Kenai Borough tax rolls see oil, gas assets jump in value
Increased oil and gas production, exploration and an influx of new infrastructure to Cook Inlet and the Kenai Peninsula is starting to register on local tax rolls.
According to a letter from Jim Greeley, Alaska State Petroleum Property Assessor, the total assessed value of all oil and gas property in the borough increased to $810 million for the 2012 tax year from $698 million in tax year 2011.
The borough’s fiscal year 2013 budget indicates that assessed value will mean a total of $7.78 million in taxes, $3.65 million of which will go to the borough’s general fund. That’s up from a total of $6.69 million in fiscal year 2012 and $7 million in 2011.
The jump in assessed value is the first significant jump in at least a decade. Previous assessed values of local oil and gas consistently ranged between $558 million to $703 million from fiscal years 2001 to 2010.
According to Greeley, the following items totaling $45.2 million in assessed value were not on the borough’s tax roll last year:
* $17.8 million: Orion Offshore, Spartan 151 jack-up rig.
* $14 million: Cook Inlet Energy, drilling rig 35 on the Osprey Platform and rig 34.
* $9.4 million: Buccaneer, Kenai Loop onshore gas infrastructure.
* $4 million: Furie Operating, gas exploration property such as tubulars, drilling equipment and inventory.
“The total value can increase because new stuff is moving in but that doesn’t mean the value of the existing stuff is increasing,” said Greeley in an interview with the Peninsula Clarion. “But, the reality is that it is a little of both — there are existing values that have increased, but there are also values that have decreased. Over the last five years or so, Cook Inlet has generally been seeing slight value increases overall. Before that timeframe it was generally dwindling in value over time.”
Assessment values incorporate three state provisions — exploration, pipeline and production -- and are affected by new investment, improved existing infrastructure, increases in production, and new reserves found through exploration, Greeley said.
“You will certainly see an increase (in value) for an existing piece of infrastructure ... if reserves are increasing or if production is increasing,” Greeley said.
According to the Alaska Department of Natural Resources, Cook Inlet oil production has been on a steady slide since it peaked in 1971 at 214,624 barrels of oil per day. The area dropped to 7,512 barrels of oil per day in 2009, but jumped to 10,235 in 2010.
April has been the most productive month so far for oil production in the Inlet with a monthly average of 13,095 barrels being produced per day. March was lowest this year with 8,042 barrels per day.
Kenai Peninsula Borough Mayor Mike Navarre said he was optimistic about the increases in Cook Inlet values and expected them to continue to rise.
“I think it’s the biggest part of the increase in assessed value to the borough is obviously the oil and gas properties and I think it reflects a couple of things,” he said. “It reflects the price of oil and increased activity in Cook Inlet and that’s something that’s good in the short term and more importantly it should be good for the long term.”
Kenai borough, Tesoro reach deal on refinery
Kenai Peninsula Borough officials recently signed off on a five-year agreement that sets annual values for property tax assessments on the single most valuable property in the area — the Tesoro refinery.
Two weeks ago, officials agreed to terms on the Tesoro refinery after a dispute about its value landed both sides in Board of Equalization hearings, Borough Assessor Tom Anderson said. The borough and Tesoro previously had a five-year agreement that went through 2010. During that period the highest value the refinery received was $182 million and the lowest was $126 million in 2010.
In 2011, the borough hired an appraiser who valued the refinery at $303 million, which Tesoro disagreed with, Anderson said. Tesoro appeal the assessment and through its own appraisal determined the value at $128 million. The board of equalization decided to set the value at $143 million.
The new agreement uses the $143 million number as a benchmark for a new agreement that is structured similarly to the old, Anderson said.
“This valuation formula is super simplified if you look at the complexities of trying to actually appraise a refinery,” Anderson said. “That’s an extremely complex appraisal assignment and it is a big learning curve for someone to try and understand how an appraiser comes up with a value for a refinery.
“This is a very simplified formula that both sides agree is a reasonable methodology to make changes to that benchmark value on a year-by-year basis that reasonably reflects changing market conditions.”
For 2012, the assessed value came out at $152.5 million. The 2011 assessment resulted in $1.45 million in tax revenue for all service areas, which meant $646,000 for borough coffers, Anderson said.
The provisions in the agreement work by applying two indexes to the property as a factor to adjust the benchmark value year over year to reflect current market conditions, Anderson said.
The first index is based on a comparison of finished product prices with crude oil prices. This index is called a “crack spread” in the industry, Anderson said.
The second index is a year-by-year comparison of the amount of product actually produced by the refinery. This index is called a “crude rate” in the industry.
The first index is a quick way to look at gross margins — the difference between the revenue they earn from the sale of their products less the cost of the crude input, most of which is Alaska North Slope crude, Anderson said.
The agreement relies on a combination of Seattle prices for jet fuel, unleaded gasoline and 380 CST fuel, compared to the Seattle price of Alaska North Slope Crude oil.
“It is looking at that spread in price one year to the next,” Anderson said. “So we are not necessarily looking at what is the value of the difference, we are looking at how much does that change one year to the next because that would affect how profitable the refinery’s operations are from one year to another.”
The agreement also applies a three-year average on those prices — something the previous agreement had — to help smooth out prices. Despite that average, however, Anderson said the value can still fluctuate “quite substantially.”
“So for 2013, we would look at what is that index for 2013, ‘12 and ‘11 and divide that by the average of those indexes for 2011, ‘10 and ‘09 to come up with what’s the factor that we apply to that benchmark value,” he said.
Kenai Peninsula Borough Mayor Navarre said he was comfortable with the agreement after receiving general support from the borough assembly and the state assessor’s office.
Navarre previously asked the assembly for $100,000 to do another appraisal on the property, but the borough only received one response to the request for proposal and never got “an acceptable and final” appraisal from the firm that they contracted with, he said. The borough spent about $25,000 of the $100,000 and the remainder will go back into the general fund at the end of the year, Navarre said.
“We were having a real struggle getting to a defensible and supportable appraisal in the open market,” Navarre said. “We tried to do that to establish the value and couldn’t get there so we negotiated with Tesoro and went back to a methodology that had been used in the past.”
Brian Smith can be reached at brian.smith@peninsulaclarion.com.
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