Alaska Senate hastily withdraws bill pushed by single producer to cut oil and gas taxes

Feb. 9—JUNEAU — The Alaska Senate has hastily withdrawn a bill that would have rewritten how oil and gas property taxes are assessed, after it was revealed a single Cook Inlet gas producer was behind the legislative effort.

After the bill was introduced last week, oil-producing municipalities leapt into action behind the scenes to kill it. Tax experts said that if the proposed changes were applied statewide, the North Slope Borough, the Kenai Peninsula Borough and the City of Valdez — and all local governments across Alaska that collect property taxes from oil and gas production — would see a significant revenue hit.

For decades, the state has assessed oil and gas properties at their replacement value: what it would cost to rebuild all of their producing assets if they were suddenly lost. Senate Bill 50 would have changed that to their market value, or what the assets would currently sell for.

The website The Alaska Landmine first published a story about the bill on Tuesday evening and its links to John Hendrix, a longtime Alaska oil and gas industry player, who has long fought against the state to reduce his tax obligation. In recent weeks, he has tried to find lawmakers to introduce the bill to benefit his business.

According to court filings, Hendrix's company Hex LLC bought Furie Operating LLC for $34 million after the Texas-based operator had filed for bankruptcy. Hendrix, a former oil and gas adviser to former Gov. Bill Walker, had help from tax credits and a $7.5 million state loan. But he said challenges remain for the small, Homer-based producer.

"I buy something that's bigger than what I need — and it doesn't produce much," Hendrix said.

Here and gone

Anchorage Republican Sen. Cathy Giessel said she introduced the bill last week on behalf of the Senate Resources Committee as a way to study all options to address looming shortfalls of Cook Inlet natural gas. But she withdrew it Wednesday morning before any legislative hearings had been held.

Giessel said Wednesday that she was approached by Hendrix to introduce the bill, which is "kind of typical" in the state Capitol. She said she was unaware at the time that he was involved in a lawsuit with the state over Furie's tax burden.

Giessel, who returned to the Legislature in January after previously serving for almost a decade, is known to be well-versed in oil and gas tax policy. She served for six years as chair of the Senate Resources Committee, but said she hadn't studied "the ramifications" of what the legislation would do.

For the past three years, Hendrix has fought against the state of Alaska after it twice assessed the taxable value of his gas-producing unit and platform at $82 million. He has claimed in court filings that it was worth less than a tenth of that based on his interpretation of how property taxes should be calculated.

"If you bought a house for $250,000, do you expect to pay a million dollars in property tax for it?" he asked rhetorically by phone on Wednesday.

Hendrix acknowledges that he knew Furie's taxable value before he bought the company. But he says that the current tax rates are stifling growth and more production — and he thought the state would change them.

Furie pays around $1.6 million in property taxes per year: Half goes to the state of Alaska and half goes to the Kenai Peninsula Borough, which is also opposed to Hendrix's efforts to reduce his tax burden.

Anchorage petroleum attorneys told Alaska Public Media last month that Hendrix is effectively asking for "special treatment" by the state.

Hendrix, who runs the only operating Alaska-owned gas producer, said his tax burden is a "killer" and could result in job losses. The company has held contracts to supply Enstar with gas.

The State Assessment Review Board has twice rejected Hendrix's appeals, arguing that the current methodology to collect property taxes is set in statute. The case is set to be heard in Anchorage Superior Court in July.

Furie is one of 14 member companies of the Alaska Oil and Gas Association — an industry trade group — which does not have a position on the proposed changes in the bill. The Department of Revenue declined to comment, citing the state's ongoing litigation with Hendrix.

[Alaska oil producers squeezed more oil out of the North Slope in 2022]

Backlash

Senate Bill 50 sparked an immediate backlash over the weekend from the North Slope Borough and other municipalities. Giessel quickly heard concerns about the potential negative impacts to their revenue.

"That was not my intention at all," she said.

Hendrix said the bill was meant to only apply to Cook Inlet — and that other resource-producing parts of the state have their own "special deals" — but most of it wasn't written that way. Part of the bill could reduce how some wells are calculated and the associated tax revenue.

One of its provisions regarding sales of assets would be limited to the Cook Inlet basin: It would reset the taxable value of an asset each time it was sold — less depreciation — likely resulting in reduced tax revenue being collected. Tax experts said those provisions may have been too narrowly tailored to benefit Furie to be constitutional.

Utqiagvik independent Rep. Josiah Patkotak said there could be "unintended consequences" from SB 50, including straining services to the North Slope Borough's 11,000 residents by cutting revenue.

"Who do you think they're going to go to when they can't levy a tax?" he said.

Lawmakers in the House were also approached by Furie to introduce Hendrix's bill. Patkotak, a member of the Bush Caucus who is serving in the Republican-led House majority's leadership team, said he helped convince them not to.

"There's just a learning curve for folks who were in the minority, who are now in the majority," he said.

Golovin Democratic Sen. Donny Olson said the legislation stirred up memories of 2019 when Gov. Mike Dunleavy proposed to divert all of the petroleum property tax revenue collected by municipalities to the state — that would have cost the North Slope Borough $376 million over the last fiscal year.

"They were very sensitive about something like that happening again," Olson said.

While the Senate has withdrawn the bill, with Giessel declaring it dead in that legislative chamber, Hendrix stressed he has no intention of abandoning his legislative efforts to rewrite the state's property tax law.

"No," he said. "We have to change it."