Andrew Jensen

AJOC EDITORIAL: Dead horses: Feds’ King Cove hypocrisy & the LIO fiasco

Sometimes a dead horse really does need another beating. On May 4, we received a fresh reminder of the federal government’s rank and callous hypocrisy regarding the emergency access road from King Cove to Cold Bay. Earlier in the week, we were treated to more of the rudderless Legislature’s trademark blend of incompetence and dysfunction that goes together like a jar of Goober Grape. Before getting to the Republican-led Legislature’s ongoing and pathetic attempts to extricate itself from the embarrassment of its Downtown Anchorage office building, up for the first whack is the U.S. Interior Department led by Sally Jewell and a new rule proposed by its Fish and Wildlife Service agency. The rule released May 4 allows for the killing of bald and golden eagles by wind farms and nearly quadruples the annual limit for killing bald eagles first proposed in 2009; it also acknowledges that human-caused mortality of golden eagles may be unsustainable because studies since 2009 indicate the population may be in decline. The new rule out for public comment would allow the killing of 4,200 bald eagles nationwide by wind farms compared to the limit of about 1,100 proposed in 2009. The limit on golden eagle kills remains zero, but the Fish and Wildlife Service knows that windmills will still be causing mortality and therefore it has come up with “compensatory mitigation” workarounds so that companies may pay some sort of fee to a conservation bank to make up for killing golden eagles. This is the same Fish and Wildlife Service that denied approval — and was upheld by Jewell — for 11 miles of one-lane road to complete a connection between King Cove and Cold Bay through the Izembek Wildlife Refuge based on hypothetical impacts on Trumpeter swans and Pacific black brant geese whose populations have no conservation concern. FWS estimates there are about 143,000 bald eagles in the U.S., with half of those in Alaska, and it believes as much as 5 percent or more of local area populations can be killed annually without impacting the species as a whole. Of the Pacific black brant geese, about 160,000 gather in Alaska annually and thanks to warmer temperatures as many as 50,000 stayed through winter in 2014 to continue feasting on abundant eelgrass in the refuge lagoons. Of the Trumpeter swans, 13,000 of the 16,000 or so in the U.S. reside in Alaska with Lower 48 populations raised mostly by eggs transplanted from here. Examples of the federal government’s arrogant abuse of discretion can be found on a daily basis, but few could be more egregious than Jewell’s heartless disregard for 1,000 mainly Alaska Natives living in King Cove while giving special treatment to a favored “green” industry such as wind power to kill thousands of eagles every year even when her own data show one of those species may be in decline. The proposed road would do no such harm, as Alaskans have a long history of building infrastructure in sensitive areas. And in any case, putting a few birds at risk cannot begin to outweigh the risks to residents with medical emergencies and the members of the U.S. Coast Guard who are called upon to rescue them. The press release from the FWS regarding the new eagle kill rule — which it describes in Orwellian fashion as “eagle management” — commits sins of omission by not including the number of eagles it will allow the wind industry to kill every year. You have to read into the 162-page proposed rule to find that information. Even more galling, though, is FWS Director Dan Ashe’s comment in the release that, “Eagles hold a revered place in our nation’s history and culture, particularly that of Native Americans.” Frankly, it is disgusting that Jewell, Ashe, et al, can pretend to be concerned about Native Americans’ feelings when it comes to eagles while coldly disregarding their feelings about access to emergency medical care. No more proof is needed that the federal government’s care for its trust responsibilities to Alaska Natives goes no further than the extent to which it aligns with its own agenda. LIO saga continues On May 2, the Legislative Council voted 12-1 to attempt to buy another office building in Anchorage for $12.5 million currently owned by Wells Fargo and rescinded its offer made just a month ago to buy the current Legislative Information Office for $32.5 million. In an ironic twist, Wells Fargo was one of the construction lenders along with Northrim on the Downtown LIO and prepared an appraisal of $44 million that was used to justify the now-voided lease being below market value at some $3.3 million per year, which means it might end up getting a double payout from this whole fiasco because those notes were eventually consolidated into a longterm loan by EverBank. The Legislature isn’t going to get away from its mess in Downtown Anchorage by moving to Midtown. The Legislature is going to get sued by the developers and their lender and based on Alaska Supreme Court precedent they’re going to have a good chance of recovering their costs at a minimum regardless of the fact the lease was voided by a Superior Court judge. This bunch in Juneau couldn’t boil water without messing it up, but then again, they can probably get a lobbyist to do it for them. A microcosm of Republican leadership’s cluelessness was Senate President Kevin Meyer’s statement about letting lobbyists for the LIO owners buy his dinner at the same time he’s getting $213 in per diem. “We could pay for our own way,” he said to the Alaska Dispatch News. “I’m just trying to think how that would work.” They sure know how to eat. They just don’t know how to pay.

ConocoPhillps loses $1.47B in 1Q, pays 96.4% effective tax rate in Alaska

ConocoPhillips posted a loss of $1.47 billion in the first quarter of 2016, including a $2 million net loss from its Alaska operations. The state’s largest oil producer increased its output year-over-year by 4.3 percent, from 163,000 barrels per day in the first quarter of 2015 compared to 170,000 in 2016. It also spent $320 million in capital expenditures in Alaska, down from the $402 million spent in the same period of 2015, which reflects the work done throughout last year to bring the CD-5 site into production last October. Although ConocoPhillips said Thursday that it is lowering its full-year capital expenditures outlook to $5.7 billion from $6.4 billion, the company announced last week it will spend $190 million to fully drill out CD-5 this year and next, and reach its production target of 16,000 barrels per day this year. Last fall, ConocoPhillips announced it has sanctioned development of the adjoining Greater Mooses Tooth-1 project that has potential to produce 30,000 barrels per day. Before reflecting net operating loss credits now the subject of so much debate in Juneau, ConocoPhillips’ unadjusted result in the state was a loss of $52 million. Yet even with the upward revision to a net loss of $2 million after taxes and credits, the company reported paying an effective tax rate of 96.4 percent in Alaska in the first quarter. It was the highest effective tax rate for any jurisdiction where ConocoPhillips operates, ahead of 90.8 percent in the Asia Pacific/Middle East and 65.3 percent in North Africa/Europe. The company's consolidated average rate was 34.5 percent. Besides production taxes, oil companies in Alaska pay a 12.5 percent royalty plus property and corporate taxes. In the same period of 2015, ConocoPhillips paid an effective tax rate in Alaska of 35.2 percent on pre-tax income of $225 million. Revenue totaled $5.02 billion, down from $8 billion a year ago. ConocoPhillips reported its average realized price for crude oil was $31.43 per barrel in the first quarter compared to $48 in the same period of 2015. The Alaska Department of Revenue estimates that lease expenses and transportation costs on each barrel of North Slope crude are about $46 per barrel. The company’s loss was less than expected by Wall Street. Losses, adjusted for asset impairment costs and one-time costs, came to 95 cents per share. This was better than the loss of $1.07 per share that analysts surveyed by Zacks Investment Research expected. Shares were up slightly by 88 cents to $49 as of 10:20 a.m. Alaska time.

AJOC EDITORIAL: Gov’s union contract is a joke, and so is GOP response

Gov. Bill Walker has a funny way of showing that he’s looking everywhere for solutions to the state’s current $4.1 billion deficit. In addition to reducing the Permanent Fund Dividend by redirecting earnings into paying for state government, he’s proposed raising taxes on oil and gas, fishing, mining, tourism, alcohol, cigarettes, fuel, and personal income. He made a big show in January of claims he’s instituted a hiring freeze and restricted employee travel, although he couldn’t provide any estimate of how much money it would save. Meanwhile, his Department of Administration was negotiating with the labor unions that represent about 87 percent of the employees covered by collective bargaining arrangements. About 11,000 of the 14,400 or so employees covered by the current negotiations are members of the Alaska Public Employees Association and the Alaska State Employees Association. Coincidentally, both unions endorsed Walker for governor in 2014. Also coincidentally, its members are giving up next to nothing in the contracts being presented to the Legislature for approval. All together, the Administration Department estimates the current contracts tentatively agreed to will save a whopping $6.5 million in the next fiscal year from a couple furlough days per employee and a minimal contribution to the health insurance from the current 0 percent to 5 percent. To put that in perspective, $6.5 million in savings represents about 0.5 percent of total state payroll of about $1.2 billion. Zero-point-five. Out of the total deficit, $6.5 million is 0.1 percent. Zero-point-one. In the accounting world these amounts are known as rounding errors. Out of the $457 million in higher taxes proposed by Walker — which amounts to more than 10 percent of the deficit — $6.5 million is 1.4 percent. The furlough days, minimal as they are, generate even less when Administration estimates that about three-quarters of employees will cash in leave rather than take an unpaid day. What remains are escalating and generous pay increases for “merit” and what is simply known as a “step” increase of 3.25 percent every two years. The definition of merit, under the state’s current contracts, is “acceptable or better.” Under this definition, according to Administration Commissioner Sheldon Fisher, about 95 percent of employees qualify for the 3.5 percent “merit” raise for each of their first five years on the job. To be fair, the Administration has removed the cost of living allowance increases, or COLA, from the current deals. A 2.5 percent COLA for the current fiscal year totaled about $30 million, which the Legislature offset with a corresponding cut to executive branch budgets. That is difficult to count as “savings,” though, as elimination of the COLA will be more than offset by the near-automatic merit and step raises still in the contracts. It is also worth noting that the Consumer Price Index has increased by just 0.5 percent and 1.6 percent in Anchorage in 2015 and 2014, respectively, thanks largely to the collapse in oil prices that is driving the deficit. The most fantastic statement in the Department of Administration’s presentation to the House Finance Committee on March 14 was from the slide titled “Bargaining Priorities” that read “Current fiscal climate requires modest reductions.” Modest? We know Juneau is off the road system but until now it wasn’t clear that it is actually on another planet. As usual, though, the Republican-led majorities are botching their response. Rep. Craig Johnson, R-Anchorage, introduced House Bill 379 that would eliminate the merit and step increases until oil reaches $90 per barrel for a full fiscal year. It would also change the qualification for a merit increase from “acceptable” to “good.” This is in direct opposition to a legal opinion from the Legislature’s own attorneys that declared unequivocally it is outside the body’s constitutional powers to engage in collective bargaining, which Johnson’s bill clearly does with its specific requirements for a labor contract. The memo concludes that the Legislature holds the power of the purse, and can simply refuse to appropriate money to fund raises if it doesn’t approve of them. All it should take is some firm statements from legislators to the Administration Department that they will not fund raises if they’re included in a contract. Instead they are taking what appears to be an unconstitutional path to achieve what they already have the power to do by other means. It’s no wonder the majorities find themselves in their current mess. Andrew Jensen can be reached at [email protected]

AJOC EDITORIAL: Final week cramming won’t produce sustainable solutions

As legislators attempt to cram their final week with major changes to how the state pays oil credits and uses its Permanent Fund earnings while filling the budget deficit with savings accounts, they may be tempted to go home to seek reelection feeling like they did their jobs. Public polling conducted by Dittman Research for the Alaska Chamber in the last week of March suggests they won’t face a lot of citizens who’d agree. When asked whether they had a favorable opinion of various state industries including oil and gas, tourism, mining and timber, the only segment of the economy to receive a negative rating was state government with just 42 percent having a “very” or “somewhat” favorable opinion. The Legislature fared even worse, with only 33 percent having a favorable opinion. That may not make the difference in the makeup of the body next year in Juneau, as voters in Alaska aren’t much different than those around the country that routinely give Congress a sub-20 percent approval rating yet more than 85 percent of incumbents are typically reelected. “Everybody else is an idiot, but my (fill in the blank) is OK,” seems to be the sentiment, which calls to mind an expression by Alaska pioneer Clem Tillion that goes along the lines of, “Nothing will make you think worse of your neighbors than seeing who they elect to represent them.” What Alaska’s fiscal crisis has exposed is how poorly so many state government functions and programs perform. In fat budget times not many in Juneau were overly concerned with throwing money at capital projects, prisons, education and oil tax incentives. Now that they have been forced to examine all spending — and as their constituents who’ve gotten hooked on it lobby to preserve the status quo — it’s clear that oversight and accountability have been sorely lacking.  Starting with oil credits, the Legislature is missing a huge opportunity to fix the program beyond simply reducing outlays. While some tweaks to credits at low prices are not unreasonable, it is indisputable that oil companies have responded to Senate Bill 21 passed in 2013 and upheld by referendum in 2014. Daily production for this fiscal year is now forecast to be about 520,000 barrels per day compared to 500,000 barrels per day last fiscal year. That’s a real number that can’t be disputed by those legislators who criticize SB 21 to this day with the same tired talking points they’ve belched out for the last three years. Even next year, knowing BP plans to shut down some rigs at Prudhoe, the forecast is for 507,000 barrels per day. In the fall 2012 Revenue Department forecast, production in fiscal year 2017 was supposed to be only 484,000 barrels per day. The 2012 forecast was for just 8,300 barrels per day in Cook Inlet. We’re now nearly 10,000 barrels per day greater than that. One Hilcorp platform that was producing just 600 barrels per day when the company took it over is now paying $6 million per year in royalties to the state and as a producer of more than 50,000 barrels per day it is no longer eligible for many of the credits it is advocating to preserve. The Cook Inlet Recovery Act and SB 21 worked to reverse declines on both the Slope and the Inlet. They aren’t perfect, but looking at the bottom line of production, SB 21 has far outperformed ACES, which had its own issues with declining output and ballooning credit payments that were on pace to top $1 billion per year before the overly generous 20 percent capital expenditure credit was repealed under SB 21 and replaced with credits tied to barrels produced and not merely money spent. That ACES cap-ex credit would have put the state on the hook for $800 million at Point Thomson alone, which is greater than the entire proposed fiscal year 2017 appropriation for tax credits and incentives. Transparency measures have been stripped out of the current oil tax credit bills, and that’s a shame. Keeping confidential credits related to actual tax liability and production is understandable. Keeping confidential the rebates paid out to companies exploring that have no tax liability is not. A simple fix would be to set an annual appropriation amount the state is willing to invest in exploration projects. Companies would have to seek pre-approval for projects, and therefore know what they can expect in rebates, and the state would know what its outlays will be and whether a prospect is worth exploring based on input from the Natural Resources and Revenue departments. Companies have been quite willing to disclose what they expect from state rebates to secure private investor funding, so if they want the state’s help they should have to do it on the state’s terms. That should mean the public knows the projects the state is investing in. It’s impossible to defend a program you can’t explain, and House Speaker Mike Chenault couldn’t be more wrong when he says the average Alaskan doesn’t care where the money is going. The state needs companies investing and exploring at times of low prices so that when the inevitable price rebound occurs the state will be positioned to benefit. But instead it once again appears poised to chase out companies with its never-ending quest to find a “heads we win, tails you lose” tax policy that jacks up taxes at times of both high and low prices. The education lobby wants funding preserved for K-12 and the university system, but there has been precious little examination of what the state is getting for its money despite spending more per pupil than every state other than New York. The idea of defunding the Alaska Performance Scholarships in order to pay for retired teacher pensions appears backward on its face — cutting spending on the future in order to pay for promises of the past — but it has shone a light on the shortcomings of the state education system. A full 50 percent of students enrolling in the University of Alaska system need remedial education, including 20 percent of the students who receive scholarships, and three out of four students who enroll at the UA won’t graduate within six years. Neither of those numbers are acceptable, yet nothing that’s happening in Juneau is addressing the chronic problem of poor results at every level of education. Critics are harping on subsidies for the oil industry that pays the freight for virtually everything in Alaska (and is once again being called to pay more), yet few have questioned the wisdom of subsidizing unqualified students and therefore the tuition rolls of the University system. On Medicaid reform, a great irony of the bill headed for passage is that most of the savings come from more federal dollars for Tribal care. The Legislature is also quietly funding the expanded class of Medicaid recipients the majorities are currently suing the governor to overturn. For the most part, legislators are papering over problems with the apparent main goal of preserving the PFD at $1,000, an amount greater than the 2012 and 2013 payouts, which were $876 and $900, respectively, in the hopes they can return to Juneau next year. A better example of election year politics is hard to imagine than setting a minimum PFD that is actually larger than recent year payouts at a time of multi-billion-dollar deficits. If lack of leadership creates a vacuum, Stephen Hawking should be studying Juneau for its resemblance to a black hole. Andrew Jensen can be reached at [email protected]

Air Force officially chooses Eielson for F-35s

A long-awaited and expected announcement came Monday by the U.S. Air Force that two squadrons of F-35 fighters will be deployed to Eielson Air Force Base in Fairbanks. A total of 54 new aircraft and an estimated 2,765 personnel will be part of the deployment, with construction to begin in fiscal year 2017, which begins Oct. 1. The two squadrons of F-35s will join the F-16 Aggressor squadron and the 168th Air Refueling Wing currently assigned to Eielson. The first jets are scheduled to arrive in 2020. "Alaska combines a strategically important location with a world-class training environment,” said Secretary of the Air Force Deborah Lee James in a statement released by the Public Affairs office for the 354th Fighter Wing. “Basing the F-35s at Eielson AFB will allow the Air Force the capability of using the Joint Pacific Alaska Range Complex (JPARC) for large force exercises using a multitude of ranges and maneuver areas in Alaska. This, combined with the largest airspace in the Air Force, ensures realistic combat training for the (Defense Department)." The announcement made formal what had long been anticipated, especially after construction began last year on a F-35 simulator at Eielson AFB. A release from the Alaska congressional delegation applauding the decision stated that construction activity associated with the siting of the F-35A Joint Strike Fighter is expected to create a total of 2,339 new construction jobs and generate $453.4 million in economic output over the next four years. That’s on top of some $1 billion in spending at Clear Air Force Station near Nenana and Fort Greely at Delta Junction currently planned or underway for upgraded missile defense radar and additional interceptors. "The decision to base two F-35 squadrons at Eielson AFB, Alaska, combined with the existing F-22 Raptors at Joint Base Elmendorf-Richardson, will double our fifth-generation fighter aircraft presence in the Pacific theater," said Air Force Chief of Staff Gen. Mark A. Welsh III. "Integrating that fifth-generation force with Navy, Marine, and allied F-35 forces will provide joint and coalition warfighters unprecedented survivability, lethality and battlespace awareness in contested environments. It's an exciting time for Pacific airpower." Members of the congressional delegation and Gov. Bill Walker noted in their official comments that it wasn’t long ago that Eielson was targeted for closure, and then the reassignment of the F-16 that would have essentially done the same. The Air Force dropped the plan to move the F-16s out of Eielson in late 2013. More recently, the delegation challenged a U.S. Army proposal to cut the 4th Infantry, 25th Brigade, also known as the 4-25, from Fort Richardson in Anchorage. Citing the state’s strategic Arctic location, emerging threats in the Pacific theater and the 4-25 status as the only Airborne Brigade in the region, the delegation convinced the Army to delay any force reduction. “It's clear DOD understands that Alaska’s strategic value — its vast training areas, proximity to the Asia-Pacific, and our commitment to serving our military — is unmatched anywhere else in the world,” said Alaska U.S. Rep. Don Young. “From the beginning, my case for bringing the F-35 to Alaska has focused on fulfilling the mission. While I’m proud to have played a role in this process, having secured language in each of the last two National Defense Authorization Acts that emphasized Alaska’s immense military value and the benefits Eielson offers the Air Force, I’ve always said that Alaska’s contributions to our military sell themselves.”

AJOC EDITORIAL: Read their lips: No new taxes

With operating budgets passed in the House and Senate but not yet funded, at least one thing is now clear: Gov. Bill Walker’s proposals to raise taxes on individuals and businesses by nearly $460 million in the next fiscal year aren’t going anywhere. Senate Finance Co-Chair Pete Kelly, R-Fairbanks, couldn’t have been more blunt — or, frankly, rude — in response to a question about how the Legislature plans to pay for the fiscal year 2017 spending that figures to outpace revenue by $3.7 billion. At a Finance Committee press conference March 15, Kelly took the opportunity of a question that did not mention taxes to state unequivocally that he has no intention of plumbing a well to the private sector to fill whatever gap remains once some means of drawing from Permanent Fund earnings is chosen. Kelly noted he was speaking for himself, but with all but one of Walker’s proposed tax hikes still sitting in committee or yet to receive a hearing, there can be little doubt his opinion represents the Republican majorities. The only tax proposal that has moved out of its original committee is the doubling of the fuel tax from its current national low of 8 cents per gallon that is projected to raise about $49 million per year. The increase has received a large amount of support from stakeholders in the transportation industry who recognize the importance of maintaining the infrastructure on which their livelihoods depends. Of all Walker’s tax proposals, it’s also the fairest and most broad-based, especially at today’s depressed fuel prices. The Legislature still has a heavy lift ahead to select a means to use the Permanent Fund earnings and because it won’t raise additional revenue through taxes, the majority in the House is going to have to cut some deals with the minority Democrats in order to draw from the Constitutional Budget Reserve, or CBR. And just as an aside, Kelly and fellow Finance Co-Chair Anna MacKinnon, R-Eagle River, attempted to argue that a budget paid for with the Earnings Reserve and the CBR is “balanced.” A budget is balanced when revenue covers expenses. A budget that relies on savings is funded. There’s a huge difference, and as far as spin goes it can’t turn a pinwheel in a hurricane. Nevertheless, the majorities are correct that it is far better to make a relatively small draw from the CBR than it is to kick Alaska’s economic drivers in the guts while they’re down. The oil industry that’s propped up Alaska’s government spending for nearly 40 years is always a juicy target — for this governor in particular — but no knowledgeable observer could look at the daily stream of news about layoffs, delayed projects and idled rigs and think raising taxes on its members by some $100 million as Walker has proposed is anything but a terrible idea. Alaska’s most valuable fishery with the greatest number of workers — salmon — is in the midst of its own price crisis yet Walker wants to extract $18 million out of the industry by raising every fish tax. Minerals prices have also trended lower, and global sluggishness is reducing demand along with other factors such as transitions away from coal that caused Usibelli to halt exports last year. The governor and his Revenue Department asked the University of Alaska Institute of Social and Economic Research to study the effects of budget cuts on the broader economy. That ISER’s original analysis did not consider the impacts of private sector job losses was a glaring omission that still managed to be revealing. What we can see from the ISER study is that government job losses have a multiplier effect of less than one. A loss of 900 government jobs results in a loss of about 700 indirect jobs. ISER may not have looked at private sector losses and their multipliers, but the McDowell Group has done plenty of work in this arena over the years. What McDowell Group has found is that every direct job in oil production creates an additional nine in the private sector. When the role of oil taxes are accounted for, each oil industry job pays for another 10 state and local government jobs. Mining and fishing have 2-to-1 job multipliers according to various McDowell Group studies. Breaking it down, the Legislature’s priorities should be clear: Preserving private sector jobs is more important than preserving public sector jobs. As a business publication, we don’t want anyone to lose their job, but this is the tradeoff the state faces. Walker may not like it — and he’s certainly welcome to go out and advocate for taxing Alaskan incomes at a $400 million annualized rate — but refusing to raise taxes during an economic downturn is the right call from the Legislature. Andrew Jensen can be reached at [email protected]  

AJOC EDITORIAL: No news is bad news for AK LNG Project

It was the Seinfeld of press conferences. One might think that a gathering of the five most influential figures in the massive Alaska LNG Project would have had more news to share, but in the end it was a press conference about nothing. And that’s bad news for everyone involved. Standing shoulder-to-shoulder with the state’s project partners whose taxes he’s proposing to raise dramatically at a time when their costs are nearly double the price per barrel, Gov. Bill Walker had no answers for where AK LNG is headed. As the Journal first reported Feb. 10, the project is now officially off schedule and most likely delayed from undertaking the more advanced work for at least two years. The state and its producer partners will finish the preliminary-front-end engineering and design, or pre-FEED, this year as planned but there will be no vote on a constitutional amendment in November because there will be no fiscal contracts to present to the Legislature for approval. The next time the state’s residents could vote on an amendment to set tax policy for the project will be 2018. Ostensibly, the delay in the project is related to the failure among the three North Slope producers who own differing shares of the gas at Prudhoe Bay and Point Thomson to reach the lynchpin gas balancing agreement governing offtake from the two fields once the project goes into production. But the “elephant in the room,” as Walker put it, is the price per barrel that has hovered in the mid-$20s or low $30s since the start of the year. As anyone who’s been following along knows, the oil companies on the Slope and around the world are hemorrhaging cash in the current price environment. Contemplating a spend of $2 billion or more among the state and its three partners for the full front end engineering design, or FEED, stage is simply not a viable option. ConocoPhillips, for example, burned through $2.7 billion of its $5 billion in cash during 2015 and was compelled to slash its dividend by two-thirds from 74 cents per share to 25 cents per share. From this vantage, then, the best way to slow-walk the project without obviously slow-walking the project is to hold off on sealing the deals that would force the companies to make the FEED decision sooner than is fiscally responsible to their shareholders. That is certainly disappointing to Alaskans who have seen the concept of commercializing North Slope gas advance further than it ever has, but with the state in deficit spending with a budget hole approaching $4 billion it doesn’t exactly have a lot of cash to throw around either. Between the Alaska Gasline Inducement Act subsidies to TransCanada, the subsequent buyout of that company’s interest in AK LNG this past November, and the state’s obligations for its share of pre-FEED spending, Alaska is blowing past a half-billion dollars spent on its last two efforts to monetize North Slope gas. The state does have more to show for its money in the current effort, with export permits in hand and a refined cost estimate to result from pre-FEED, but anything would look good compared to what Alaska got out of AGIA. With a desperate need to hold this project together through a brutal price cycle nobody saw coming, Walker must rethink his proposals to hike taxes on our project partners. Walker wants to raise the tax floor from 4 percent to 5 percent, and restructure the system so that producers are always paying taxes even when they are losing money. Walker cannot have it both ways. He cannot endlessly repeat that Alaska should act like an owner state while expecting to be insulated from depressed markets. It has always been well known that such a capital-intensive project with much thinner margins would require a healthy oil business to support it, yet Walker is proposing to drain the Slope producers’ cash at a time when they have none to spare. With or without AK LNG, the state and the Slope producers are in this boat together. We shouldn’t be the ones trying to sink it by weighing our partners down with more taxes.

AJOC EDITORIAL: Moda’s big Obamacare bet goes bust

Moda Health went all in on Obamacare, and it is now short-stacked and heading for the rail. On Jan. 29, the Alaska Division of Insurance followed suit of its counterpart in Oregon by suspending Moda from operating in the state due to its rapidly deteriorating financial condition caused by massive losses incurred operating in the health insurance exchanges created by the ill-named Affordable Care Act commonly known as Obamacare. Moda’s suspension leaves Alaska with only Premera Blue Cross Blue Shield offering individual health insurance policies. The Oregonian reported this past October on Portland-based Moda pulling out of the insurance markets in Washington and California after the company announced it would receive only $11 million of the $90 million it was expecting from the federal government to cover its losses from the exchanges. As the company sought a 25 percent premium increase in Oregon, it had also asked for and received a 39.6 percent increase for its Alaska policies. Premera received approval for a similarly large increase of 38.7 percent for 2016, citing losses from the policies sold in the state. In 2014, Premera lost $9 million serving the individual Alaska policyholders, and a similar loss of $9 million was projected for 2015 based on claims cost data in the first three months. “The bottom line is that we see another year of significant losses,” Premera spokeswoman Melanie Coon told the Journal last August. “It’s not getting any better.” Insurers across the country are warning they will consider pulling out of the insurance exchanges next year if the situation does not improve. The nation’s largest, UnitedHealth Group, is among those, and Aetna recently reported that it lost $100 million last year from its exchange business. Herbert Stein’s Law states: “That which cannot continue, won’t.” Insurers are not going to sit back and continue to lose hundreds of millions of dollars, which should be of grave concern in a state with one company that is currently losing money in the Obamacare exchanges. So what’s going on here? It starts with the way the Obama administration got insurance companies to buy in to the law in the first place. The ACA created a “risk corridor” by which the companies agreed to pay the government for profits in excess of their estimates for the year and if they lost money, the government would bail them out. Remember, Obamacare was sold as deficit-neutral at worst, and a deficit-reducer at best. Over and over we heard the pitch that it was going to save the country money (part of those “savings” came from the government taking over the student loan business, but that’s a whole ‘nother column). Well, Republicans in Congress led by presidential candidate Sen. Marco Rubio inserted language into the 2015 and 2016 spending bills that prohibited the Department of Health and Human Services from using discretionary funds to bail out insurance company losses from the exchanges. In other words, they held the Obama administration to its pledge that the ACA would not add to the deficit. Here’s how the Fiscal Times reported the results in December: “Last year, the insurance companies paid just $362 million into risk corridor program while submitting $2.87 billion in claims for reimbursement … The fiscal 2015 budget package approved last year specified that payments made to insurers under the risk corridors could not exceed collections. That is why the (DHHS’s) payouts this year were equivalent to just 12.6 percent of the claims.” President Barack Obama signed every bill with these spending restrictions, so while he may have vetoed the bill to repeal his namesake law, he did sign the bills that may have started its death spiral. Moda entered the Oregon market with the lowest premiums in 2014, betting on getting its losses covered by the federal government and gaining 100,000 customers in the process. It even signed a 10-year, $40 million naming rights deal for the basketball arena in Portland just a couple years after only clearing $10.4 million in net income. Barely two years later its bet went bust. Moda may be one of the biggest losers so far to gamble on Obamacare, but it will surely not be the last. Andrew Jensen can be reached at [email protected]

AJOC EDITORIAL: Market slide shows risks of counting on Fund earnings

Since oil first started gushing through the Trans-Alaska Pipeline System nearly 40 years ago, the Alaska has repeatedly failed to learn the lessons from the troughs in the price cycle. Now facing a yawning budget gap nearing $4 billion annually with crude collapsing to less than $27 per barrel as of Jan. 20, there is near-unanimous support to shift from oil income to tapping the investment earnings from the Permanent Fund to bridge the gap. Gov. Bill Walker’s proposal to use a so-called “sovereign wealth model” using the Earnings Reserve where the Fund income flows anticipates an annual rate of return of 6.7 percent essentially in perpetuity allowing yearly draws of more than $3 billion to pay for state government. At the beginning of the fiscal year, the value of the Permanent Fund was just more than $55 billion. As of Jan. 18, the value of the Fund was $49.2 billion. Rosy predictions of future returns are how governments get into trouble, particularly when they are facing looming unfunded liabilities such as pension obligations — of which the state has more than $12 billion — or budget deficits. After yet another rout on Wall Street Jan. 20 as the markets are off to their worst ever start to a year, we are now officially in a correction, which is defined as a drop of 10 percent or more from the high point in the indices. It wasn’t that long ago, back in 2009, when the Permanent Fund lost money for the year as the Dow dropped into the 6,000 range. The markets nearly tripled since then, creating a situation where the state was earning more money from its investments than from its oil income. Now that the bulls ran for more than half a decade, the bears are roaring back. Multiple investment firms are forecasting oil could keep dropping to less than $20 per barrel, some as low as $10 according to a Jan. 12 article in The Telegraph, as OPEC refuses to cut back production and Iran has stated it intends to start pumping 500,000 barrels per day into the market now that it has been relieved of sanctions. While there is consensus that oil prices will keep falling, whether the United States will enter a recession is still being debated. There can be no doubt, though, that the reeling energy sector that fueled so much of the economic expansion will drag down growth. More than 70,000 oilfield workers have been laid off — including hundreds so far here in Alaska — and more pink slips are coming. Hundreds of rigs have been idled and the ripple effects through the broader economy will be felt from everyone to contractors to homebuilders. There is also no doubt that lower fuel prices benefit multiple sectors of the economy, but industrial output is dropping as well. This from a Dec. 16 Reuters  report: “U.S. industrial production saw its sharpest decline in more than three and a half years in November as utilities dropped sharply, a sign of weakness that could moderate fourth-quarter growth. “Industrial output slipped 0.6 percent after a downwardly revised 0.4 percent dip in October, the Federal Reserve said on Wednesday, marking the third straight month of declines.” Alaska’s great gasline hope for economic growth and new revenue will also face major hurdles beyond the enormous cost. Prices in Asia have been halved since 2013, and current demand forecasts are being revised downward. Since shutting them down after the 2011 earthquake and tsunami, Japan has restarted nearly all of its nuclear reactors and is actually reselling LNG shipments; ditto for China amid its own economic growth slump. Korea is also lowering its demand forecasts as nuclear power is still a cleaner alternative when it comes to meeting lower carbon emission commitments. To say it’s rough out there would be the understatement of the year. Strong leadership from the governor and legislators is critical right now, but even if the competing sides can come together with a fiscal plan they must do so knowing that the fight for Alaska’s future is far from over — and that putting our faith in investment earnings may be just as risky a bet as counting on oil prices.

AJOC EDITORIAL: Time for Penney to drop vendetta against setnetters

Bob Penney is now 0 for 2 at the Alaska Supreme Court in his efforts to reallocate Cook Inlet salmon stocks at the ballot box, but he’s not giving up the fight against commercial fishermen. It’s past time that he did after some three decades of dividing the community with his nonstop efforts to drive his neighbors out of business and turn the Kenai River into his personal playpen. After the court emphatically rejected his ballot initiative that would ban setnetting from Cook Inlet beaches on Dec. 31, Penney released a statement that, “Maybe it’s time the federal government looked into this issue.” Later, Clark Penney, the executive director of the Alaska Fisheries Conservation Alliance started by his grandfather to push the initiative back in November 2013, said the group is looking into pursuing an Endangered Species Act listing for Kenai River king salmon. Anyone can petition for such a listing, but AFCA will have no better luck with the ESA than it had at the Alaska Supreme Court. Abundance of the late run of Kenai River kings is no doubt at a low point, but the stock has never failed to meet its escapement goal and in fact returned in strong enough numbers to allow all user groups more liberal harvest opportunity in 2015. The early run of Kenai River kings, on the other hand, has failed repeatedly in recent years to meet minimum escapement goals and was closed to all sportfishing in the past two years. Notice it hasn’t been closed to commercial fishing. That’s because commercial fishermen haven’t been in the water during the early run for decades as the stock abundance cratered under heavy pressure from the guided angler industry. That’s something Penney and his like-minded friends don’t ever talk about because they can’t blame it on commercial fishing. Oh, but they can spin a fish tale, though, and never was Penney’s win-at-all-costs mentality more evident than last legislative session when his advocacy outfit led a misleading smear campaign against a well-respected member of the Kenai Peninsula community who’d been nominated to the Board of Fisheries. The successful effort by the Kenai River Sportfishing Association to defeat Soldotna habitat advocate Robert Ruffner by a single vote based on a made-up criteria about not living in Anchorage and a ridiculous accusation that he was some kind of Manchurian candidate of the commercial fishing industry was the last straw for many in the community who saw his candidacy as an opportunity to break up what had become a polarized board dominated by factions instead of facts. KRSA, which is based in Soldotna, claims to be a conservation organization. The words “Kenai River” are in its name. Yet they waged a public relations war against a neighbor and conservationist despite his widespread endorsements from the local legislative delegation, municipal governments, and chambers of commerce. And they won, as they often have in the Cook Inlet fish wars they keep fueling. A similarly dishonest campaign was waged two years earlier, and succeeded in getting board member Vince Webster booted by an identical 30-29 vote. At both the 2011 and 2014 Upper Cook Inlet meetings, KRSA was able to essentially write the management plan for the Kenai River. In 2011, the group’s proposal severed the historical split between setnetters and drifters, turning what had typically been a 50-50 ratio into a 2-1 gap amounting to millions of dollars in reallocation. In 2014, KRSA was able to go further, getting the board to adopt a plan that removed almost all discretion from the day-to-day fishery managers in favor of the arbitrary hours and so-called “paired restrictions” designed to render setnetting uneconomic. One of the most damaging provisions KRSA was able to push through was a rule that after Aug. 1 the Department of Fish and Game must still restrict commercial fishing if the king salmon escapement is projected to be less than 22,500. That is the mid-point of the escapement goal, or 50 percent above the minimum. Last year, with the king salmon escapement goal ensured of being met, the sockeye run showed up in force at record late dates, and millions of dollars worth of fish went unharvested in August because of a rule in the management plan that has no basis in science but instead reflects the political muscle of KRSA to get what it wants at the Board of Fisheries. Penney couldn’t influence the Supreme Court with campaign donations and a Kenai River Classic perk package, though, and this time he’s going to have to take “no” for an answer. Andrew Jensen can be reached at [email protected]

AJOC EDITORIAL: Time to put up or shut up for Legislature

With just a couple weeks to go until the next legislative session begins, Alaska’s elected officials have a hefty to-do list. In no particular order, here it is: • Restructuring the Permanent Fund earnings in order to use a portion to pay for state government, and possibly reducing the annual citizens’ dividend. • Considering whether to raise or institute new taxes. • Cutting spending. • Reaffirming approval for the sale of pension-obligation bonds; and deciding whether to fund the capital budget with general obligation bonds subject to voters’ approval. • Allocating $15.7 billion in payments-in-lieu-of taxes, or PILT, between the state and municipalities for the Alaska LNG Project. • Reforming the oil tax credit program, and possibly raising or hardening the production tax floor. • Dealing with the Anchorage Legislative Information Office hot potato. • Funding the expanded class of Medicaid recipients that the House and Senate majorities are currently suing the governor to overturn. • Approving Alaska LNG Project fiscal terms, commercial agreements and a constitutional amendment securing those terms to be presented to voters in November. Any one or combination of the above items would bog down a Legislature that has gone down to the last minute or overtime just to pass budgets in healthy fiscal years. Taken in total mere months from a statewide general election, it would be wildly optimistic to expect a series of profiles in courage to be written from the halls of the Capitol in Juneau. Both sides are going to have to be realistic. Republicans should know they can’t cut enough, and Democrats should drop their incessant insistence on raising oil taxes. Reforming the credit program or hardening the tax floor is one thing; pretending that there’s some vast supply of money on the Slope that can be tapped at $35 per barrel is not. Republicans have stated Gov. Bill Walker’s budget doesn’t cut operating spending enough, by only $100 million compared to their desire for a $400 million reduction. If they can cut operating spending by another $300 million compared to Walker’s budget, it would eliminate the need for $200 million in revenue from a state income tax. Whether they have a plan or the wherewithal to execute such a reduction remains to be seen. If the Republicans can’t propose a budget that balances, or choose to move some of the Constitutional Budget Reserve into the Permanent Fund Earnings Reserve as part of the restructuring to fund government, then the House minority Independent Democrat caucus will still have the same leverage it exerted last session to protect its members’ funding priorities such as education or Medicaid expansion. Senate President Kevin Meyer, R-Anchorage, has said some in the majorities could be comfortable with a budget that doesn’t fully close the $3.5 billion gap, which could be a preferable compromise between not slashing state spending to the bone while reducing the annual draw from the CBR to a much smaller level. With a 15-5 advantage in the Senate, Meyer can pass such a plan without Democrats; such is not the case in the House. If the Republicans don’t want to raise or create taxes to fully close the deficit, the House majority is going to have to work far more constructively with the minority than it did last year when, at an impasse, the leadership proposed to transfer the entire Earnings Reserve into the Permanent Fund to eliminate the requirement for a three-quarters vote to pull from the CBR. Democrats are correct to be concerned that new taxes, higher taxes and a reduced dividend will impact low income Alaskans disproportionately. Taken in total, Walker’s fiscal plan would remove some $1.15 billion — $500 million in taxes, $650 million from the dividend payout — from the private economy to help fund government. But funding government is also a Democrat priority, and they’re not going to be able to have it both ways. Republicans are also correct that taking money out of the private sector and disrupting the oil tax system for the fifth time in 10 years is likely to chill investment and economic output at a time when state government can least afford it. None of the options are good, but legislators will have to remember what Hyman Roth said in The Godfather Part II: “This is the business we’ve chosen.” If they’re not ready to make the hard choices and compromise, the voters may send them into another line of work. Andrew Jensen can be reached at [email protected]

AJOC EDITORIAL: Breaking LIO lease will signal state can’t be trusted

Legislators were rightly concerned when Gov. Bill Walker, without warning, vetoed $200 million in appropriations from the current fiscal year budget designated for the oil and gas tax credit program. Walker noted at the time — and his Revenue Commissioner Randall Hoffbeck had to spend a lot of time in the aftermath reiterating to the financial community — that the State of Alaska was not reneging on its obligation to pay the credits. The consequences of not honoring its debts would be terrible for a state trying to protect its top-notch AAA credit rating as it faces multi-billion deficits and now plans to finance its $13 billion share of the Alaska LNG Project. Yet here the Legislature is, through its Legislative Council that handles out-of-session affairs for the body, contemplating breaking a 10-year lease for its downtown Anchorage office building. Like all leases the state government enters, payment is “subject to appropriation,” meaning it can break the lease simply by refusing to pay the rent.  The Senate passed an operating budget last session that withheld the rent payment while the House passed a budget that did. That early April action by the Senate was so concerning that it spurred the Alaska Bankers Association to convene a meeting of its seven member institutions on Easter Sunday to craft a letter to the budget conference co-chairs Sen. Pete Kelly and Rep. Mark Neuman. The language was not ambiguous. ABA President Steve Lundgren of Denali State Bank wrote that, “We alert you that this action will likely impact the State’s credit worthiness and the cost of borrowing in the future.” Lundgren closed with this: “Alaska should not put itself in the position of having to react to a narrative that it will not live up to its commitments. How long creditors would remain accommodating is a great question to which we do not have the answer. What we do know is that some ideas have unintended consequences, and the current funding proposal would be as a good a bellwether as any signaling a risk aversion to the greater credit markets.” Thomas F. Klinker of the law firm Birch Horton Bittner & Cherot, was similarly blunt, citing Moody’s Investor Service guidance that states that “depending on the circumstances involved in a lessee’s decision to not appropriate, this risk could be reflected in that entity’s other debt ratings, including its general obligation and other tax-supported debt.” Klinker noted that while it is true the lease on the Legislative Information Office is not securitized, “a decision to not appropriate rent for the lease without a specific justification, such as the lessor’s failure to perform, could have a similar adverse effect.” He further stated that breaking the lease — which in this case is being contemplated for no reason other than public scrutiny, not because the state lacks the ability to pay — “could be considered material to investors in future state financings, and a required subject of disclosure to prospective investors in such financings under federal securities law, particularly financings based on a lease that is subject to annual appropriation.” Not only is the state considering financing its capital budget for the next two years with general obligation bonds, but Walker has also proposed issuing pension obligation bonds to help cover the 11-figure unfunded liabilities of the public employee and teachers retirement systems. Pension obligation bonds are also “subject to annual appropriation.” Hoffbeck said in a recent interview that while the Legislature has previously approved the issuance of such pension bonds in 2008, a new vote would reassure investors the state would make good on payment if the bonds are sold. “If the Legislature is not willing to voice support of it, we don’t want that kind of noise going into the market when we try to sell bonds,” Hoffbeck said. In other words, if the Legislature won’t pay what it owes on something as small as a $3.3 million annual appropriation, investors aren’t going to lend the state money to finance billions of dollars in bonds or they will do so at much greater interest rates. It is irrelevant at this point whether the decision to renovate and improve the downtown office space was right or not. The fact is the Legislature signed a contract and it should live up to it. If the Legislature can’t make what’s a difficult but necessary decision to pay its debts, how in the world will its members find the intestinal fortitude to do what needs to be done to put the state on a more sustainable fiscal path? A shortsighted action bowing to political pressure or just the optics of the whole thing will signal to private investors that the state can’t be trusted when times get tough, and they sure aren’t getting easier any time soon. Given the circumstances we find ourselves, that should be the last way the Legislature wants to ring in the new year. Andrew Jensen can be reached at [email protected]

Alaska, British Columbia sign transboundary MOU

Gov. Bill Walker and British Columbia Premier Christy Clark signed a Memorandum of Understanding Nov. 25 committing to cooperation on transboundary issues, particularly related to concerns in Southeast over mines on the Canadian side of the border. The MOU will create a Bilateral Working Group on the Protection of Transboundary Waters that will facilitate the exchange of best practices, marine safety, workforce development, transportation links and joint visitor industry promotion. It will also explore other areas for cooperation such as natural resource development, fisheries, trade and investment and climate change adaptation. The neighboring U.S. state and Canadian province will work together on water quality monitoring, scientific information exchanges, resource sharing and facilitating access to information and soliciting input from First Nations, Alaska Native Tribes, and other stakeholders. Lt. Gov. Byron Mallott will lead the Alaska side of the working group and the Minister of Environment and Minister of Energy and Mines will lead the BC side. “As our next door neighbor, Canada plays a significant role in many Alaska industries, including trade, transportation, and tourism,” Walker said. “This MOU underscores that connection, and I thank British Columbia Premier Clark for her support and cooperation in advancing this important relationship “As we work to improve our state’s economy, it is important that we actively reach out and foster good relationships with our trading partners and neighbors with whom we share so much in common.” In an interview with the Journal, British Columbia Minister of Energy and Mines Bill Bennett said the MOU signifies a “change in how we do business” between Alaska and BC. “How we were doing business was the state and province cooperated on mine approvals and permitting that takes place in British Columbia that has potential to impact Alaska,” he said. “But there wasn’t very much public awareness of that relationship and it was incredibly difficult for Tribes and conservation groups and fishing groups to get information on our processes. “We realized that was a shortcoming of our approach and Alaska realized they needed to communicate more with Alaskans on the opportunities the state has to be involved in our process. It’s a matter of opening our doors to acquiring information and making it easier. We’re adding to the opportunities for them to be involved. “This is sealing the deal by having the two leaders sign a deal that says ‘we’re going to do a better job on issues between the jurisdictions.’” There was initially some confusion among the Southeast stakeholders who have been pushing for action on transboundary issues. They had been presented the draft of a statement of cooperation on Nov. 16 by Mallott and told they had two weeks to provide comments to the state. After the announcement, Salmon Beyond Borders, a coalition of Southeast stakeholders representing Tribes, fishing and conservation groups, released statements blasting the timing of the signing and the nonbinding nature of the agreement. A spokesperson from the governor’s office clarified to the Journal that the MOU signed Nov. 25 was not the one presented to the stakeholders for comment Nov. 16, and that the comment period has been extended to Dec. 11. The MOU signed Wednesday is the “umbrella agreement,” Bennett said, which creates the working group that will facilitate the access and cooperation between the two jurisdictions. Southeast stakeholders have repeatedly called for the involvement of the International Joint Commission, which regulates disputes under the Boundary Waters Treaty of 1909. “Since day one, the fishing industry has called on the state and Congress to secure legally binding agreements between the U.S. and Canada with substantial habitat protection and mitigation requirements to ensure the state’s interests are protected,” said Dale Kelley, Executive Director of the Alaska Trollers Association, in the Salmon Beyond Borders press release. “Alaska has instead signed non-binding agreements with British Columbia that offer no visible means of holding Canada, or the mining companies, accountable for mitigating our losses should accidents like the one at Mt. Polley occur in the region.” Kelley was referring to the Mount Polley mine tailings disaster on Aug. 4, 2014, that spilled millions of gallons of mine waste into the Cariboo region of British Columbia, polluting several lakes and watersheds. Concerns over mine waste polluting Alaska watersheds have been elevated by several proposed cross-border mines, particularly the proposed KSM mine near the Unuk River watershed that will also require a large tailings dam structure; there is also ongoing acid rock drainage flowing into a tributary of the Taku River from the abandoned Talsequah Chief Mine. R. Brent Murphy, vice president of environmental affairs for Seabridge, the owners of the proposed KSM mine, wrote in an emailed statement that, “Seabridge wants to clarify that our proposed TMF (tailings mine facility) associated with the KSM Project is not situated in the Unuk watershed or a watershed that drains into Alaska, contrary to the assertions of those who are the most vocal with regards to transboundary development. Our TMF will be situated within the Nass watershed, a watershed that drains entirely into Canadian waters.” Murphy also wrote that naturally occurring acid rock drainage is currently occurring in a Unuk tributary. “We also want to highlight that the water quality within the Unuk River is currently being impacted by naturally occurring acid rock drainage originating from the exposure of the Mitchell Deposit within the head waters of Mitchell Creek (which is a tributary of the Unuk River),” he wrote. “This naturally occurring acid rock drainage results in naturally elevated concentrations of many metals within the river, including copper, iron and zinc. These elevated concentrations have been identified during our extensive baseline sampling of the Upper Unuk River and associated watersheds, which has been ongoing since 2008.” After Bennett visited the Talsequah site in August, government agencies issued a letter to the owners of the mine Nov. 10 that they have 90 days to come up with a plan to stop the acid rock drainage. Although the drainage has been ongoing for years, tests by several government agencies have found that fish in the Tulsequah River are not being affected by the discharge. Regarding the Tulsequah mine, Bennett said the company has told the province it will have a plan to improve the site but that it will stop short of reopening the water treatment plant because the small exploration company doesn’t have the financing. “We think we have some opportunities here to have the company improve the site,” he said. “The best thing would be to develop the site, create cash flow for the company that can open the treatment plant, operate the mine, then close the site, remediate the site, and stop the leaching. That would all be paid for by company as opposed to the public. “That’s what BC has been trying to see happen for 20 years.” He said the fact no harmful effects have been measured by agencies on either side of the border affects how the province is approaching the mine, but that could change if damage was being done. “If the scientists in Alaska and British Columbia were saying that the drainage was harming the water, harming the fish, we’d obviously have a different reaction,” he said. “I think we should do more study, more monitoring, to make sure about the impacts. “If it was determined that there is a negative impact, I think BC would have to take more dramatic action and we’d be responsible for that site. The government would probably have to take it over. I don’t see it happening any time soon, but I acknowledge that it’s a possibility in the future.” Bennett also said there is a “fundamental misunderstanding” of what role the International Joint Commission, or IJC, could play on Alaska-BC transboundary issues. As sub-national jurisdictions, Alaska and BC cannot sign legally binding documents, and the IJC could only get involved if both the U.S. and Canada agreed to it, and if there was a complete breakdown in communications between the nations. He noted that there is a “tremendous amount of pressure on both jurisdictions” related to preserving watersheds from mining impacts and the signing of the MOU is a strong public commitment to working together. “It’s there for the world to see,” he said. “It’s shortsighted to say it won’t impact BC or Alaska.” Andrew Jensen can be reached at [email protected]

AJOC EDITORIAL: Tax credit program would benefit from transparency

When the Legislature finally adjourned after a second special session to pass a budget this past spring, about 20 percent of the approximately $3.5 billion deficit was related to payments from the state’s oil and gas tax credit program. Unlike deductions, which the large producers use on a per-barrel basis to reduce their tax liabilities, the credits are direct payments from the state to mostly independent companies exploring for oil and gas in Cook Inlet and the North Slope. Gov. Bill Walker roiled the industry and lending circles with his move in late June to use his line item veto authority to reduce a $700 million appropriation for the credits by $200 million, deferring the payments to future fiscal years. The short-term effect was a credit freeze between lenders and explorers that required damage control by the state Revenue Commissioner Randall Hoffbeck to assure financial institutions and private equity firms that Alaska would make good on the payments owed. That’s according to the report released Dec. 1 by the Senate Oil and Gas Tax Credit Working Group formed among members of the Senate Majority and Minority member Sen. Bill Wielechowski, D-Anchorage. The report was short on recommendations to actually reduce the annual outlays and focused more on going slow with any changes so as not to disrupt projects in the development stage, protecting the state’s interests should a company go into bankruptcy as Buccaneer Energy and Cook Inlet Energy have, and firming up the tax “floor” on production taxes so companies cannot use a net operating loss, or NOL, deduction to reduce their liability to less than 4 percent. Cementing the tax floor seems to be a no-brainer and should be an easy fix by requiring companies to spread the NOL out over multiple years if necessary to ensure a minimum production tax is received. Ultimately, though, there is no silver bullet to fix Alaska’s revenue problem at the current oil prices under any current or prior tax system. Without question the oil and gas credits, or rebates, require examination along with every expenditure the state is making. There is also no question that the state’s oil and gas credit system has major successes to tout. The Cook Inlet gas supply resurgence led by Hilcorp would not have happened absent the credit system, nor would the recent start of gas production by Furie Operating Alaska that is now delivering gas to Homer Electric Association at a lesser price than some of Hilcorp’s customers from the first new production platform seen in Cook Inlet in more than three decades.  Looking to the North Slope, the independent Caelus is currently developing the Nuna prospect it acquired from Pioneer Natural Resources in 2014, and is scheduled for production in 2017. Hilcorp has entered also the fray by purchasing some smaller BP assets and has now submitted a development plan for the Liberty offshore field that could produce 60,000 to 70,000 barrels per day by 2020. The majors are also spending money on the Slope despite the price crash. ConocoPhillips has spent $1.5 billion developing Drillsite 2S in Kuparuk and the CD-5 field in the National Petroleum Reserve-Alaska. It also just sanctioned a billion-dollar project at Greater Moose’s Tooth-1, also in the NPR-A. When companies continue to spend money in the current price environment and bid on acreage as many independents did at the recent state Slope lease sale, something is working. While we can piece together a rough picture of how credits may be benefitting the state economy, the credit program needs to be more transparent. The public has a right to know how much in credits is being paid out and for what projects. That is the only way to tell if the state is getting something back for what it is spending. The working group reached a rather strange conclusion in its recommendations to disclose the amount of credits paid by project, but not the recipient of the credits. It is hard to understand what difference it would make to withhold the recipient of the credit while disclosing the project for which it was paid. Under the since-discontinued film tax credit program, the public was able to see the project, the recipient, the amount of the credit and the qualifying expenditures that led to the credit. If the oil and gas industry really wants to see this program continue, they should be disclosing how much they’re spending, what they’re spending it on, and how many people in Alaska are being hired as a result. A simple return on investment analysis of credits relative to production taxes does not capture things like local wages, their multiplier effects or the economic impact of ratepayers in Homer or elsewhere benefitting from lower utility costs. The best way to ensure a stable credit system continues — and it must continue — is to make it more transparent.

Alaska, BC sign transboundary MOU

This story has been updated with clarification and a comment from Seabridge Gold Inc. Vice President of Environmental Affairs R. Brent Murphy. Gov. Bill Walker and British Columbia Premier Christy Clark signed a Memorandum of Understanding Wednesday morning committing to cooperation on transboundary issues, particularly related to concerns in Southeast over mines on the Canadian side of the border. The MOU will create a Bilateral Working Group on the Protection of Transboundary Waters that will facilitate the exchange of best practices, marine safety, workforce development, transportation links and joint visitor industry promotion. It will also explore other areas for cooperation such as natural resource development, fisheries, trade and investment and climate change adaptation. The neighboring U.S. state and Canadian province will work together on water quality monitoring, scientific information exchanges, resource sharing and facilitating access to information and soliciting input from First Nations, Alaska Native Tribes, and other stakeholders. Lt. Gov. Byron Mallott will lead the Alaska side of the working group and the Minister of Environment and Minister of Energy and Mines will lead the BC side. “As our next door neighbor, Canada plays a significant role in many Alaska industries, including trade, transportation, and tourism,” Walker said. “This MOU underscores that connection, and I thank British Columbia Premier Clark for her support and cooperation in advancing this important relationship “As we work to improve our state’s economy, it is important that we actively reach out and foster good relationships with our trading partners and neighbors with whom we share so much in common.” In an interview with the Journal, British Columbia Minister of Energy and Mines Bill Bennett said the MOU signifies a “change in how we do business” between Alaska and BC. “How we were doing business was the state and province cooperated on mine approvals and permitting that takes place in British Columbia that has potential to impact Alaska,” he said. “But there wasn’t very much public awareness of that relationship and it was incredibly difficult for Tribes and conservation groups and fishing groups to get information on our processes. “We realized that was a shortcoming of our approach and Alaska realized they needed to communicate more with Alaskans on the opportunities the state has to be involved in our process. It’s a matter of opening our doors to acquiring information and making it easier. We’re adding to the opportunities for them to be involved. “This is sealing the deal by having the two leaders sign a deal that says ‘we’re going to do a better job on issues between the jurisdictions.’” There was initially some confusion among the Southeast stakeholders who have been pushing for action on transboundary issues. They had been presented the draft of a statement of cooperation on Nov. 16 by Mallott and told they had two weeks to provide comments to the state. After the announcement, Salmon Beyond Borders, a coalition of Southeast stakeholders representing Tribes, fishing and conservation groups, released statements blasting the timing of the signing and the nonbinding nature of the agreement. A spokesperson from the governor’s office clarified to the Journal that the MOU signed Wednesday was not the one presented to the stakeholders for comment Nov. 16, and that the comment period has been extended to Dec. 11. The MOU signed Wednesday is the “umbrella agreement,” Bennett said, which creates the working group that will facilitate the access and cooperation between the two jurisdictions. Southeast stakeholders have repeatedly called for the involvement of the International Joint Commission, which regulates disputes under the Boundary Waters Treaty of 1909. “Since day one, the fishing industry has called on the state and Congress to secure legally binding agreements between the U.S. and Canada with substantial habitat protection and mitigation requirements to ensure the state’s interests are protected,” said Dale Kelley, Executive Director of the Alaska Trollers Association, in the Salmon Beyond Borders press release. “Alaska has instead signed non-binding agreements with British Columbia that offer no visible means of holding Canada, or the mining companies, accountable for mitigating our losses should accidents like the one at Mt. Polley occur in the region.” Kelley was referring to the Mount Polley mine tailings disaster on Aug. 4, 2014, that spilled millions of gallons of mine waste into the Cariboo region of British Columbia, polluting several lakes and watersheds. Concerns over mine waste polluting Alaska watersheds have been elevated by several proposed cross-border mines, particularly the proposed KSM mine near the Unuk River watershed that will also require a large tailings dam structure; there is also ongoing acid rock drainage flowing into a tributary of the Taku River from the abandoned Talsequah Chief Mine. From R. Brent Murphy, Seabridge: “Seabridge wants to clarify that our proposed TMF (tailings mine facility) associated with the KSM Project is not situated in the Unuk watershed  or a watershed that drains into Alaska, contrary to the assertions of those who are the most vocal with regards to transboundary development.  Our TMF will be situated within the Nass watershed, a watershed that drains entirely into Canadian waters. "We also want to highlight that the water quality within the Unuk River is currently being impacted by naturally occurring acid rock drainage originating from the exposure of the Mitchell Deposit within the head waters of Mitchell Creek (which is a tributary of the Unuk River). This naturally occurring acid rock drainage results in naturally elevated concentrations of many metals within the river, including copper, iron and zinc. These elevated concentrations have been identified during our extensive baseline sampling of the Upper Unuk River  and associated watersheds, which has been ongoing since 2008.” After Bennett visited the Talsequah site in August, government agencies issued a letter to the owners of the mine Nov. 10 that they have 90 days to come up with a plan to stop the acid rock drainage. Although the drainage has been ongoing for years, tests by several government agencies have found that fish in the Tulsequah River are not being affected by the discharge. Regarding the Tulsequah mine, Bennett said the company has told the province it will have a plan to improve the site but that it will stop short of reopening the water treatment plant because the small exploration company doesn’t have the financing. “We think we have some opportunities here to have the company improve the site,” he said. “The best thing would be to develop the site, create cash flow for the company that can open the treatment plant, operate the mine, then close the site, remediate the site, and stop the leaching. That would all be paid for by company as opposed to the public. “That’s what BC has been trying to see happen for 20 years.” He said the fact no harmful effects have been measured by agencies on either side of the border affects how the province is approaching the mine, but that could change if damage was being done. “If the scientists in Alaska and British Columbia were saying that the drainage was harming the water, harming the fish, we’d obviously have a different reaction,” he said. “I think we should do more study, more monitoring, to make sure about the impacts. “If it was determined that there is a negative impact, I think BC would have to take more dramatic action and we’d be responsible for that site. The government would probably have to take it over. I don’t see it happening any time soon, but I acknowledge that it’s a possibility in the future.” Bennett also said there is a “fundamental misunderstanding” of what role the International Joint Commission, or IJC, could play on Alaska-BC transboundary issues. As sub-national jurisdictions, Alaska and BC cannot sign legally binding documents, and the IJC could only get involved if both the U.S. and Canada agreed to it, and if there was a complete breakdown in communications between the nations. He noted that there is a “tremendous amount of pressure on both jurisdictions” related to preserving watersheds from mining impacts and the signing of the MOU is a strong public commitment to working together. “It’s there for the world to see,” he said. “It’s shortsighted to say it won’t impact BC or Alaska.” Andrew Jensen can be reached at [email protected]

Walker shakes up AGDC board again, adds Hopkins, Luiken

Alaska Gov. Bill Walker, who replaced two members of the Alaska Gasline Development Corp. board of directors shortly after taking office this past January, has shaken up the board again by dismissing board Chair John Burns and swapping one of his cabinet appointments. Walker replaced Burns with former Fairbanks Mayor Luke Hopkins, who served on the board of directors of the Alaska Gasline Port Authority, which Walker led and represented as general counsel since its creation in 1999. The move comes a day before the AGDC board is to meet in Anchorage to finalize the state’s buy out of TransCanada’s interest in the Alaska LNG Project, the $45-$65 billion gas project in which the state is partnering with the three major North Slope producers ExxonMobil, BP and ConocoPhillips. “As the state transitions to play a larger role in the Alaska LNG project, it is absolutely critical that we have strong leadership in place to guide our endeavors,” Walker said in a statement. “I also plan to work on direct communication between the Governor’s office and the legislature, and I will continue to look for opportunities to include them in discussions about the project. I look forward to working with the AGDC Board and the legislature in the coming months and years as we work to bring Alaska’s natural gas to the world market.” It’s the second appointment Walker has made to the board with ties to the AGPA. Rick Halford of Dillingham, who worked as a lobbyist in 2005 for AGPA and was paid more than $100,000 by the entity, was appointed to the board in January. Two days before a scheduled AGDC board meeting in January, the governor dismissed former state legislator Drue Pearce, Al Bolea, a retired BP manager, and Richard Ranibow, a former ExxonMobil pipeline project manager, from the board. Walker replaced them with Halford, Joe Paskvan of Fairbanks and Hugh Short of Anchorage. Halford and Short were confirmed by the Legislature while Paskvan, who served in the state Senate from 2009-12, was rejected. At the time Walker said he wanted a transparent board and ordered new members from his administration — Department of Labor Commissioner Heidi Drygas, and Acting Commerce Commissioner Fred Parady — not to sign confidentiality agreements. He retained public members Dave Cruz, owner of Cruz Construction Inc., and Burns. Walker eventually appointed Chris Hladick as Commerce Commissioner, replacing Parady, and has now replaced him with Department of Transportation Commissioner Marc Luiken. Walker has loaded the AGDC board and his staff with former associates from the Alaska Gasline Port Authority, which was formed to build, or cause to be built, an Alaska gasline. Among Walker’s staff are former AGPA Executive Director Jim Whitaker, now Walker’s chief of staff; former law partner and current Attorney General Craig Richards; Halford; and former authority consultants Rigdon Boykin and Radoslav Shipkoff. Boykin and Shipkoff have drawn attention for contracts paying them more than $100,000 per month, and Boykin, who was the third lead negotiator Walker has chosen in less than a year in office, was recently sent home to South Carolina by Walker for time off. Walker has since said he’d like to find another role for Boykin in the project. The seven-member board also includes Joey Merrick of Anchorage and Department of Labor and Workforce Development Commissioner Heidi Drygas.

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