 1, 1974.

The draft would expressly count rig mobilization and setup, hydraulic fracturing, installation of completion equipment, flowback, well testing and repeated completion attempts. It would also count drilling pads, gravel installation and access roads needed for drilling and initial completion. Pads and roads that also serve other purposes would need a "reasonable, documented method" to split costs.

Pipe, casing, engines and other property with salvage value would still not qualify. Also excluded: well intervention or recompletion after initial completion, routine well operation and maintenance, and separate production, processing, storage or transportation facilities not necessary to drilling or initial completion.

A department filing says the change would reflect specified federal drilling and development cost categories, subject to Alaska law, and aims to clear up regulatory ambiguity. The department's fiscal note projects no revenue change for fiscal years 2027 through 2029.

The definition has been disputed before. A Dec. 16, 2024, Alaska Office of Administrative Hearings decision found the exclusion did not extend to federal intangible development expenses. At a May 29 House Finance Committee hearing on the gas line bill, North Slope Borough Mayor Josiah Patkotak listed "the argument of definitions on what's incidental drilling expense" among his concerns as a government that levies the tax.

Comments can be sent through the online public notice. After the comment period, the department may adopt the proposal or a different version without further notice, or take no action.