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We Build Alaska

Senate bill aims to radically change how oil and gas property taxes are calculated

Last week, the Senate Resources Committee introduced Senate Bill 50, “An Act relating to the assessment of property for the purposes of the oil and gas exploration, production, and pipeline transportation property tax; and providing for an effective date.”

It’s a short bill, but it would radically transform how oil and gas property taxes are determined in Alaska.

Currently, the tax base for oil and gas property taxes depends on whether it’s exploration or production property. While exploration property is taxed based on the value the property would bring in an open market transaction, once the property begins production, it is based on replacement cost less depreciation.

Section 2 of SB50 would make the assessment the lesser of 1) replacement cost less depreciation or 2) estimated market price in a sale. This gets complicated because the provision would apply statewide. So, any time an ownership interest changed it would likely lead to a tax decrease.

An example is oil company A might argue that since they bought oil company B’s assets for less than their assessed value, they would need a tax cut. Or if oil company C wanted to sell their assets at a loss and divest from Alaska, it would lead to an argument for a tax cut for the buyer.

This bill would also create a situation where boroughs across the state could potentially lose considerable oil and gas property tax revenue. The State splits these property taxes with the boroughs where the assets are located. For example, the North Slope Borough and Kenai Peninsula Borough both benefit from oil and gas property taxes.

The motivation for the bill appears to be about a smaller oil and gas company, HEX (who bought the assets of Furie and two debtors, Cornucopia and Corsair out of bankruptcy in 2020). HEX is owned by John Hendrix. He has spent the last few years trying to get the State to massively reduce the property tax assessment for his property in Cook Inlet. But as hard as he has tried, he has been unsuccessful.

Hendrix’s argument centers around his view of the market value of the enterprise. The property was purchased for $15 million in bankruptcy proceedings. The Department of Revenue assessed it at $81.7 million. HEX/Furie views the assessment as excessive due to it being above the bankruptcy purchase price. They initially argued for a $20.5 million assessment, then a $17 million assessment and now $7.8 million assessment – a more than 90% tax reduction.

HEX/Furie’s current property tax is $1.6 million a year, split between the State and the Kenai Peninsula Borough. The State Assessment Review Board (SARB) ruled twice against Hendrix, first in May 2021 and again in May 2022. Both times, they upheld the $81.7 million assessment.

In June 2021, Hendrix filed a lawsuit against the State over the matter. A trial is scheduled for July. Former Revenue Commissioner Lucinda Mahoney was conflicted out of making any decisions regarding HEX/Furie because her husband, Steve Mahoney – an oil and gas property tax lawyer – is representing Hex/Furie.

While the value of the business may be less than the $81.7 million assessment, the State is taxing the value of the assets (Hendrix inherited some debt and other obligations when he bought the company at fire sale prices out of bankruptcy). Hendrix recently told Alaska Public Media he knew the assessment when he bought the company.

Section 3 of the bill appears to apply specifically to Hex/Furie. It says if someone purchased a company in the Cook Inlet in a specific type of bankruptcy proceeding, that would be the assessed value. It may be of note that Article II, Section 19 of the Alaska Constitution states, “The legislature shall pass no local or special act if a general act can be made applicable,” presumably to prevent legislative dispensation of favors.

Section 3 also changes the definition of proven reserves, which would completely change the depreciation methodology currently used for all properties. Depreciation for proven reserves is currently calculated by taking current year production divided by peak year production. This could allow oil companies to have geologists attest that there’s less oil in a reserve than previously thought to get excess depreciation.

When asked about SB50, Robin Brena, a long-time oil and gas attorney who has represented both the oil and gas industry and the taxing authorities in Alaska, said:

SB50 represents the worst type of special-interest legislation. It is a poorly conceived and written ad valorem tax give-away. SB50 would harm the State and those communities that rely upon the State to fairly determine the market value of oil and gas properties throughout Alaska. When Alaskans are only getting about one-third of the revenue for our oil and gas resources compared with other states, the last thing this Legislature should be doing is advancing legislation to give away even more of Alaskans’ share.

The proven reserves definition advanced by SB50 contradicts the existing law in Alaska established after years of litigation which included two decisions by the Alaska Supreme Court. In place of this well-considered established law, SB50 would substitute a standard for financial disclosures rather than for determining market value. The impact of SB50 would significantly and artificially reduce the calculation of proven reserves and, therefore, the ad valorem taxes. 

Public reports show that the State has paid nearly $140 million in cashable credits since 2017 to Cornucopia (Furie’s sister company under the HEX umbrella). A 2021 lawsuit filed in Texas is seeking more than $100 million from the former Furie owners, alleging they defrauded investors.

Senator Cathy Giessel (R – Anchorage), who co-chairs the Senate Resources Committee, declined to discuss the bill. When asked about the bill earlier today in the halls of the Capitol she said, “If you just take a breath, you will see everything will be ok.” She did not respond to a question asking if Hendrix was the source of the bill. However, when asked in her office last week about the bill, she said she was busy but referred to SB50 as the “Furie bill.”

Senator Click Bishop (R – Fairbanks), the other co-chair of the Senate Resources Committee, also declined to comment on the bill today, saying he wanted to discuss it with Giessel first. In fact, everyone I spoke with on the Senate Resources Committee either refused to comment or said they were not aware of the bill. All seven members of the Senate Resources Committee are in the Senate majority.

When asked for a comment on SB50, the Alaska Oil & Gas Association said, “We do not have a position yet on the bill.” Furie is one of several members of the Alaska Oil & Gas Association.

Alaska Public Offices Commissions (APOC) records show Hendrix donated more than $10,000 during the recent election cycle to several candidates. He donated more than $5,500 to Governor Mike Dunleavy (R – Alaska), $800 to Senator Bert Stedman (R – Sitka), co-chair of the Senate Finance Committee, and $500 each to Senator Bishop and Senator James Kaufman (R – Anchorage) – who both sit on the Senate Resources Committee.

Interestingly, Hendrix also donated $1,000 on January 11, 2023 to former Senator Peter Micciche, who is currently running for Kenai Peninsula Borough mayor. But Micciche refunded the donation two days later. On his APOC report, Micciche noted on the refund, “Refund due to open routine property tax assessment challenge that involves the KPB and Mr. Hendrix. Thankful of John’s support, but could cause the perception of a conflict (although KPB legal finds no direct actual conflict).”

Several people representing boroughs and larger oil companies have expressed concern with the bill. Boroughs are worried about losing substantial revenue. Larger oil companies are worried about what could be tacked onto the bill, like a reduction in the per barrel credit, and that a small operator like HEX/Furie is willing to open up a potential Pandora’s box just so their property tax can be reduced.

SB50 was referred to the Senate Resources Committee and the Senate Finance Committee. A hearing has not yet been scheduled.

Update: SB50 was withdrawn by Senator Giessel this morning on the Senate floor.

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Lynn Willis
3 months ago

According to the Legislative web site, Senate Bill 50 has now been withdrawn. This bill was sponsored by “Senate Resources” which absolves any individual from responsibility as a named sponsor, SB50 seemed to be tailored to benefit a particular Cook Inlet potential producer. During hearings on this topic of Cook Inlet gas supply Senator Wielechowski commented that there is no incentive to invest to produce more gas and there simply are no longer any available state incentives to be offered to induce gas production in Cook Inlet. Was this legislation a desperate attempt to maintain the Public Private Partnership “PPP”… Read more »

Taku
3 months ago
Reply to  Lynn Willis

I noticed the same thing. No individual sponsored the bill, so there isn’t anyone person to hold accountable.

Withdrawing the bill is the best thing that could have happened to it.

Mark Kelsey
3 months ago

Good piece with a good outcome. Thanks for being on this.

Grateful Alaskan
3 months ago
Reply to  Mark Kelsey

Amen.

I understand some of the angst towards Jeff. He sometimes puts his cis-white-male victimhood above any sort of objective/editorial perspective, but gosh darn if the Landmine hasn’t served the public interest HUGELY on several occasions.

Alaska is a better place because of Jeff Landfield. Warts, speedo, and everything.