A newly introduced bill by Senator Jesse Bjorkman (R – Nikiski), Senate Bill 254, includes a provision that would allow the state to acquire, through eminent domain, private overriding royalty interests in Cook Inlet. Westlaw defines an overriding royalty interest as, “A percentage of gross production that is not charged with any expenses of exploring, developing, producing, and operating a well.”

Here is the section of the bill that deals with overriding royalty interests:

Article 6A. Overriding Royalty Interests.

Sec. 38.95.280. Overriding oil or gas royalty interests; condemnation.

(a) The department may exercise the right of eminent domain to acquire a private overriding royalty interest in oil or gas produced from land that does not include land located north of 68 degrees North latitude if the commissioner determines that the

(1) acquisition is in the best interest of the state; and
(2) acquisition will promote the development of oil or gas resources.

(b) The department shall provide just compensation and damages for the acquisition of a private overriding royalty interest under this section. Unless otherwise determined by a court, for purposes of this section, compensation and damages are equal to the average annual income generated by the overriding royalty interest over the preceding five years, multiplied by two.

(c) In this section,

(1) “commissioner” means the commissioner of natural resources;
(2) “department” means the Department of Natural Resources.

All North Slope oil fields are above 68 degrees North Latitude, so this provision is meant to apply to Cook Inlet. The vast majority of gas in Cook Inlet is produced by Hilcorp. They are not asking for this provision, or for that matter any royalty relief at all.

However, John Hendrix, the owner of the oil and gas company HEX/Furie, is precisely asking for this. Hendrix purchased Furie’s Cook Inlet assets out or bankruptcy – with the help of the Alaska Industrial Development and Export Authority – in 2019 at a fire sale price of $15 million. He was aware of the overriding royalties when he made the purchase.

In November, he told Petroleum News, “Were going to invest in inlet natural gas exploration and development wherever it makes sense financially to do so. KLU (Kitchen Lights Unit) is part of our portfolio but it is burdened by high costs, overriding royalties, and taxes, so diversifying our investments into other leases and opportunities outside the KLU has advantages.”

On February 7, Mark Slaughter, the chief commercial officer for HEX/Furie, spoke before a joint meeting of the House and Senate Resources Committees on the gas situation in Cook Inlet. One of his slides listed the 12.5% overriding royalty as one of their “challenges.”

When asked about the effect of the change, long-time oil & gas lawyer Brad Keithley told the Landmine, “The legislation would set up a situation where the state could, using eminent domain, compel the owner of the overriding interest to sell it to the state for a price set by a court – essentially ‘nationalize’ the interest – and then, once acquired, use its existing authority over state royalties to reduce the royalty substantially, potentially even to zero. The combined effect would be to shift a significant share, if not all, of the cost of the override to the state, freeing HEX/Furie of the burden, in essence, subsidizing a significant cost of development, while Hex continues to take the profits.”

The aim of the provision in the bill seems simple: the state acquires the overriding royalties for HEX/Furie, and through royalty relief, eliminates them.

When asked, Senator Bjorkman said that John Hendrix did not talk to him about or inspire this provision in the bill. Which is interesting because Hendrix talks about this issue with anyone that will listen.

Last February, Senator Cathy Giessel (R – Anchorage) introduced a Senate Resources Committee bill that aimed to deal with another problem Hendrix has – paying his property taxes. Hendrix had tried for years to get his $1.6 million a year property tax bill (split between the State and the Kenai Peninsula Borough) reduced by 90%, but was unsuccessful. He convinced Senator Giessel to try and get it done through a bill, but after this Landmine story came out, the bill was withdrawn the next day.

The bill has been referred to the Senate Resources Committee. Senator Giessel and Senator Click Bishop (R – Fairbanks), the co-chairs of the Resources Committee, told the Landmine they have not yet looked at the bill.