The Department of Revenue analysis found field operating costs were 50 percent higher than expected while oil and gas companies’ capital investments were 15 percent to 20 percent lower than estimated by the state.

Total payments by producers for April to December 2006 under the new Petroleum Profits Tax (PPT) were $813 million, or $137 million less than the $950 million forecasted by the department, Revenue Commissioner Patrick Galvin said in a press conference in Juneau. Overall, the new tax is expected to bring Alaska about $1 billion in additional revenue per year, however the state will give a more detailed estimated in a revised revenue forecast which was expected to be out April 19 or 20, Galvin said.

The lump-sum payments were received by the state in late February from industry taxpayers as a “true-up” payment for April through December 2006. The Legislature enacted the new tax last summer, but made it retroactive to April. To allow for the transition to the new tax system, the Legislature let the oil companies pay under the previous production tax until December. The older system was based on gross revenues, while the new tax is based on net profits. Since January, taxpayers have been making monthly payments to the state under the new system.

Part of the $137 million difference – about $66 million – was due to the state’s underestimating payments the companies would make under the previous production tax. Since those revenues were higher, the amount of “true-up,” or additional tax owed under the new system, was less, Galvin said.

Another $50 million of the $137 million was due to operating expenses that were 50 percent higher than estimates the department had made, although the effect of this was lessened by lower capital investments. The department could not account for the remaining $21 million of the difference and will be discussing this with taxpayers, Galvin said.

Galvin said the department is working to obtain more information from the taxpayers as to why the differences occurred. “We need to understand the differences so we are able to make better estimates in the future,” he said.

It is too early to judge whether the department will challenge the estimates expenses, Galvin said. “We’re now requesting information just to gain clarity about the estimates. There will be opportunities to get more detail. Ultimately we will get around to auditing,” he said.

The commissioner said that gathering information will take several months, and it could be as long as two years “before it is know that there might be difference of opinion (between the state and taxpayers).”

The PPT is a significantly different kind of tax system compared to the previous gross-value system, so an audit by the state will require much more information from the taxpayer. Both sides are in new territory, and it will take time for clear understandings to be developed.

For example, some of the regulations to guide taxpayers in filing their returns have just been put into effect.

Galvin said the department does not have enough people to handle the auditing tasks and that the state is now out recruiting. There is no immediate problem because the state is not yet in the auditing phase, but if new auditors do not come on board over the next few months, there could be delays in conducting the audits, he said.

The commissioner said the department increased its estimates of operating costs last fall after corrosion was discovered in Prudhoe Bay field pipelines, requiring extensive repairs and pipe replacement. There is not enough information, however, to know whether the corrosion and repairs played a significant role in industry taxpayers reporting higher operating costs, Galvin said.

There was also significant activity in development of smaller fields on the Slope, which also added to operating costs, he said. “The more realistic explanation is that we simply haven’t constructed our model to accurately forecast operating costs,” he said.

Tim Bradner can be reached at