Gas property tax dispute costs Kenai Peninsula Borough

Cook Inlet
Cook Inlet from North Kenai Beach. (Sabine Poux/KDLL)

A natural gas producer with roots in Homer is going on year three of fighting the state and Kenai Peninsula Borough on the property taxes he’s paying for his platform in Cook Inlet.

John Hendrix is president of HEX, which acquired a gas-producing unit and platform in the middle of Cook Inlet in a bankruptcy proceeding in 2020 when it purchased previous producer Furie Operating Alaska.

Hendrix said the high property taxes are making it hard for him to invest in additional natural gas production there.

“This is taking money out of our coffers, and into our workforce, which makes us cut back,” he said.

Meanwhile, the Kenai Peninsula Borough is racking up hundreds of thousands of dollars in legal fees to fight the case.

It all hinges on a disagreement over how much the property is worth.

At the beginning of each year, the state of Alaska assesses oil and gas exploration, production and transportation properties, including drilling rigs, pump houses and offshore platforms. For the last two years, it has valued HEX’s Kitchen Lights property at around $81 million.

Hendrix said the property is worth a quarter of that. Both times, his company has appealed those assessments to the state’s review board where, both times, they’ve been upheld.

Now the appeals are in court, set to go to trial this summer.

The fight is coming at a big cost to the Kenai Peninsula Borough, which is defending the state’s assessment as an intervener in the case.

The Kitchen Lights property falls within the boundaries of the borough, and it gets about half of the $1.6 million in annual taxes HEX pays on the property. The state gets the other half. (While residential and commercial property taxes are the sole purview of municipalities in Alaska, the state gets a cut of taxes on oil and gas properties and determines their taxable value.)

Revenue from the borough’s share is divided between its general fund and services in Nikiski. For example, $218,843 went toward the Nikiski Fire Service Area in 2022.

Jessica Dillon is an Anchorage attorney representing the borough in the case. She said HEX shouldn’t be getting special treatment from the state.

“Both the state and borough are required by law to treat all property taxpayers equally and that law sets out how oil and gas property must be valued,” Dillon said. “But Furie rejects that method and asks for special treatment from the state and the borough by having its property assessed differently from all other oil and gas taxpayers.”

Legal counsel for the state declined to comment on the case.

Roger Marks, a petroleum economist in Anchorage, said it’s not hard to see how these sorts of disputes happen when it comes to assessments. Tax assessment battles between the owners of the trans-Alaska pipeline and marine terminal in Valdez and the state lasted years and cost multiple millions in legal fees for all parties.

Marks said assessing a property is not like assessing a car, where you can go to the Blue Book to see what other people have paid for the same model.

“With a platform sitting in Cook Inlet, there’s not a lot of comparable sales,” Marks said.

He said the method of assessing is laid out in state statute. But the different steps to get there require judgment calls.

In HEX’s case, state assessors have estimated how much they think the property is worth based on how much it would cost to build the platform today. That’s a very different number from what HEX actually paid for the property in 2020.

“A combination of buying it under a distress sale back then, coupled with all the inflation we’ve had would yield quite a bit of difference between the assessed value and what they paid for it,” Marks said.

Hendrix, the company president, said he knew about the state’s assessment when he bought the property three years ago.

But he said he thought the state would budge. Disputes like these, when they do arise, are often decided in settlements, out of court.

“To me, naively, I thought it was a no-brainer,” Hendrix said.

He said the state is not accounting for how hard it is to produce in Cook Inlet, an oil and gas basin many big producers have long abandoned. And he said the taxes he’s paying each year could be going to production and paying a Kenai Peninsula workforce. HEX sells its gas to buyers in Southcentral Alaska.

“The Inlet’s got a lot of challenges,” Hendrix said. “But if they have a lot of challenges, then the valuation needs to go down.”

The Kenai Peninsula Borough estimates spending approximately $400,000 to cover legal fees on the case through trial. Hendrix said HEX has spent $500,000 on litigation.

And the assessment for the upcoming tax year hasn’t come out, yet. But Hendrix said HEX will be appealing when it does.

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