Elwood Brehmer

Trilogy keeps refining Arctic project as it awaits road permit

Trilogy Metals is in the midst of advancing two mineral prospects in Northwest Alaska but it’s still on the lookout for additional opportunities in the region. The Vancouver-based mining company is preparing its most advanced Arctic copper, zinc and precious metal deposit for permitting. CEO Rick Van Nieuwenhuyse wrote via email that Trilogy is specifically developing an environmental evaluation document to ostensibly organize and vet all of the information about the prospect and planned open-pit mining operations before it is submitted in formal state and federal permit applications. The environmental evaluation goes hand-in-hand with a feasibility-level study of the mine and its forecasted economics, according to Van Nieuwenhuyse. Trilogy has $7 million budgeted for the feasibility and environmental work this year with a goal of having the feasibility study done in early 2020. He expects to formally start the permitting process once the Ambler Mining District Industrial Access Project is “substantially permitted” through its own environmental impact statement process, he wrote. Generally referred to as the Ambler road, the access project is a state-led plan for a 211-mile unimproved industrial road off of the Dalton Highway to reach the large Ambler mining district, which holds Trilogy’s Arctic and Bornite prospects, among others, on the southern flank of the Brooks Range. The road project has drawn opposition from residents of the area and environmental groups who are worried the project will disrupt caribou migrations, which Van Nieuwenhuyse acknowledges is the most significant subsistence food source in the region. The proposed mines have also drawn scrutiny for potential impacts to salmon and whitefish runs in the Kobuk River drainage. The Alaska Industrial Development and Export Authority is leading development of the road, which has an estimated cost of between $305 million and $346 million for a basic, single-lane gravel road. It would be financed by the authority with bonds that would be paid back through tolls paid by Trilogy Metals and any other companies that would develop one of the other prospects in the Ambler mining district. The Bureau of Land Management is writing the road EIS and the first draft of the environmental review is expected in late summer or early fall with a final EIS published towards the end of 2019, according to BLM’s project website. At its core, the Arctic prospect is about as good as undeveloped metal deposits come these days, according to Van Nieuwenhuyse. With just more than 43 million metric tons of probable reserves averaging 2.3 percent copper, 3.2 percent zinc and smaller amounts of lead, gold and silver, it’s roughly 10 times the average grade being mined in many other open pit copper mines today, he has said previously. Trilogy’s prefeasibility study of Arctic estimates the relatively small but high-grade prospect would cost $911 million to develop and operate over a short 12-year life but with roughly $450 million in annual free cash flow it would have just a 2-year payback. The mill and other facilities at Arctic could also be used for the company’s other, larger, but less explored Bornite copper and cobalt prospect about 20 miles to the southwest. While most of the exploration drilling at Arctic is done, Trilogy has a $9.2 million drilling program planned for the upcoming summer at Bornite. That work will be a combination of infill and expansion drilling for the existing known deposit, according to a company presentation. The Bornite prospect is on NANA Regional Corp. lands and under a partnership with Trilogy, the Alaska Native corporation can receive up to a 2.5 percent royalty on the ore concentrates produced from the prospect if it is developed into a working mine. Trilogy drilled 12 boreholes at Bornite in 2018. The prospect holds about 900 million pounds of indicated copper and 77 million pounds of indicated cobalt with another nearly 5.5 billion pounds of copper inferred, according to Trilogy’s resource analysis. Finally, Trilogy is also spending $2 million this year in a joint venture with South 32 Ltd. to conduct an electromagnetic geophysical survey of the entire roughly 75-mile long Ambler district belt. The airborne survey is being done as a new way to hunt for metal deposits in the area where dozens of prospects have been identified over the years. Targets identified by the survey will be examined more closely with follow-up drilling, Van Nieuwenhuyse said in a February company release. “It is exciting to be drilling new exploration targets again,” he said. “We are confident that we can find additional high-grade polymetallic resources along this prolific mineral belt.” ^ Elwood Brehmer can be reached at [email protected]

Consultant team including Begich tapped for Port of Alaska review

The Anchorage Assembly has brought in some familiar names in Alaska political and maritime circles to determine the best path forward on its troubled port modernization project. The Assembly Enterprise and Utility Oversight Committee on April 18 approved a $45,000 contract to a partnership of the national project management firm Ascent PGM and the Anchorage consulting firm led by Mark Begich Northern Compass Group. Ascent Alaska Vice President Roe Sturgulewski said he has worked on large port projects in Unalaska and Kodiak as well as other smaller marine infrastructure efforts across the state over the past 30 years. Begich, a former U.S. senator and Anchorage mayor, noted during the April 18 committee meeting that he opposed the original port project management structure that put the U.S. Maritime Administration, or MARAD, in charge of the construction project because of the agency’s lack of experience in project management. MARAD’s management was approved by the Assembly and former Mayor George Wuerch shortly before Begich was sworn in as mayor in 2003, he said. Most recently Begich ran as a Democratic candidate for governor in 2018 when he lost to Republican Michael J. Dunleavy. Construction problems arose in the 2008-09 timeframe on the initial $350 million port expansion project, which has mostly been stalled since. Those issues led the city to sue MARAD in 2014 to recoup lost construction funds; that lawsuit is ongoing in Federal Claims Court. The cost estimate on a new, scaled back design advanced by the engineering firm CH2M has gone from $485 million in 2014 to nearly $2 billion today, prompting the Assembly to reexamine all aspects of the work. The nearly $2 billion price tag is largely seen as unfeasible given the State of Alaska’s ongoing budget deficits and the fact that the Municipality of Anchorage does not have a tax base to support such an expensive endeavor. The port, renamed the Port of Alaska in 2017 by the Assembly, is the primary entrance point for consumer goods and commodities going to communities across Alaska and portions of its badly corroded docks have less than 10 years of operational life left before the must be shut in, according to port engineers. The full Assembly approved up to $100,000 in late March for consulting work to determine, among other things, why the costs on the current plan have escalated so severely; what design criteria the project should have; what basic infrastructure and amenities port customers need and the best way to pay for it all. Assemblyman Christopher Constant said the Ascent-Northern Compass team was the only bidder on the municipality’s request and other potential bidders told him they would not bid on the port consulting work because the contract terms would preclude them from competing for potentially more lucrative port construction contracts. Begich said they expect to have a report back to the Assembly by Sept. 15, which would be a faster turnaround than requested, but it better matches budget cycles for possibly securing funding for the project. ^ Elwood Brehmer can be reached at [email protected]

Brooks Range closing in on Mustang startup

Alaska is on the cusp of gaining a new, albeit quite small, North Slope oil field. Brooks Range Petroleum CEO Bart Armfield said first oil from his company’s Mustang project should be flowing sometime in the next 90 days. The company is in the midst of prepping the infrastructure and facilities needed to support the flow of oil. “We’ve got a lot of activity taking place in the field right now with pipeline installation, electric and instrumentation, platform installation — a lot of trenching work on the pad itself,” Armfield said during an April 17 Alaska Industrial Development Authority Board of Directors meeting in Anchorage. With the 1,100-foot oil line nearing completion, the remaining major work includes installing a modular “early production facility” before production can commence, according to Armfield. The pipeline connects to ConocoPhillips’ main Alpine transportation pipeline, which serves as a primary artery for moving sales-quality oil produced from the west and central portions of North Slope oil development to the Trans-Alaska Pipeline System. Armfield highlighted that oil production from Mustang would make Brooks Range the first small independent company working on the North Slope to take a prospect from discovery and see it through to commercialization. “If little Brooks Range can do it anybody should be able to go to the North Slope and do it,” he said. The Mustang project is in the Southern Miluveach Unit just south of the very large Kuparuk River field operated by ConocoPhillips. The company is targeting the same sandstone formations that have helped produce more than 2 billion barrels of oil from Kuparuk. Mustang holds 22 million barrels of proven reserves, according to Brooks Range. Peak production estimates for the field have been in the range of 12,000 barrels per day. The latest timeline to first production is pushed back slightly from what Armfield forecasted in a December interview, when he pegged an April startup, but it still signals a major step forward for Brooks Range. The company has been working on Mustang for years, though the project has gone through fits and starts since oil prices collapsed starting in late 2014. Anchorage-based Brooks Range is owned through subsidiaries by the Singapore investment firm Alpha Energy Holdings Ltd. The small oil company has been subject to multiple ownership structures since starting the Mustang project. AIDEA first partnered with Brooks Range in December 2012 when the authority approved a $20 million investment in a nearly $30 million five-mile gravel road to access the prospect and 20-acre gravel pad to host production facilities. The gravel infrastructure was completed in April 2013. At the time, Brooks Range leaders said they wanted to have the field in production by fall 2014 and credited incentives in the just-passed and industry-supported oil production tax structure under Senate Bill 21 for improving the economics of the project and spurring it forward. In April 2014, AIDEA committed an additional $50 million of investment into a planned $225 million Mustang oil processing facility known as Mustang Operations Center-1, or MOC1, which authority leaders then saw as a facility other small companies prospecting in the area might potentially be able to use. However, when oil prices fell from $100-plus per barrel in late 2014 to eventually less than $30, it caused company and authority leaders to reevaluate their plan. “(At) $120 oil we sometimes make decisions that maybe should be rethought,” Armfield said April 17. Multibillion-dollar budget deficits — also triggered by the collapse of oil prices — also pushed the state to slow the pace of repaying its oil and gas tax credits starting in 2015, which further challenged Mustang. Brooks Range is owed approximately $20 million in tax credit payments, according to Armfield. AIDEA and Brooks Range owners agreed to rework their partnership last May when the authority approved a transaction to shift from an investor to a lender in Mustang by selling its stake in the holding companies set up under the original deals for the gravel infrastructure and processing facilities. That move freed Brooks Range to focus on getting to first oil — and cash flow — with a smaller, less expensive early production facility before eventually growing the operation. “MOC1 was the Cadillac and now we’re going with a Chevy that still gets us from point A to point B on four wheels safely in a proper manner,” Armfield said. He noted that while AIDEA has had to wait much longer than expected for its investments to bear fruit, the gravel road and pad have been used by numerous other companies as a launching point for exploration activities in the area. State officials in the Division of Oil and Gas have also pressed Brooks Range to find a way to production in recent years as the company failed to follow through on its stated drilling and development plans, but that trend appears to have been reversed. Once the early production facility is installed Brooks Range will begin production from the North Tarn-1A well the company successfully flow tested in November 2017. The North Tarn well produced nearly 1,300 barrels per day from a 10-foot section the Kuparuk C sandstone formation with only trace amounts of water during the test, according to a company release. Production is expected to start in the 1,000 barrels per day range. Once it’s sustained, the company plans to drill 6,000-foot lateral section in another partially completed well that should generate an additional 2,000-3,000 barrels daily. “It’s right above the Kuparuk sands. We just need to drill the lateral section in it,” Armfield said of the second well. The early production facility is designed to process up to 6,000 barrels per day, so as oil flow ramps up with the eventual drilling of up to 18 wells — split between producers and water injectors — permanent processing facilities estimated at roughly $350 million will need to be installed, according to Armfield. “We’ve been around for a while and we’re finally going to get this thing done and start (producing) oil and putting money in our pocket and in turn back into your pocket,” he told the AIDEA board. Elwood Brehmer can be reached at [email protected]

Ferry system under fire seeks sustainable solution

Gov. Michael J. Dunleavy’s administration is moving ahead with its investigation into overhauling the state’s ferry system. The Department of Transportation on April 10 issued a public notice announcing its intent to award a consulting contract for up to $250,000 to the Anchorage-based firm Northern Economics to examine structural changes to Alaska Marine Highway System operations with the end goal of drastically reducing the cost to the state of running the ferries. Dunleavy proposed a $65 million cut to the ferry system’s General Fund subsidy in his fiscal year 2020 budget plan released in February. The governor’s cut would amount to roughly a 75 percent reduction in the system’s budget and ferry operations. The $21.8 million unrestricted General Fund appropriation Dunleavy put forth would allow for ferry service to continue through September before the vessels would be laid up for the remaining nine months of the state fiscal year, which begins July 1, according to DOT officials. AMHS advocates stress that major cuts to service would severely damage the 33 coastal Alaska communities the system serves as it not only provides reliable, affordable transportation, but is also used by businesses to move goods such as commercially harvested salmon regularly moved via ferry each summer. The current fiscal year 2019 budget allocates $86 million in unrestricted general funds to the ferry system to support an overall budget of $140 million. The state money fills the budget gap left after fare revenues are accounted for. The AMHS also collects roughly $17 million in formula-driven federal funds, which are usually used for large vessel maintenance projects. Deputy DOT Commissioner Mary Siroky told Senate Finance Committee members April 10 that the department chose to keep its published summer schedule intact and end service in October rather than spread the funding out over the entire year with drastically reduced service to meet reservations already made for summer travel “in order to maintain the system’s credibility.” DOT’s reduced budget plan would focus service on Southeast Alaska; there would be no September ferry service to Homer, Kodiak, Prince William Sound or Alaska Peninsula-Aleutian communities. Concurrently, the department plans to evaluate and implement a wholly new configuration for operating the state ferries, which will presumably be based on the conclusions of Northern Economics’ analysis. DOT’s request for proposals contemplates several options for full or partial Alaska Marine Highway System privatization; transforming it from a state agency to a public corporation, outsourcing portions of current service; increasing fares; and renegotiating AMHS union labor contracts to reduce operating costs. The consultant study is expected to be done by mid-October in order to give DOT time to implement its recommendations in time for restarting the system July 1, 2020, based on the administration’s plan. However, that work has already been done. 2016 study In May 2016, former Gov. Bill Walker signed a memorandum of understanding with the Southeast Conference — a community development group originally formed in 1958 to advance a transportation network that became the ferry system — directing DOT to partner with the nonprofit in addressing the system’s mission statement, governance structure, operations, revenue opportunities and other potential partnerships that could support major changes to the system. DOT also sponsored part of the ferry reform evaluation, though Southeast local governments, nonprofits and businesses paid for most of it. The original AMHS operational and business plan reform initiative resulted in two reports drafted by the Alaska research firm McDowell Group and the Seattle-based marine engineering and consultant firm Elliot Bay Design Group. The first report evaluated a suite of six potential operating structures the state could employ, from full privatization to remaining as a state agency, in part by studying other ferry operations in the Lower 48, Canada and Europe. That report concluded that a public corporation — similar to the Alaska Railroad Corp. — with an expert-filled board of directors would be the best option for Alaska’s ferries. The public corporation model would provide stability in management and board oversight that could translate into the long range planning that is needed to maximize efficiencies available in vessel operations and overall fleet management, according to the report. While it would not eliminate the need for an ongoing state subsidy, a public corporation ferry system also would at least be partially insulated from political influence, which has led to shifting priorities and continual budget debates. Year-to-year budget uncertainty translates directly to schedule uncertainty and has prevented ferry managers from maximizing revenue opportunities, many ferry stakeholders insist. State General Fund support of the ferries has fallen from a high of $123 million in 2013 to the current $86 million. The “Phase 2” ferry reform report analyzed current ferry operations and opportunities for increasing revenue. It concluded that forward funding the system would go a long way towards improving its ability to capture revenue. Historically, roughly 40 percent of ferry riders have been non-residents, according to the AMHS. The system is often marketed as an alternative to traditional cruise ships, particularly in Southeast Alaska. However, seasonal ferry schedules are finalized just a few months prior to implementation because the system budget is not known each year until the overall state budget is approved. To the contrary, prospective visitors often book their trips more than a year in advance, which can preclude the ferry system from being an option for them, said, Robert Venables, the Southeast Conference executive director and chair of the state Marine Transportation Advisory Board. “The revenue for next year is now in question as the whole existence of the Marine Highway System is one big question mark and folks choose to make other arrangements for that component of travel within Alaska,” Venables said. The report also contends that increasing passenger fares significantly would impact ridership to a point that it would negate the desired revenue benefits. Conversely, lowering fares would not attract enough new riders to offset the lost per-passenger revenue. It does suggest the AMHS employ demand management strategies as a way to grow freight revenue, which is currently about $2 million per year. Continuing service to Bellingham, Wash., is imperative to a successful ferry system, as it accounts for 44 percent of operating revenue, according to the report. Military personnel moving to and from Alaska, as well as tourists often utilize the Bellingham route. Standardization of the ferry fleet to the extent possible and replacing the most expensive ferries to operate will in the long run significantly save money, according to the report; and utilizing modern automated ferries could reduce on-vessel labor by up to 10 percent. Ferries for sale To that end, DOT recently put its “fast ferries,” the Chenega and Fairweather, up for sale as the twin 280-foot Tazlina and Hubbard “day boats” are prepped for service in Lynn Canal. The Tazlina is set to enter service in May with the Hubbard coming later. The 235-foot catamaran-style fast ferries are two of the newest ferries in the 10-vessel fleet, having entered service in 2004-05. However, they have proved to be expensive to run — favoring speed over fuel efficiency — and have been plagued by engine problems and hull cracking. DOT sold the 55-year old ferry Taku in January 2018 to a Dubai-based company for $171,000. The past AMHS reform work did result in House Bill 412, which would have transformed the system to the public corporation model. The bill was introduced by the House Transportation Committee late last session and was expected to be a priority for coastal lawmakers this year, but it hasn’t yet been resubmitted for consideration as legislators and staff continue to refine the major bill, which started at 53 pages. The version of the operating budget that passed the House April 9 cut the AMHS appropriation by about $10 million. Senate Finance co-chair Bert Stedman, R-Sitka, has said maintaining some level of year-round ferry service is a top priority for the committee. “We’re trying to come up with something that will work for the citizens of Alaska and for the budget. Of lesser concern is the administration and the employees,” Stedman said April 10. “First priority here is transportation to the citizens.” DOT’s Siroky said in an interview that current leadership at DOT is certainly aware of the existing ferry studies commissioned by the Southeast Conference, but said in her opinion the public corporation model would not result in significant cost savings. “We’re in a budget crisis, no? So the governor directed us to look at something that speaks to the cost right away, not just the political vagaries that AMHS may have responded to,” Siroky said of the public corporation model, adding that there should be a balance between cost and service. “I think it’s certainly worth us finding out if there’s people who can provide services cheaper than we can.” Seeking stability and savings McDowell Group principal Susan Bell said DOT’s move to largely repeat the work done over the past three years lends credence to the AMHS reform report conclusions. “That stability between changes in administration, the longer planning horizon — I think in some ways what’s happened in this last year helps show the value of the public corporation (model),” Bell said in an interview. McDowell Group did not bid on the latest AMHS reform contract. Northern Economics representatives could not be reached for comment in time for this story. Venables said administration officials did not consult with Southeast Conference officials before choosing to do their own study, but he noted that both reports and related documents are readily available for anyone to review. Bell added that former legislator and current policy advisor to the governor Ben Stevens spent several hours at a December joint MTAB-AMHS Steering Committee meeting in Anchorage. Siroky told Senate Finance that DOT officials are looking into outsourcing routes to some small Southeast communities as part of an alternative to completely shutting down service come October. According to the contracts the state has with ferry labor unions, service to Angoon, Gustavus, Kake, Hoonah, Tenakee and Pelican could be outsourced to another operator. That operator would bring their own vessels and employees and would not be required to use union labor, Siroky said. The concept would require nearly doubling Dunleavy’s proposed AMHS General Fund appropriation to $41.6 million and would provide 288 weeks of service. DOT also projects it would generate a fare box recovery rate of 50 percent. The long-term decline in AMHS fare box recovery is at the heart of efforts to improve, or reduce, service and what it costs. For many years fares from passenger, vehicle and freight service provided 50 percent to 60 percent of the system’s overall operating budget until the mid-2000s when the fast ferries and the Lituya —dedicated to serving Metlakatla south of Ketchikan — were added to the ferry fleet. Fare box recovery since 2007 has stabilized in 30 percent to 35 percent range of overall costs. Siroky said the change is primarily due to more reliable air service in rural Alaska. “People love to ride the ferry for that once or twice a year when they have it planned as part of a trip but for routine work transport, people fly,” she said. Siroky said she doesn’t know of a ferry system anywhere that fully covers its expenses with fare box revenue, but DOT is looking for someone to develop a more short-term plan to change the system and minimize its subsidy, ideally within three years. “We really look forward to somebody taking a really holistic look and saying, ‘This is what really makes sense and this is where you can look to outsourcing or look to have industry come in and help,’” Siroky said. She added that businesses using the ferry for commercial purposes could be displacing barge service, while some Southeast business owners say they rely on the more affordable transportation the system provides. Declining riders Ridership has declined over the past 20-plus years from about 350,000 ferry passengers in 1998 to 251,000 passengers in 2018. Recent ridership declines also correspond to a roughly 25 percent reduction in service since 2012, according to AMHS figures. At the same time, vehicle transport has remained steady at about 100,000 car, truck and van shipments per year. Despite the challenging passenger numbers, DOT Commissioner John MacKinnon noted in the system’s fiscal 2018 financial report that revenues per vessel operating week were the highest in the history of the Marine Highway in 2018. Venables said declining fare box recovery rates are the result of “a perfect storm” of additional vessels in the fleet and service to new, small communities without the ability to maximize efficiencies in utilizing the added ferries. Additionally, the major contractions of Southeast’s former flagship industry, timber, and more recent commercial fisheries declines, have challenged the ferry system, according to Venables. Siroky acknowledged DOT officials have not discussed what it would take to restart the system in July 2020 if the Legislature were to approve the governor’s AMHS budget plan, but said, “it would be a challenge.” “Until we knew what that budget was we wouldn’t have an idea where to even begin,” she said. Venables said the lack of a plan is somewhat concerning — a point echoed by stakeholders to other parts of the Dunleavy administration’s budget proposal — as is the idea of cutting service to smaller communities that are more expensive to serve on the hope the private sector will fill the void. Still, he said the Southeast Conference is ready to help in any way it can to find a long-term solution for the ferry system. “Hopefully at the end of the day we’ll be better off and still have a Marine Highway System that can be healthy and vibrant as possible with more certainty,” Venables said. Elwood Brehmer can be reached at [email protected]

Indy to drill for oil at Point Thomson

A small Alaska explorer has plans to drill for oil inside ExxonMobil’s Point Thomson Unit. Jade Energy LLC received approval of its 2019 plan of development for Area F of the Point Thomson Unit from the state Division of Oil and Gas April 4. The company previously took a 62 percent interest in the Point Thomson Area F lease in the southeast corner of the unit from ExxonMobil in a transaction approved last November. The $4 billion Point Thomson development that ExxonMobil finished in early 2016 is focused on natural gas; the field is estimated to contain upwards of 8 trillion cubic feet of high-pressure natural gas. As a result, it is expected to be a lynchpin for any large gas export project. Point Thomson sits on the eastern edge of state land on the North Slope and is adjacent to the northwest corner of the Arctic National Wildlife Refuge. After dealing with technical challenges related to the high gas reservoir pressure at Point Thomson that hampered initial production— approximately 10,000 pounds per square inch, according to ExxonMobil — the major now produces nearly 10,000 barrels of natural gas condensates that are stripped out of the gas before it is reinjected into the reservoir. Jade Energy entered into a farm-out agreement with ExxonMobil in June 2018 to develop the Brookian oil prospects. The company acquired 3D seismic data from Area F during the 2017-18 winter, the results of which will inform its drilling next winter, according to Oil and Gas filings. The target is Brookian formation reservoirs in the 12,000-foot range that are believed to contain significant amounts of oil. BP drilled two exploration wells in the area in the mid-1990s known as the Sourdough wells and in 1997 BP and Chevron issued a press release stating they had confirmed approximately 100 million barrels of recoverable oil in the area. However, the economic viability of the prospect was unclear at the time and the confidentiality period on the Sourdough well data has been extended, according to the submitted plan of development. Anchorage-based Jade Energy is a startup explorer co-owned by Erik Opstad, who is the company’s managing member. Opstad has also recently been an Alaska manager for Accumulate Energy Alaska Inc., another Slope explorer that is the local subsidiary of Australian 88 Energy Ltd. Accumulate has led Brookian and unconventional oil exploration elsewhere on the Slope in recent years. Opstad could not be reached with questions in time for this story. Jade Energy plans to drill a well bore into the Brookian formations in next winter. From there, the rock samples will be evaluated to determine if they would be suitable for angled or horizontal development drilling, which the company believes is necessary to commercialize the field. If it’s concluded the reservoir is compatible with the modern drilling techniques the well would likely be reentered during the 2020-21 winter when a lateral well would be drilled to appraise the prospect. Elwood Brehmer can be reached at [email protected]

Alaska Railroad income beats expectations in 2018

The Alaska Railroad Corp. managed to turn an $18 million profit in 2018 despite a one-third decrease in activity in its primary business line, according to its annual report released this month. The $18 million net income is down from a $22.4 million profit in 2017 but an improvement over other recent years. Operating revenue fell $1.7 million year-over-year in 2018 to $163.4 million, while operating income fell further — from $6.4 million in 2017 to $1.5 million last year — on slightly higher expenses. As has been the case in recent years, the state-owned railroad’s profit was largely built on its real estate business, which generated a $13 million profit for the year. The railroad is a significant landowner with title to about 37,000 acres across the state, roughly half of which is on revenue-generating properties. While a state-owned corporation, the Alaska Railroad does not receive state funding as part of its normal business operations. The $18 million profit also was better than expected. Railroad leaders had forecasted a $13.5 million profit for 2018 early in the year and the annual report lists a $21.7 million profit forecast for 2019, which would jive with a general expectation for an improving state economy this year. The railroad ended 2018 with a net position of $356.6 million in 2018, according to the report. A longer-term drop in the railroad’s freight resumed in 2018, as it’s overall freight tonnage fell sharply from nearly 4.8 million tons in 2017 to 3.2 million tons last year. Freight business historically has accounted for 40 percent or more of the railroad’s operating income. Spokesman Tim Sullivan said the drop in freight volumes was mostly due to a decline in gravel demand after a series of large road construction projects in 2017. “When there are big construction projects going on we’re moving gravel and we’re a pretty steady representation of what’s going on there,” Sullivan said, noting that 2017 was an anomaly to an overall trend of declining freight volumes. The Alaska Railroad’s annual freight tonnage has gradually declined from 6.3 million tons in 2010. The railroad has also seen increased competition from trucking for fuel transports between Anchorage and Fairbanks, according to Sullivan. However, the revenue generated from moving 3.2 million tons of freight last year very nearly matched what was made off of moving 4.8 million tons of building materials and equipment in 2017. In fact, revenue from the nearly $72 million freight business line decreased just $354,000 in 2018. That’s because the railroad saw an 8 percent increase in its high-value rail-barge business, primarily from additional North Slope oil exploration and development activity last year. The rail-barge link allows railcars loaded in the Lower 48 to be barged to Whittier where they are added to Alaska Railroad trains. The railroad also hauled U.S. Army supplies and equipment for deployment and training at Fort Wainwright in Fairbanks, according to the report. Activity in the passenger segment of the railroad’s business continues to increase. Employment at the railroad stayed steady at about 550 year-round workers in 2018 after several rounds of layoffs and organization restructuring in prior years that were necessitated by declining business, according to railroad officials. The railroad also hires up to about 140 seasonal workers each year to match summer passenger train demand. The strong Lower 48 economy has helped to consistently grow Alaska’s tourism industry over the past five-plus years and railroad ridership has followed suit. Ridership increased about 5 percent to nearly 532,000 passengers in 2018 and the report notes that “offseason” ridership has more than doubled over the past five years as well. Train ridership bottomed out at 405,000 passengers in 2010 following the Great Recession. Sullivan said the number of winter passengers has gone from roughly 5,500 to more than 11,000 passengers per season as the railroad has added more trains between Southcentral and the Interior. “We’ve seen quite an increase in locals traveling between Anchorage and Fairbanks as well as big increases in Asian winter tourism and they take advantage of those extra trains as well,” he said. Fairbanks-area tourism businesses have also expanded their offerings in recent years, particularly to attract Asian visitors seeking out prime aurora-viewing opportunities. Elwood Brehmer can be reached at [email protected]

Court ruling scuttles Chamber plans for insurance association

The Alaska Chamber was just a few weeks away from opening enrollment to new health insurance options for small employers in the state when a D.C. District Court ruling changed those plans. Alaska Chamber Vice President Albert Fogle said the business group had pegged May 1 to start enrolling small businesses and nonprofits in its association health plan. That was before D.C. District Judge John D. Bates on March 28 struck down a 2018 federal Labor Department rule that expanded the ability for small employers to band together to purchase health insurance for their workers. “We were real close and if we were still a ‘go’ today I would be doing our first road show presentation and I would’ve been on the road all the month of April and into May going to all the local chambers and giving speeches about the Alaska Chamber health plan,” Fogle said during an April 8 interview. Association health plan advocates see pooling small employers into large groups as a way to take control over the health insurance plans offered to workers at organizations with less than 50 employees, provide more insurance options and possibly reduce costs in the typically higher-cost small group and individual insurance markets under the Affordable Care Act. However, Judge Bates threw out the rule because it greatly exaggerated the definitions of “employer” and “employee” under the 1974 Employee Retirement Income Security Act, or ERISA, and the ACA, according to his 43-page decision. Labor Department officials generated the rule, which was finalized in August 2018, in response to an October 2017 executive order from President Donald Trump directing the agency to expand options for developing such association health insurance plans. The executive order nearly immediately led to the development of about 35 such association health plans, many of which were sponsored by chambers of commerce or similar business groups, according to an Alaska Chamber statement. The U.S. Chamber of Commerce estimates more than 300,000 individuals would have enrolled in association plans nationwide if not for the court ruling. Eleven states and the District of Columbia quickly joined together to sue the Labor Department over the rule, contending it is another attempt by the Republican administration to undermine the ACA and its consumer protections. The Labor Department association health plan rule allows nearly any group of disparate employers to qualify for a single health plan under the ERISA, which reversed the department’s decades-long precedent of requiring such associations to have members with “close economic and representational ties” to qualify as employers under the law, according to Bates. The ERISA is the key in the case because it is the primary federal law covering employee benefit plans. Bates concluded that the Labor rule, which allows sole proprietors to join together and form an association plan, goes far beyond Congress’ definitions of “employer” and “employee” under ERISA. He wrote that under the rule 51 sole proprietors could form an association that would actually have 52 employers — counting the association as one employer — and 51 employees. “This logic is clever but ultimately not persuasive,” Bates wrote, further explaining the rather convoluted counting. “When one counts the employees employed by two self-employed persons without employees, the sum is zero. (Labor’s) feat of prestidigitation transforms two individuals, neither of whom works for the other, into a total of three employers and two employees. This interpretation strains the ERISA definition of ‘employee,’ which contemplates an individual ‘employed by’ another.” Before Bates handed down his decision, which remanded the rule back to the Labor Department for analysis and possible revision, the Alaska Chamber was getting loads of interest from small employers in Alaska, according to Fogle. “We all have been receiving daily inquiries from multiple employers asking when this is coming online; when they’re going to be able to see plans,” he said. “People were looking for a different option because the plans that are in the small group market are what they are.” Chamber leaders had been working with a consultant on the association plan since 2017 and the Labor rule just made the process easier, he added. The Alaska Chamber had an internal goal of signing up 1,000 individuals in the first year of the plan, as that would give the plan a large enough pool to be independently rated by insurers. The expected benefits of the Chamber’s association plan went beyond cost for many prospective members, according to Fogle. He said a comparison of the plan against existing small group insurance offerings in Alaska found that the Chamber’s plan would have kept premiums flat or lowered them for about 60 percent of participants. He stressed, however, that it would have had benefit enhancements offered at lower cost shares for employees. The Chamber’s plan offered a traditional range of low, medium and high deductible insurance plans, but also included, among other benefits, vision and “COBRA” coverage, which allows workers to continue receiving health insurance for a period after they are no longer employed. The COBRA benefit was particularly appealing to employers with less than 20 employees, Fogle said, adding that the insurance plan was fully compliant with the ACA. “To me, those are the benefits that go all the way down to the individual employee level, where families and individuals are having a lower out-of-pocket,” he said. The Alaska Chamber is now working to put together a revised association plan that is compliant with Bates’ decision. “We certainly have encouraged the Department of Justice to file the appeal and ask for a stay in the decision by the judge who issued the ruling until there’s finality on this decision but other than that, my main focus has been to find a way that we can do this under the current ruling and find a path forward,” said Fogle, who was about to go into a meeting on that topic. Elwood Brehmer can be reached at [email protected]

Interior utility scraps Siemens talks

(Editor's note: This story has been updated to include a statement from Siemens Government Technologies.) A third would-be private partner has gone by the wayside in the state-sponsored effort to get more natural gas to Fairbanks. The Interior Gas Utility Board of Directors voted 5-2 to terminate its working agreement with Siemens Government Technologies Inc. during an April 9 special meeting. The board signed a memorandum of understanding with the multinational industrial technology firm last October to investigate Siemens’ proposal to bring new supplies of Cook Inlet-sourced LNG to the Fairbanks area by rail. Board members who voted in favor of ending the courtship reiterated themes that were heard throughout the fledgling business relationship: that Siemens representatives were still unable to substantiate key portions of their pitch after roughly five months of negotiations. The vote came following a recommendation by IGU’s management and negotiating team to end the agreement. “I think we turned over every stone we could turn over,” utility attorney Zane Wilson said in reference to negotiations with Siemens. Board member Patrice Lee voted against terminating the MOU and instead suggested a 30-day pause independent review of Siemens’ plan. Lee said she believes Siemens and IGU representatives have very different views of the progress of their negotiations. Other board members who supported the recommendation said the company had not lived up to its end of the agreement. Some had been skeptical of the proposal from the outset and said Siemens still had not answered fundamental questions from utility leaders. Last August, representatives from Virginia-based Siemens Government Technologies presented a proposal to IGU officials for a 20-year “turnkey” project that would have relieved IGU from much of the work it would have to do for the Interior Energy Project; all the utility leaders would have to do is sign a liquefaction services agreement, or LSA, and wait for the Alaska Railroad to deliver LNG to the utility’s storage tank now nearly completed in South Fairbanks. Specifically, the plan called for Siemens to install two of its modular “LNGo” gas liquefaction units at a proposed industrial park on Knikatnu land near Alaska Railroad Corp. tracks in Houston. Knikatnu is an Alaska Native village corporation. The fuel would travel by rail to IGU facilities in Fairbanks for regasification and distribution to residents and businesses. Once gas demand grew to where more than four of the LNGo units were needed, the company would look at installing a single, larger LNG facility, according to Siemens officials. The acknowledged at the time that the company hopes to parlay work with IGU into more gas supply projects in the state, notably at Interior military bases. Siemens representatives also consistently stated a belief they could get feedstock gas for $5 per thousand cubic feet, or mcf, or less, which would be significantly cheaper than pricing much larger Southcentral utilities have been able to secure in recent years on much higher volume supply contracts. The Siemens-led group also said it would investigate the prospect of developing potential gas reserves in the Houston area, which would bring the feedstock price down to $4 per mcf, according to the company’s project documents. Some IGU board members were skeptical of the gas supply claims from the outset and that skepticism did not wane. Board member Jack Wilbur said Siemens eventually backed away from the position it could supply gas and handle the transportation contract with the Alaska Railroad. “In the end the only thing they were willing to do was toll gas,” Wilbur said, referring to Siemens’ alleged desire to just run the LNG portion of the complex supply chain. A Siemens spokesman said via an email that the company has been working with the utility for more than a year on options for delivering more natural gas to the Interior. "We respect the IGU Board of Directors' decision to exit the current memorandum of understanding in order to consider new options. With a long-standing commitment to Alaska and ongoing projects in the state, we look forward to next steps, and, the opportunity to evaluate a new approach as LNG procurement plans are finalized and communicated by IGU," the Siemens statement said. Knikatnu CEO Tom Harris said in an interview that he was “saddened to hear IGU chose to walk away,” noting that reviews of geologic and well data from old exploration wells in the Houston area indicate large potential gas resources. However, Harris said there are no immediate plans to drill new exploration wells in the area. “We’re concerned that (IGU’s) decision will mean more LNG trucks on the road,” Harris said. IGU currently has a gas supply contract with Hilcorp Energy for $7.72 per mcf of gas that runs through 2021 for its base of nearly 1,000 Fairbanks customers. Where exactly IGU goes with the Interior Energy Project from here is unclear, but utility officials are also in the process of designing and evaluating an estimated $75 million expansion to the small Titan LNG plant in the Mat-Su Borough that supplies its existing customer base. A final investment decision on the Titan expansion is planned for later this year. IGU is also close to completing a 5.25-million gallon LNG storage tank in South Fairbanks. In late 2014 the Colorado-based engineering firm MWH Global Inc. parted ways with the Alaska Industrial Development and Export Authority after plans to source gas from the North Slope and truck LNG south to Fairbanks fell through. Cost estimates for final, delivered gas in that proposal came in roughly 35 percent higher than expected and challenges securing a gas supply also scuttled the plan. AIDEA was tasked with the Interior Energy Project by the Legislature in 2013 when lawmakers and former Gov. Sean Parnell approved a $330 million bond-loan-grant financing package to support getting additional supplies of natural gas to the Interior where high energy costs and poor winter air quality have been ongoing issues. Then in November 2016 AIDEA ended its relationship with Salix Inc., a subsidiary of the Washington-based utility company Avista Corp., which it had first partnered with to develop a Cook Inlet-sourced LNG supply chain for the Interior. However, challenges getting a gas supply at desired prices for a fledging market with an uncertain demand profile killed those prospects as well. AIDEA then turned the project over to IGU in a December 2017 deal that included the utility purchasing Fairbanks Natural Gas Co. and its sister LNG supply chain companies to IGU for $54 million. However, some IGU leaders contended at the time that the state-owned authority had inflated the price of FNG in the deal. Elwood Brehmer can be reached at [email protected]

Reducing costs still a priority at Alaska Energy Authority

Reducing the cost of energy across Alaska remains a priority, so the Alaska Energy Authority’s core mission is not changing according to new Executive Director Curtis Thayer.. AEA’s goal of making energy more affordable across Alaska is intact, but Thayer said on April 5 that Gov. Michael J. Dunleavy has also tasked the quasi-government agency with seeing what it can do to promote economic development in the state. “The biggest thing the governor, in my conversations with him, said is it’s not only lowering the cost (of energy) but it’s creating the capacity to attract new businesses here — so what does that look like?” he said, adding that Dunleavy is relying on AEA for guidance on state energy policy. Thayer spoke to a gathering of the Alaska policy think tank Commonwealth North about AEA’s direction under the Dunleavy administration, which has proposed eliminating, consolidating or overhauling numerous programs and agencies to close the state’s projected $1.6 billion budget deficit in the 2020 fiscal year that starts July 1. He took over at AEA in early February after being asked to apply for the position. He previously led the Alaska Chamber and served as state commissioner of Administration and deputy commissioner of the Department of Commerce, Community and Economic Development, which oversees AEA. Thayer assuaged the worries of many who have been concerned about Dunleavy’s proposal to dissolve the $1.05 billion Power Cost Equalization Fund into the state’s General Fund. While the administration proposed ending the PCE Fund, which acts as an endowment and generates investment returns that help offset the high cost of electricity for residents in 194 rural communities, the governor’s operating budget still includes a $32.3 million PCE appropriation for fiscal year 2020. Office of Management and Budget officials said when the governor’s budget plan was released in February that the PCE and other designated state funds should be moved into the General Fund so all constituencies can compete on a level playing field for state support. The PCE Fund is managed by the Department of Revenue and generated $76.6 million in income in fiscal year 2018, according to Revenue financial reports. The PCE program paid out about $26.1 million of that to communities over the year, according to AEA, which manages the distributions. The power subsidy to each individual community is based on the average cost of consumer power in a given rural community — often 60 to 70 cents per kilowatt-hour — compared to the average cost of power in urban Alaska, which averages slightly less than 20 cents per kWh. The PCE program was established in 1985 as a way to provide more equitable financial assistance to rural communities that don’t directly benefit from state power infrastructure investments, primarily in the Railbelt region that encompasses Fairbanks, the Matanuska-Susitna Borough, Anchorage and the Kenai Peninsula. Thayer noted that despite the administration’s stated goal of sweeping the PCE Fund into the General Fund, the legislation needed to make that happen hasn’t been introduced. He added that not many lawmakers appear interested in the change, either. “A lot of members of the Legislature have PCE communities in their districts,” Thayer said. Internally, AEA addressed the state’s budget challenges by not making a capital budget request for 2020. The agency received $16 million in combined general funds for its rural Bulk Fuel Upgrades and Rural Power System Upgrades programs in the current-year capital budget. As is often the case, that state money was matched by nearly $23 million in other funding, much of which typically comes from the federal Denali Commission. According to Thayer, about 30 percent of the Denali Commission’s grant funding flows through AEA. The Bulk Fuel and Rural Power programs help fund larger diesel storage tanks allowing for more economical fuel purchases and more efficient powerhouses in small rural communities. AEA has completed Bulk Fuel projects in 118 communities since 2000 at an average current cost of $4 million to $5 million apiece, according to Thayer. “We’re not necessarily out of funding, we’re prioritizing funding for the next two years,” he said. The authority’s prioritized project list for fiscal 2020 includes approximately $7 million for five Rural Power Systems projects and $5.2 million for six Bulk Fuel projects in varying stages of design and construction, Thayer wrote via email. As for the big picture items to increase power generation capacity in the state, Thayer said AEA leaders are looking at the possibility of revisiting the Susitna-Watana Hydro project that was one of six large, early-stage projects shuttered by former Gov. Bill Walker through an administrative order in December 2014 to limit state spending. While some other projects were eventually allowed to proceed, the stop order stayed on the large dam until Dunleavy rescinded it Feb. 22. Proponents of the 459-megawatt, 705-foot dam estimated to cost $5.6 billion in 2014 contend it is the only viable way the state can meet its goal of generating half of its energy from renewable sources by 2025 at relatively low and stable prices. However, dam opponents argue the resulting alterations to Susitna River water flows would endanger salmon stocks. They also question the economics of the massive project at a time when regional power utilities have invested heavily in new natural gas-fired power plants and long-term forecasts indicate little growth in power demand. AEA has not been formally tasked with restarting Susitna-Watana, according to Thayer. “Since putting the project into abeyance, AEA continues to field and answer questions from all interested parties regarding processes and costs associated with receiving a (Federal Energy Regulatory Commission) license in the event the project is someday restarted,” he wrote. Thayer said it’s generally believed it would take about four years and $100 million to get a FERC construction license for the project. Other long-term possibilities for providing substantial quantities of new power in the state could include a high voltage direct current, or HVDC, power line coming off the North Slope, Thayer conceptualized. The HVDC idea has long been discussed as a way to utilize the state’s large North Slope gas reserves without building a pipeline and exporting LNG. It would have a large gas-fired power plant on the North Slope feeding the HVDC line, which would be an artery to transmit power to the rest of the state. Finally, Thayer said AEA hopes to disperse about $7.2 million of the $8.1 million Alaska received from the Volkswagen diesel emissions court settlement this year. AEA was tasked with managing the money — that must be spent on local renewable energy or energy efficiency projects — and solicited grant requests last year. Elwood Brehmer can be reached at [email protected]

BP reports $916 million Alaska profit in ‘18

BP saw improved results in 2018 as increasing oil prices helped boost the producer’s bottom line both in Alaska and worldwide. In Alaska, the London-based major netted $916 million last year from its North Slope operations, according to the company’s 2018 annual report. Those profits came on the back of more than $4.3 billion in total revenue. Comparatively, BP generated an $830 million profit from $3.3 billion in revenue in 2017. Worldwide the company netted nearly $9.4 billion in profits in 2018 versus nearly $3.4 billion the year prior. “Our teams have delivered strong results across the business and we are well positioned to continue to deliver value as we play our part in the dual challenge of delivering more energy with fewer emissions,” BP Chairman Helge Lund said regarding the 2018 results in a letter to shareholders. Company officials in Alaska said higher oil prices were a primary driver for the improved margins. BP’s Brent indexed crude — which Alaska North Slope oil follows closely — sold for an average of $71.31 per barrel last year, roughly a 25 percent increase versus the 2017 average price of $54.19 per barrel. BP Exploration Inc., the company’s upstream Alaska business, paid $804 million in production, property and corporate taxes and royalties to the State of Alaska last year, BP Alaska controller David Knapp said. The company also invested $370 million in capital projects in Alaska in 2018, according to Knapp. BP operates the mature, iconic Prudhoe Bay oil field and has interests in the producing Milne Point and Point Thomson units on the North Slope as well. The company is required to report its upstream Alaska business in its annual report and accompanying “20-F” financial report. BP Alaska officials have touted their ability to generally hold oil production from Prudhoe and its satellite fields steady at roughly 280,000 barrels per day since 2016 despite cost reductions. The company is also conducting a 3-D seismic data shoot over the entire Prudhoe field this spring. While BP made $916 million on the Slope last year, the company’s Alaska leaders insist a $531 million profit figure is more accurate, as it captures the costs for all of its operations in the state, which include the Trans-Alaska Pipeline System and marine oil transport from the Valdez oil terminal. They note the $531 million Alaska profit figure is more representative of BP’s total Alaska business because it also accounts for the property taxes paid on the midstream infrastructure. However, those costs of getting the oil to market are also deductible from the state’s production tax. BP owns 48.4 percent of the Trans-Alaska Pipeline System, the largest single share of the oil transport network. The company also has oil tankers dedicated to its Alaska operations and has supported the Alaska Gasline Development Corp. with predevelopment work on the $43 billion Alaska LNG Project. BP pulled the Alaska-class tanker Frontier from service in September, according to the annual report, leaving it with three oil tankers dedicated to operations in the state. “With the reduction in volume over time, as well as new efficiencies identified in the shipping programme, Frontier has been removed from service and its carrying value impaired accordingly,” the report states. In 2018, BP also sold its 39 percent stake in the large Kuparuk oil field ConocoPhillips as part of a neutral value swap with the Houston-based producer that included BP acquiring an additional 16 percent interest in the Clair field in the North Sea. BP spent approximately $1.7 billion related to acquiring the Clair field interests in the deal, according to the report. Elwood Brehmer can be reached at [email protected]

Legislators turn to dividend spend to plug deficit

Budget negotiations at the end of the legislative session typically focus on one or two sticking points. In recent years of tight budgets those negotiations between caucuses in both chambers have centered on oil tax credits and funding the state’s education and ferry systems; this year, it appears, it will all be about the PFD. Gov. Michael J. Dunleavy largely campaigned on returning to the statutory Permanent Fund dividend formula after three years of lawmakers deviating from it while the state was mired in multibillion-dollar budget deficits. Dunleavy emphasized on the campaign trail that improved oil prices could support current levels of state spending as long as future budget growth was mostly limited to match inflation. It wasn’t until the very end of the campaign and more so after the election — when oil prices fell from near $80 per barrel to eventually stabilize in the mid-$60 range, and expected state revenue dropped in concert — that talk began of major budget cuts to pay for a $3,000 PFD this year. While the newly-elected governor has subsequently chosen to start budgeting by paying a full PFD and proposing major budget cuts to resolve the $1.6 billion deficit at current spending levels using the remaining revenue from all sources, legislative leaders are taking a much different approach. A full, statutorily calculated PFD for the upcoming 2020 state fiscal year is expected to cost about $1.9 billion. House Finance Committee co-chair Rep. Neal Foster, D-Nome, said during a March 28 press briefing that the bipartisan House majority caucus would focus on the budget first and address the dividend with the remaining funding available. “We’re working in House Finance to construct a budget that is fiscally responsible and at the same time funds the things that Alaskans are asking for,” Foster said. He and his fellow Finance co-chair North Pole Republican Rep. Tammie Wilson said they’re looking to make gradual budget cuts over several years to allow government agencies and the businesses that work with them time to react to reductions. Foster suggested legislators could appropriate this year’s PFD in a new, drastically amended version of the governor’s bills to repay forgone dividend amounts, which don’t appear likely to pass as the administration has proposed. The first version of the House budget — also subject to several rounds of amendments — calls for $45 million in cuts to General Fund spending but is more than $1 billion less than the current 2019 budget mostly because it does not include the PFD appropriation that has generally been in the operating budget bill. “I think one of the things we realized is we have to do business different,” Wilson said. “We can’t just keep cutting; we have to change” state government operations to maintain some services at lower spending levels. House Speaker Bryce Edgmon, I-Dillingham, said the eight community meetings representatives held across the state in late March drew an overwhelming response in opposition to Dunleavy’s budget plan. Specifically, individuals testifying against the governor’s budget cuts outweighed those in favor of them by a five-to-one margin, according to Edgmon. The number of Alaskans who testified in community and Finance meetings in support of generally reducing the PFD to pay for government services also outweighed those opposed to PFD cuts by three-to-one based on a tally kept by the majority caucus. “A lot of Alaskans, not all, but a lot of Alaskans are willing to take a reduced PFD in order to protect schools and public safety and road services and other essential items,” Edgmon described. Senate ponders new PFD plan Elsewhere in the Capitol, senators are discussing the prospect of changing the PFD to better match the state’s new fiscal situation. Senate Finance co-chairs Natasha von Imhof, R-Anchorage, and Bert Stedman, R-Sitka, said March 27 that they are working on a new dividend formula that would better fit within the framework of the Permanent Fund percent of market value, or POMV, draw legislation passed last year. The POMV law calls for drawing 5.25 percent of the five-year average Permanent Fund value from the $64-billion fund’s Earnings Reserve Account, which this year amounts to a $2.9 billion draw to pay dividends and support government services. In an interview, von Imhof said the PFD bill would make the dividend a portion of the overall POMV draw on the fund. The current formula is based on a portion of the annual average income the fund produces and changing it to split the POMV would align the currently incongruent statutes, she said. It would also stabilize future dividend amounts, the senators noted. What exactly the proposed split will be is unclear at this point, but it doesn’t appear likely it will be weighted towards dividends. A 50-50 split of the POMV draw would lead to a roughly $2,300 PFD this year, but also leave a deficit of $861 million, according to Senate Finance calculations. Of the budget cuts to expect in the Legislature’s final 2020 budget, Stedman said, “We can’t get to $861 million in reductions; that I can virtually assure you.” Sen. Lyman Hoffman, D-Bethel, said he agrees that the size of the dividend should be debated. However, he and others from both parties contend the PFD should be enshrined in the Alaska Constitution for the simple reason that otherwise it will continue to be a political talking point since the Legislature and former Gov. Bill Walker set the precedent of diverging from the historical formula the past three years. “If we do not resolve the issue on a permanent basis and let the people of Alaska decide what (the PFD) might be we are setting ourselves up for decades to come of making the dividend a political discussion for everyone’s election,” Hoffman said. Wilson said House members also heard in their community meetings that many Alaskans were frustrated not so much by the concept that the PFD formula could change, but that it seemed to be “picked out of the sky” of late. Anchorage Democrat Sen. Bill Wielechowski, who unsuccessfully sued Walker for his 2016 partial veto of the PFD appropriation, emphasized that until the PFD statue is changed the Legislature needs to work within the confines of the existing law. “The reason the dividend was set up was because you had a system where the rich and powerful and the politically connected would come in and take an inordinate share of the government’s wealth and the Permanent Fund dividend program was set up so it was shared equally,” said Wielechowski, who advocates for changes to the state’s oil tax system to generate more revenue. He has also sponsored resolutions to put the PFD in the Constitution, a concept von Imhof rejects. She argues that no allocations were included in the Alaska Constitution because those who wrote it had the foresight to not bind future lawmakers to obligations they might not be able to fulfill. “We have no idea what the future holds. We must be able respond to any set of unknown circumstances that might occur. You have emergencies; you have economic expansion projects; debt service, et cetera,” von Imhof said. “As a strong fiscal conservative I believe that the annual budget needs to be reflective of the times. We need to be able to have some flexibility and we can’t give the individual dividend checks a priority over everything else.” In the committee hearing she described the concept of putting the PFD in the Constitution as valuing the “individual over the community”. Elwood Brehmer can be reached at [email protected]

Production issues prevent Furie from meeting gas supply contracts

One of Southcentral Alaska’s few natural gas producers has not been able to meet its contracted supply requirements for more than two months. Furie Operating Alaska stopped supplying natural gas to Enstar Natural Gas Co. Jan. 25, according to Enstar spokeswoman Lindsay Hobson. The small Texas-based producer operates the offshore Kitchen Lights natural gas field in central Cook Inlet and also has a firm contract to supply Homer Electric Association with feedstock gas for its power plants. Hobson wrote via email April 1 that Furie had resumed delivering gas to Enstar in recent days but at volumes below what the utility had contracted for. HEA has not received gas from Furie since about Feb. 25, the Kenai Peninsula electric utility’s Manager of Fuel Supply and Renewable Energy Mikel Salzetti said April 1. The utilities have avoided service disruptions by purchasing spot market gas and drawing on purchased reserves stored in the Cook Inlet Natural Gas Storage Alaska facility commonly known as CINGSA. The gas storage is in a depleted Kenai-area gas field and has 11 billion cubic feet, or bcf, of capacity for Southcentral utilities to store gas reserves, which are usually built up in summer. It was finished early in 2012 at a time when there were widespread concerns that declining natural gas reserves in the Cook Inlet basin could result in gas shortages. Enstar’s parent company SEMCO Energy Inc. is a majority owner of CINGSA. Hobson said the warmer-than-normal late winter and early spring across Alaska has helped keep Enstar from needing to purchase additional gas; HEA, on the other hand, has been forced to purchase gas to fill the void in addition to drawing on its CINGSA reserves, according to Salzetti. He said Furie is the electric utility’s only current firm supplier, which meant the utility had to backfill all of its gas needs of approximately 12.4 million cubic feet per day. A previously scheduled overhaul to a nine-mile section of the transmission intertie that connects the Kenai Peninsula power grid to Anchorage added to the headache caused by the gas supply disruption, Salzetti said. The transmission work in the Turnagain Pass area took the intertie offline for about two months, according to Julie Hasquet, a spokeswoman for Chugach Electric Association, which owns that portion of the intertie. Hasquet said the work was done March 20 and the transmission system is back online. The intertie outage meant HEA had to run additional power generation units in Soldotna to provide its own backup, or spinning reserve, power in case its Nikiski plant or the Bradley Lake hydro power plant went down. Normally, HEA runs its more efficient combined-cycle Nikiski power plant and uses the transmission intertie, and the access it affords to Anchorage-area power — as its spinning reserve, Salzetti said. Furie is one of the newer entrants to Cook Inlet that were supposed to ease Southcentral gas supply concerns by developing new fields and adding competition to the market. In 2015 the company installed the Julius R platform at Kitchen Lights, which was the first new production platform built in Cook Inlet in decades. In September 2015 Furie and HEA agreed to a supply contract that began April 1, 2016, at prices lower than previous contracts. Enstar then signed a contract with Furie in early 2016 for gas deliveries beginning in April 2018 and running through March 2021. The initial Enstar-Furie contract was for 18.6 bcf of gas, or about 20 percent of Enstar’s total expected demand for the period. Furie leaders did not respond to multiple requests for comment in time for this story. However, a Feb. 11 letter from Enstar and Alaska Pipeline Co. President John Sims to Furie leaders and investors contends “Furie has had a difficult time meeting required milestones under the (gas supply agreement) from the time the ink was dry on the GSA.” Alaska Pipeline Co. is a sister company to Enstar under SEMCO Energy. According to the letter, Furie has had problems proving up its gas reserves to meet its contract with Enstar and has had operational problems with its wells. The producer asked for a delayed delivery of more than half of its firm supply commitment to Enstar on Jan. 17 as it worked on issues at its facility, the letter states. Hobson said Enstar understands the supply disruptions are due to a Furie pipeline that froze during a cold stretch of January weather. Alaska Pipeline-Enstar agreed to defer the full deliveries until March 31, according to the letter. Salzetti said Furie has been in regular contact with HEA during the ordeal and has given utility officials a verbal estimate as to when gas deliveries will resume but he declined to elaborate further on the discussions. Furie officials said in 2017 they planned to work on developing oil prospects in the Kitchen Lights gas field, but those plans have largely been scuttled because of the state’s delay in repaying millions of dollars in oil and gas tax credits the company earned for its previous work, according to the 2019 Kitchen Lights Plan of Development filed last October with the state Division of Oil and Gas. In late 2017, former Natural Resources Commissioner Andy Mack issued a default notice to Furie for allegedly not conducting the work the company claimed it would in prior development plans. Furie’s work in 2018 was sufficient to resolve the default, according to Oil and Gas records. Officials at the Regulatory Commission of Alaska, which approved the gas contracts, said the commission is aware of the situation but it doesn’t typically act on such matters until a formal complaint is filed, which hasn’t happened. Salzetti said that while HEA put all its stock in Furie for feedstock gas, the utility’s contingency plans have worked. He noted that some other utilities in the region rely on a single source of gas as well. “We evaluate lots of criteria when we negotiate gas supply contracts and obviously we knew that a single supplier operating a single field is somewhat of a risk and at the time it was a risk we were willing to take for the price we received for that gas,” he said. With overall gas demand lower in spring and summer there is usually more supply available at better short-term prices, Salzetti added, which leads him to believe HEA could get through the rest of the year without Furie’s supply. HEA’s contract with Furie is through the end of 2019, he said. ^ Elwood Brehmer can be reached at [email protected]

Federal judge rejects deal for road through Izembek National Wildlife Refuge

A federal judge on Friday morning vacated a land swap deal between the Interior Department and an Alaska Native corporation that set the stage for building a long-sought road between Alaska Peninsula communities of King Cove and Cold Bay. U.S. District Court of Alaska Judge Sharon Gleason ordered the January 2018 land exchange agreement signed by former Interior Secretary Ryan Zinke and King Cove Corp. leaders invalidated because Zinke failed to explain the reasoning behind the department’s policy reversal, according to Gleason’s 31-page ruling. The land exchange was meant to facilitate construction of an 11-mile gravel road through a portion of the Izembek National Wildlife Refuge currently designated as wilderness. King Cove leaders and Alaska lawmakers have long petitioned federal officials to approve the road; they see it as an essential link for emergency services when bad weather prevents flights out of King Cove or boat travel across Cold Bay. In late 2013, then-Interior Secretary Sally Jewell rejected land swap deal passed by Congress in 2009 after a U.S. Fish and Wildlife Service environmental review determined the road would irreparably damage critical waterfowl habitat in the 315,000-acre Izembek Refuge. In summer, the refuge is home to 98 percent of the world’s population of Pacific black brant, a goose that breeds there, according to the Interior Department, as well as other sensitive wildlife and waterfowl. With a paved runway longer than 10,000 feet, Cold Bay’s airport has one of the longest civilian runways in the state and is the area’s main link to Anchorage 600 miles away. The old military post was built during World War II. King Cove’s airport has a 3,500-foot gravel runway for the community with roughly 950 year-round residents. Over the years 18 people have died in plane crashes or waiting to get medevac service out of King Cove, according to the Interior Department. However, no one has died trying to leave since 1994. According to Sen. Lisa Murkowski, there have been 98 medevacs from King Cove since 2014 with 21 conducted by the U.S. Coast Guard.  A coalition of Alaska and national environmental organizations sued Interior shortly after the swap was announced contending, among other things, that the agency did not follow specific procedures for such deals in the 1980 Alaska National Interest Lands Conservation Act, which also established the Izembek Refuge. Judge Gleason found that Zinke failed to provide rationale for the reversal from Interior’s 2013 decision and thus violated federal Administrative Procedures Act. While federal attorneys argued in court filings that Zinke understood the potential impacts to wildlife the road could have and instead “came to a more humane conclusion,” the 2013 decision is not addressed in the eight-page agreement with King Cove Corp, according to Gleason. “The Exchange Agreement does not explain the agency’s ‘reversal of course arising out of concern about economic and social hardships’; moreover, there is no language in the Exchange agreement suggesting the Secretary’s reversal is the product of his rebalancing of the facts in light of new policy goals,” Gleason wrote, citing previous federal court decisions. “While a court should ‘uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned,’ a court may not ‘supply a reasoned basis for the agency’s action that the agency itself has not given.’” Zinke said in a formal statement when the equal-value land exchange was announced that it fulfills the federal government’s duty to keep Americans safe. “Previous administrations prioritized birds over human lives, and that’s just wrong,” Zinke said in 2018. “The people of King Cove have been stewarding the land and wildlife for thousands of years and I am confident that working together we will be able to continue responsible stewardship while also saving precious lives.” The now-defunct agreement called for an equal-value land swap between King Cove Corp. and Interior in which neither side was to give up more than 500 acres. The land swap rejected in 2013 would have traded 206 acres of Izembek land and 1,600 federal acres outside the refuge for about 56,000 acres of state and King Cove Corp. land. Opponents of the swap said Gleason’s ruling illustrates the arbitrary manner in which Interior has handled public lands issues under President Donald Trump. “The court’s decision today provides an important and essential check on Interior’s public land giveaway. The agency’s attempt to skirt the law to benefit private or commercial interests disregards the intention of Congress and the purpose of the refuge itself,” said Katie Strong, an attorney for the environmental nonprofit law firm Trustees for Alaska, which filed the suit on behalf of the nine conservation groups. Others have argued authorizing the road would set a dangerous precedent for allowing development in areas designated as wilderness and could be used by seafood companies instead of just for emergency purposes as proponents have claimed. Alaska Native groups from the Yukon-Kuskowkim Delta have fought against the road over concerns it would impact populations of geese they hunt for subsistence and use the refuge. A spokeswoman for Interior said the department could not comment on ongoing litigation. King Cove Corp. spokeswoman Della Trumble said in a prepared statement that it’s disappointing the court found process flaws in the agreement, but “the King Cove group will never give up our fight for this land exchange. It is so crucial for safeguarding the lives of our families. This access is truly a matter of life and death for us,” Trumble said. House Speaker Bryce Edgmon, I-Dillingham, who represents King Cove and Cold Bay, echoed that sentiment in a statement Friday. “The people of King Cove deserve reliable access to healthcare, and the fight to build a simple gravel road affording them that basic right has taken far too long. Today’s U.S. (District) Court decision to invalidate the plan to allow a land exchange between the Interior Department and King Cove Corp. is disappointing and presents an unnecessary setback,” Edgmon said.   Elwood Brehmer can be reached at [email protected]

Officials explain how state would cut Medicaid budget

Department of Health and Social Services leaders believe they can cut about $100 million out of the state’s Medicaid budget quickly while getting to the remainder of Gov. Michael J. Dunleavy’s goal of $225 million in state Medicaid cuts will be more complex. The Dunleavy administration is planning a 5 percent cut to many, but not all, provider payment rates as well as changes to payment methodologies and administrative consolidations to save roughly $100 million; much of the proposed cuts can which can be done without legislative approval but do require permission from the federal Center for Medicaid Services, or CMS. Administration officials have stressed in media calls and legislative hearings that the spending cuts have been developed in ways that will protect primary care access, small hospitals and general access to services while aligning payment levels with other public payer entities. Dunleavy has pledged to eliminate the state’s $1.6 billion budget deficit without new taxes while restoring Permanent Fund dividend payments to their statutory calculation. DHSS leaders said in a media briefing ahead of the initial March 19 House Finance subcommittee meeting on the department’s budget that the changes were expected to result in $94.6 million of savings to the state’s General Fund; the department’s presentation from the hearing stated $102.9 million of savings are expected. They acknowledged that the goal of $225 million in cuts — other budget documents indicate upwards of $270 million in General Fund reductions — to Medicaid services was a directive from the Office of Management and Budget that the department was subsequently tasked with meeting. “Our division directors have truly been scrubbing all areas, working together, collaboratively, to try to find a variety of ways we can meet that $225 million objective,” DHSS Deputy Commissioner Donna Steward told the House subcommittee. As of February, there were about 214,400 recipients in Alaska’s Medicaid program, according to DHSS. A 5 percent provider rate cut and withholding inflation adjustments is expected to save $24.3 million in the fiscal year 2020 budget. However, the lower reimbursement levels will not apply to primary care providers, federally qualified health centers or at least 11 small hospitals across the state deemed to offer critical access to basic care in their respective areas of the state. That means the state will primarily be counting on Alaska’s large hospitals to absorb the rate reductions without corresponding cuts to offered care. Former Gov. Bill Walker’s administration implemented a 5 percent across-the-board rate cut last year, but it has since been restored to 2017 levels, Steward said. DHSS officials are also planning a shift to hospital diagnosis-related group, or DRG, payment schedules, which are intended to encourage cost-containment by making a single payment that covers all charges associated with an in-patient stay for a given condition. The shift to DRGs is expected to save the state $4.5 million per year. Health and Social Services Committee co-chair Rep. Ivy Spohnholz, D-Anchorage, was critical of much of the Medicaid plan but said she’s excited to hear of the move to DRG billing for hospitals as it is “incremental steps towards value-based compensation” and more transparency. Other changes to a cost-based methodology for late-stage renal disease treatment and more frequent amendments to the state’s preferred pharmaceuticals list would result in smaller savings, according to Steward. “Right now we are not able to change the drug list quick enough to take advantage of a reduction in drug prices that happen on the national level,” she said, adding that the state has been amending its list about twice per year, while the federal list usually changes quarterly. The pharmacy pricing adjustments are expected to net savings of $2.1 million per year. The leaders of some of Alaska’s largest hospitals have been highly critical of Dunleavy’s plan to cut Medicaid spending; they insist that provider rate cuts will simply push more physicians and clinics to stop accepting Medicaid. Alaska State Hospital and Nursing Home Association CEO Becky Hultberg said in a formal statement that the administration’s plan “is not well thought out, realistic or achievable. It is simply a blunt instrument developed in response to the mathematical exercise required by the Office of Management and Budget.” Steward noted that any provider rate changes must be approved by the federal CMS and monitored over three years to see how the change impacts providers or access to care. She also said the rate adjustments will only last through 2020 as the administration identifies longer term cost savings in the second phase of its Medicaid overhaul. What exactly the second round of changes will consist of is unclear, as it will require multiple approvals and possible waivers from CMS, according to DHSS officials. Hultberg wrote in testimony to the House subcommittee that the Hospital and Nursing Home Association conducted its own analysis of options for capturing Medicaid savings in 2017 and a consultant concluded that a provider tax and moving to DRGs for large hospitals could help and be further evaluated for implementation in 2021. A former commissioner of Administration under former Gov. Sean Parnell, Hultberg also wrote to lawmakers that few quick and simple cuts to state government spending remain after five years of budget reductions without significantly disrupting the larger economy. After drafting a report for the Hospital and Nursing Home Association on the economic impacts of Medicaid, longtime Alaska economist Jonathan King concluded that the proposed cuts would likely result in at least 8,000 job losses in the state. Dunleavy’s proposed cuts to state Medicaid spending would also forgo upwards of $465 million of federal money in 2020, according to Steward. Medicaid spending has helped insulate the health care sector from Alaska’s ongoing recession that has touched nearly every other industry in the state. And while overall Medicaid spending in Alaska continues to rise, the state’s part of that bill is shrinking. According to the Legislative Finance Division, overall spending on Medicaid in Alaska has increased from $1.7 billion to more than $2.3 billion since fiscal year 2015, but the state’s portion of that has actually gone down from $724 million in 2015 to $677 million, which includes a $15 million supplemental budget request, in the current fiscal year. Medicaid expansion, approved by Walker in 2015, has increased the federal government’s share of Medicaid payments and the Legislature has in recent years taken measures to capture all available federal Medicaid funding. The House subcommittee rejected Dunleavy’s proposed budget cuts by a 5-3 vote that split along party lines, with majority member and Finance Committee vice chair Jennifer Johnston voting with minority member Republicans. The cuts could become part of the budget later in the process or the governor could still veto a portion of the state’s Medicaid appropriation. Administrative savings, dental care Additional savings are expected from a host of smaller Medicaid program changes, including halving the time providers have to file claims. Steward said a proposal to cut the period that providers and others have to file a claim after performing a service from 12 months to six months should help reduce the number of “aberrant” claims the department deals with. Illegitimate Medicaid claims sometimes arise when a provider retires or leaves Alaska but doesn’t notify the state about the change. She noted that much of the $10 million in savings expected from time reduction would likely be a one-time benefit as some late claim filers will miss out on payments only once before changing their habits. The department is also anticipating $500,000 in savings from implementing a nurse hotline to help guide individuals in making their medical care decisions. The hotline plan was generally well received by the subcommittee members. To the contrary, a plan to cut about $27 million in Medicaid adult dental coverage — $8.2 million state savings and $18.7 million federal reduction — was not well received by Democrats on the House panel. General adult dental coverage is an optional Medicaid service. Steward acknowledged that no analysis was done when it was decided that adult dental coverage would be cut from Medicaid but added that emergency dental procedures will still be covered and provide a “backstop” for patients. Alaska Dental Society Executive Director David Logan wrote to the subcommittee that cutting preventative adult dental care would inevitably lead to more costly emergency room visits, which can only provide temporary relief. “In most situations in health we want to push people towards the preventative care and not the emergency phase of care but in this instance, for example, we’re doing the exact opposite,” Rep. Geran Tarr, D-Anchorage, said. “We’re saying forgo the preventative care that’s less costly that will prevent more significant health problems.” Elwood Brehmer can be reached at [email protected]

Gov: Budget reset needed to save economy

Gov. Michael J. Dunleavy’s underlying message about the State of Alaska budget deficit is much the same as his predecessor’s, but his plan to address it is vastly different. Dunleavy stressed throughout a nearly two-hour talk in Anchorage March 26 that without major, durable spending reductions to close the $1.6 billion deficit the Permanent Fund dividend will disappear within three years. He and members of his administration presented their budget plan alongside members of the conservative political group Americans for Prosperity, which sponsored and hosted the event at the 49th State Brewing Co. Former Gov. Bill Walker’s message, starting in late 2015 when he unveiled his long-term fiscal plan, was that the dividend formula needed to be adjusted along with spending cuts and various taxes to preserve the payouts in some form. The current governor campaigned largely on restoring the PFD to its statutory payment calculation, which if followed is expected to generate dividends in the $3,000 per person range this year. That money, he insists, is best spent individual Alaskans rather than using part or most of it to close the budget gap. He also emphasized that long-term reductions to state spending would not dramatically harm Alaska’s currently fragile economy, which many of the state’s economists have said is ready to come out of a nearly four-year recession late this year barring major unforeseen events. Numerous economists have said the nearly $3 billion of cuts that have been made since 2014, largely from reducing the capital budget to little more than enough to generate federal matching funds, have deepened and extended the recession that was triggered by the sustained fall of oil prices late that year. The majority of jobs lost in the past four years have been in the oil and gas and construction industries. Dunleavy noted that Alaska already has the highest unemployment rate in the country even with current state spending levels. “We feel, for the sake of the private economy, to get that back on its feet and growing, what we need to do is reduce the government side of the economy, so that’s why you have our budget before you,” he said, adding that his budget plan would cost Alaska 600 to 700 jobs. The Office of Management and Budget has calculated that Dunleavy’s budget proposal would eliminate 714 state positions. However, economists routinely stress that Alaska’s economy is largely supported by government spending whether it comes from state or federal sources, which is common for relatively young economies. The Anchorage Economic Development Corp. estimates that about 20 percent of the jobs in Alaska’s largest city are tied to government. Economists for the University of Alaska Anchorage Institute of Social and Economic Research project the administration’s budget would result in roughly 7,000 additional jobs lost across employment sectors; those losses would be on top of the 12,300 jobs Alaska has lost since 2015, according to the state Labor Department. Other economists have calculated that the plan to cut more than $700 million from the state’s Medicaid program would result in 8,000 job losses alone . The administration’s chief economist Ed King testified to the Legislature in early March that the budget plan would likely mean about 5,000 fewer jobs statewide, but he said the losses would reset the state’s economy to a sustainable level. Dunleavy echoed that sentiment March 26, saying that government money had inflated the size of the state’s economy. “We get this budget under control, we’ll get more investment and we’ll get more revenue,” he said. Walker often pointed to the fact that without a statewide tax, which Dunleavy rejects, economic growth is a drain on state services if it does not come in the form of oil revenue to state coffers. OMB Director Donna Arduin said the administration is focused on cutting spending this year and reforming the state departments and programs hardest hit by budget cuts — K-12 education, the University of Alaska, Medicaid and the state ferry system — in the future. She specifically said omnibus education reform legislation would be introduced in the coming weeks. The governor acknowledged that reaching his goals would be challenging, adding that his three proposed constitutional amendments are needed to make it effective long-term. The amendments are to adjust the current spending cap, which Attorney General Kevin Clarkson said would be $10 billion this year, enshrine the PFD as a transfer payment rather than an appropriation, and require public votes for tax increases. Adding those items to the state Constitution would give Alaskans a stronger voice in such major policy decisions, he said. “I have a lot more faith in the people of Alaska than some of the special interests that don’t want you near a constitutional amendment,” Dunleavy said at the event. Elwood Brehmer can be reached at [email protected]

Anchorage Assembly seeks fresh look at port cost estimate

The Anchorage Assembly is seeking help to determine once and for all if it really needs to spend roughly $1.9 billion to rebuild the city’s deteriorating port. Assembly member Christopher Constant, who has started a reexamination of the Anchorage Port modernization program as co-chair of the Assembly’s Enterprise and Utility Oversight Committee, summed up reaction to the potential price of the port project at a March 21 Assembly committee meeting. “We need to look closely to figure out if there’s cost savings. Sticker shock doesn’t even get near the level of shock,” Constant said of the $1.9 billion estimate to replace and upgrade the port’s cargo, petroleum, cement terminals and other facilities. Modernizing the Anchorage port — officially renamed the Port of Alaska by the Anchorage Assembly in 2017 to highlight the statewide importance of the city-owned infrastructure — was initially pegged at just less than $500 million in 2014. That cost estimate grew to more than $700 million in 2017 and was updated to approximately $1.9 billion earlier this year. There is no questioning of the need to substantially rehabilitate the Anchorage port, which is the primary hub for goods entering Alaska. Some sections of the pile-supported docks have been in place since 1961 and have far exceeded their initial 35-year design life as the saltwater they stand in has gradually taken its toll and badly corroded the steel support pilings. The Assembly on March 19 unanimously approved spending up to $100,000 from the port’s operating funds to hire experts to evaluate the overall cost of the current plan as well as whether or not the remaining development from the first, failed port project is usable. Constant said the money could be split into two or more contracts to satisfy the economic and engineering aspects of the review. He also noted the Assembly could approve additional funding for the consulting work if $100,000 isn’t enough. The Assembly specifically wants to know why the expected construction costs have nearly quadrupled over five years; ways the work can be modified or sequenced to lower costs; what facilities and equipment long-term port users truly need and are willing to pay for; and what are the best avenues for funding the project, whatever the final price ends up being among other aspects of the project. A key caveat is that any firm hired to perform the consulting work will not be eligible for future work on the large port construction project. CH2M, recently purchased by Jacobs Engineering Group, evaluated the design for the original port expansion project and determined — in addition to problematic construction techniques — the underlying engineering of the proprietary Open Cell Sheet Pile dock design did not meet the challenging seismic stability requirements for the port. CH2M detailed its findings in a lengthy report released in early 2013. Officials in former Mayor Dan Sullivan’s administration then recommended to the Assembly in early 2014 that CH2M lead management of the next iteration of the port overhaul given the company’s knowledge of the situation. The Assembly in 2014 approved CH2M to manage the downsized port modernization project, which calls for using more traditional pile-supported docks. However, some current Assembly members have expressed frustration over the fact that a firm first hired to conduct an independent analysis of the construction issues at the port was subsequently offered additional work based on the findings in its report. A large part of the new consulting work would be evaluating CH2M’s findings. Representatives from PND Engineers Inc., the Anchorage-based company that designed the sheet pile dock, have contended for years that the first port project failed because of faulty construction and not problems with its proprietary dock design that has been installed elsewhere in the state at ports in Kodiak and Dutch Harbor. PND President Jim Campbell told the Assembly committee in late February that he believes two new cargo terminals could be built off of the remaining sheet pile for a little more than $300 million versus the roughly $1.4 billion CH2M estimates it will cost to remove the sheet pile and much of the land behind it before building new cargo terminals. Port officials have generally said increased foreign steel tariffs; building to high seismic criteria with a 75-year working life; the logistical complexities of keeping the port open during construction; and removing much of the 30 acres of fill that created a large area of backlands at the north end of the port during the expansion project have added to the project’s costs. CH2M project manager Jeff Bool said March 21 that any firm hired to analyze the current project should also have experience with federal permitting requirements, specifically those for the National Marine Fisheries Service, as marine mammal protections related to endangered Cook Inlet Beluga whales add significantly to construction costs. With the prospect of state funding uncertain as lawmakers continue grappling with resolving the state’s large budget deficits and federal support unlikely at least until the city’s lawsuit against the federal Maritime Administration over management of the first construction is closed, city officials have said raising import tariffs at the port is one of few remaining ways Anchorage can pay to rebuild the aging docks. The municipality is contemplating increasing fees on fuel and cement to finance the reconstruction of the terminal that handles those goods using revenue bonds. However, the port customers and many other observers worry the five-fold or more tariff increases that would be needed for Anchorage to self-fund the work would drive business away from the port and raise the cost of basic goods such as fuel and groceries to the point that Alaska’s overall economy could suffer as a result. Elwood Brehmer can be reached at [email protected]

Anchorage airport officials pursue cargo transfer development

Officials at Ted Stevens Anchorage International Airport are angling for help to maximize the benefits of the unique freedom from some trade laws the airport offers. Anchorage is one of very few airports in the world where a foreign cargo can be transferred from one aircraft to another without being subject to customs and other trade requirements. Anchorage Airport Manager Jim Szczesniak said cargo transfers are being done on a small scale and he believes part of the reason it hasn’t grown is there isn’t a good place for it. As a result, airport leaders are looking to help someone develop a large cargo transfer facility there. “People aren’t going to come up here and leave a couple pallets of iPads sitting on the ramp waiting for another plane to show up,” Szczesniak said. “If they have a facility where they can take fish, fruits, electronics, engine machinery — high-value stuff — and securely store it out of the weather they can wait for that flight that goes (to the proper city) and get things there more directly.” The airport is already the fifth-busiest cargo hub on Earth at a volume of roughly 2.8 million tons of freight per year, but that’s mostly due to its geography that makes it an advantageous refueling stop for cargo flights between Asia and the North America. The Anchorage Economic Development Corp. estimates the airport generates 1 out of 10 jobs in the city. Few cargo companies have regularly utilized the unusual but potentially significant opportunity — particularly given Anchorage’s geographic location — that in theory could make their operations more efficient. For example, a foreign-flagged carrier could deliver cargo from Asia to Anchorage on a Boeing 747 and transfer it directly to smaller aircraft destined for multiple cities across the Lower 48. Additionally, domestic freight forwarders can purchase space on flights and act as the domestic carrier because they “own” the cargo. Almost all of the dedicated cargo traffic headed to the Lower 48 through Anchorage is destined for another major cargo hub such as Chicago, New York City or Los Angeles. From there, the goods are sent out by land in a web of distribution networks. The same options are available at the Fairbanks airport; however, Anchorage has more capacity to handle large aircraft. Airport officials and general Alaska trade advocates have said the open shipping options have not attracted business in part because shippers are often skeptical they’re actually allowed; in most places such cargo transfer would be cabatoge, a federal crime. Airport officials surveyed cargo carriers last fall to gauge the interest in a potential cargo transfer facility and the response was positive enough to investigate the idea further. Szczesniak added that produce going from Latin America to Asia and e-commerce shipments have increased of late alongside the traditional cargo going from Asian manufacturing centers to North American consumers, so the facility could offer more than simple warehouse space if it is requested. “We’re also trying to maximize the airport’s ability to process Alaskan goods. We’ve got high demand for live king crab, obviously salmon, and peony flowers are quite popular,” Szczesniak said. He noted the project, likely in the tens of millions of dollars, could also be phased to best match demand from carriers or forwarder companies. A large parcel on the northern part of the airport adjacent to FedEx’s hangar has been identified as the best location for the facility. While the project would rely on a private developer, the state-owned airport would collect lease revenue; more cargo flights would also mean more landing and other fees for the airport, which generates all of its own revenue. Total revenue from all sources was about $147 million in the 2018 fiscal year. Szczesniak said the plan is to issue a request for qualifications to potential developers in late spring and if the RFQ generates interest, a formal request for proposals, or RFP, could follow in late summer or fall. “We want to make sure that we maximize the airport’s ability to attract business and it’s beneficial to the airport, too, because if we have the facilities that help cargo customers keep their planes full that keeps them at our airport,” Szczesniak said. Elwood Brehmer can be reached at [email protected]

Alaska LNG Project economic review underway

Alaska’s new gasline team expects to have the analyses that will determine the path of the estimated $43 billion Alaska LNG Project complete in the next two months. Gov. Michael J. Dunleavy’s senior policy advisor Brett Huber said March 14 that the Alaska Gasline Development Corp. should know in about 60 days whether or not the state should continue actively pursuing the large LNG export plan based on the project’s economics. Dunleavy and several members of his administration held a conference call with reporters while attending the CERAWeek oil and gas industry conference in Houston. The governor subsequently downplayed the prospects of Alaska LNG, saying there generally appeared to be little interest in the project from potential investors also attending the conference. He said talks about Alaska were instead primarily focused on the state’s conventional oil plays, which he highlighted in a speech at the conference. AGDC officials offered more detail on the Alaska LNG review in background discussions. The project review is being done from two angles. First, AGDC engineers are attempting to determine what advancements in LNG technology, such as modular construction, might have occurred over the last three years that could bring the $43 billion Alaska LNG cost estimate down. In 2016, the international energy consulting firm Wood Mackenzie concluded the Alaska LNG Project likely wasn’t economic if developed by Alaska’s major producers, as first envisioned, in part because of the high internal return requirements oil companies typically have. However, a state-led project with federal tax exemptions could be viable, Wood Mackenzie said at the time. Secondly, the state corporation is conducting an all-in, long-term economic modeling exercise for the project that includes construction expenses, financing rates, operations and management costs under multiple ownership and investment structures. That economic modeling, which is being done in conjunction with the Department of Revenue, will ultimately forecast rates of return for potential investors based on the project’s structure; those returns will largely determine the path forward, officials said. If the expected investment returns from the project are favorable — in the 10 percent to 15 percent range — AGDC is likely to begin seeking investors with experience in the LNG realm. If the range of returns comes in lower, the Dunleavy administration, the corporation’s board of directors and legislators will have to decide how much further they want to take the project at this point. AGDC leaders are also planning to meet with BP and ExxonMobil representatives in Houston to review the modeling with them when it is complete. The companies signed agreements announced in early March to assist the state corporation in finding ways to improve the project’s economics. Regardless of the outcome of the economic modeling, AGDC will almost certainly continue seeking a favorable record of decision for the project from the Federal Energy Regulatory Commission. In February, FERC pushed back the Alaska LNG environmental impact statement schedule several months; the first draft of the EIS is now expected in June, with a final EIS set for March 2020 and a decision on the broad federal authorization coming in the months after the final draft. AGDC officials and other industry observers have emphasized the value of securing the authorization whether or not the project is advanced immediately afterwards. It is seen as a major step in de-risking the project, which could attract investors at lower return thresholds or allow the state to quickly resume the project if LNG market conditions improve. Those big decisions aren’t likely to be made until the EIS is complete. On the commercial side, a dialogue between AGDC and potential LNG buyers continues but the sides are no longer actively negotiating. Corporation leaders said they are continuing the relationship they have with the three Chinese companies — Sinopec, Bank of China and the China Investment Corp. — that signed a nonbinding joint development agreement with AGDC in November 2017 with monthly phone calls and will meet with them in Shanghai at the LNG2019 conference in early April. Elwood Brehmer can be reached at [email protected]

Denver company taking a fresh look at old seismic data

Although the first new oil is yet to flow, the apparent recent successes of several companies exploring on the North Slope has at least a few people looking for new clues in old geologic information that covers a large swath of the oil and gas basin. Geologist Bill Enyart and his Denver-based company Seismic Strategies have applied modern processing techniques to approximately 1,000 miles of the roughly 15,000 miles of two-dimensional seismic data shot across the National Petroleum Reserve-Alaska. The 23 million-acre federal NPR-A covers nearly the entire western half of the North Slope. The eastern portion of the reserve nearest to existing oil infrastructure is a focal point for Slope oil exploration after Torok and Nanushuk formation discoveries by ConocoPhillips in the NPR-A and Armstrong Energy and Caelus Energy on adjacent state acreage. ConocoPhillips’ Willow prospect, announced in early 2017, has the potential to produce upwards of 100,000 barrels per day, according to the company, as does Armstrong’s original Nanushuk discovery in the Pikka Unit on state lands just to the east of the reserve. Both of those finds centered on the shallow, conventional Nanushuk formation, are being permitted for development. Oil Search, an Australian producer, took over operations of the Pikka Unit last year after a $400 million deal with Armstrong announced in fall 2017. Caelus’ similarly large Smith Bay prospect in state waters on the northern edge of the NPR-A is focused on the Torok formation, which is geologically related to the Nanushuk. Those discoveries also led the U.S. Geological Survey to drastically increase its oil resource estimate for the reserve and nearby state lands in late 2017 to more than 8.8 billion recoverable barrels. Enyart said the NPR-A 2D seismic data was shot by federal agencies, including the Navy, in the 1970s and 80s. The NPR-A was first established as a Naval Petroleum Reserve in 1923 and was later transferred from the Navy to BLM. He described the original seismic as “a very good data set” that would be difficult to duplicate today, primarily because of cost and environmental considerations. Given that, the mere fact that it exists makes the old information valuable today, he said. “The signal’s there but since that data was acquired we have seismic data processing routines that can extract additional information and those routines just weren’t available 40 years ago,” Enyart said. Very simply, when geologic seismic data is shot, sound waves are sent into the depths of the Earth and when those waves return — in a basic sonar process — they provide information about the type and formation of rocks beneath the surface as well as the possibility of hydrocarbon deposits. New seismic reprocessing technology provides higher resolution images and can better organize old sound signals that were disrupted by permafrost, which can scramble seismic signals. “The original process was just broad-brush processing looking deep into the section. Historically, a lot of the production was coming from older, deeper formations, so we put a lot of effort looking into the (often shallower) Cretaceous rocks, that would be the Nanushuk and Torok formations,” Enyart said, adding that he’s not aware of anyone else doing this work on the NPR-A data. While the Slope is generally considered a vastly underexplored oil and gas basin, such reprocessing can help identify previously overlooked prospects even in heavily covered areas such as the Gulf Coast, according to Enyart. He acknowledged that most oil companies today won’t commit to drilling an exploration well — which on the Slope can cost $20 million or more depending on the remoteness of the location — without first seeing modern 3D seismic data of the target, but said an updated version of the publicly available 2D data is a good starting point for companies interested in Alaska. “The downside to 3D is it’s an expensive means of acquiring seismic data and 2D is a good reconnaissance project,” Enyart described. “You go into an area the size of the NPR-A and shoot 15,000 miles of 2D seismic — that gives you clues as to the broad geology. It gives you an idea of what it looks like below the surface in kind of a gross or coarser sense and then that allows you to zero in on choice areas and go out and acquire 3D for finer prospecting.” Similar reprocessing could be done on “tax credit” seismic data shot on state lands that is becoming publicly available because it was shot with the financial help of the state’s former refundable oil and gas tax credit program, according to Enyart. Companies that use the seismic tax credit program were able to get state support for the work in exchange for agreeing to make the data public after 10 years. Alaska Division of Oil and Gas geophysicist Holly Fair said reprocessing old seismic is a basic way to add value to what is already publicly available. Geologist Kevin Frank, head of the Oil and Gas Resource Evaluation Section, added that seismic shoots on the North Slope must be done when the tundra is frozen, which limits the ability to acquire the data. A planned 3D seismic shoot over the newly-opened for exploration portion of the Arctic National Wildlife Refuge had to be scratched this winter after the government shutdown delayed permitting for the work, Frank noted. “If you just cannot get — even if you’re indifferent to cost — you cannot get new data, you work the old data to your benefit,” he said. Some seismic was shot on the ANWR coastal plain by a consortium of companies in the mid-1980s, but it generally remains proprietary information. Elwood Brehmer can be reached at [email protected]

30 years after Exxon Valdez, vigilance still No. 1 priority

This March 24 marks 30 years since one of the darkest days in Alaska’s history. It was the day when the industry largely credited with affording Alaska the ability to become a state wounded the marine ecosystem to the point where it still hasn’t fully recovered. For that reason and others, leaders of the Prince William Sound Regional Citizens’ Advisory Council make it a point to acknowledge the anniversary of the Exxon Valdez oil spill while trying to avoid reliving the events. “You recognize, you commemorate it, but certainly there are a lot of communities in Prince William Sound that are still very much suffering or feeling the effects of the oil spill. It’s not a happy anniversary at all,” PWSRCAC Executive Director Donna Schantz said in an interview. The council’s approach instead has been to evaluate the changes in Prince William Sound oil tanker operations since 1989 and highlight the improvements made to safety and environmental protection as well as areas where work could still be done. That evaluation makes up the council’s Then and Now report, which is updated every five years. The 30-year edition of Then and Now was released March 19. Schantz called Alaska’s largest oil tanker operation and the spill prevention and response efforts that surround it “a world class system,” but one that could still be better, according to the council. “Our message really is:’ Hey, we’re doing really well, we haven’t had another major oil spill in 30 years; we must be doing something right,’” she said. “Let’s not let complacency creep back in. We need to remain vigilant.” Congress concluded complacency contributed to the spill and subsequently established the citizens’ advisory councils in the 1990 Oil Pollution Act, Schantz noted. A sister council was also created for Cook Inlet. The law was a major overhaul of spill prevention and response capabilities. It established the requirement to develop spill contingency plans for oil shippers and storage facilities and the federal Oil Spill Liability Trust Fund, which can provide up to $1 billion to respond to an oil discharge. Cleanup during 1989 of the Exxon Valdez cost more than $1.8 billion, according to the National Transportation Safety Board. The requirement for two tugs to escort each laden tanker out of Prince William Sound not only provides immediate response capabilities in the event of an incident, it also adds redundancy in fighting the “human factor,” according to Schantz, who cited statistics indicating the vast majority of oil spills, including the Valdez disaster caused by the tanker grounding on Bligh Reef, are the result of human error, not equipment failure. There are simply more people observing the entire operation with two more vessel crews involved. “It’s a lot harder to have something like the Exxon Valdez happen with all those extra sets of eyes watching and maintaining protection. The two escort tugs really are one of the biggest oil spill prevention efforts in place,” Schantz said. Last summer, Edison Chouest Offshore took over the escort responsibilities and many other prevention and response duties at the Alyeska Marine Terminal from Crowley Maritime. Crowley held the Ship Escort/Response Vessel System, or SERVS, contract since 1990. There were questions from advisory council members and other observers after the contract was announced in mid-2016 about whether Edison Chouest would be able to take over the role in the relatively short time, given the company was to build many of the 10 new tugs and 8 purpose-built response barges at its Gulf Coast shipyards. The company also brought in employees who were not familiar with Alaska operating conditions. After two minor incidents in early summer 2018 around the time Edison Chouest took over the SERVS work, the company has performed well, Schantz acknowledged. “Edison Chouest has really good people and they’ve worked really hard. This winter we were very concerned because it was a steep learning curve coming into a new environment, a new operating system,” she said. The council has also recently focused its attention on more closely matching condition requirements for some escort and response training exercises with what are deemed acceptable operating conditions for laden tankers. Currently, tankers are permitted to travel through the sound in weather and water conditions of up to 45-knot winds or 15-foot seas at Hinchinbrook Entrance near the open Gulf of Alaska. Council officials note the tanker and tug crews do not train in such adverse conditions, which they contend could leave the mariners less than fully prepared for the situations they might encounter on some working days. The council’s position is that it could be safer for the crews to work in controlled conditions and to better understand the limits of safe operations, Schantz said, adding that if conditions are deemed unsafe to train in the operating maximums might need to lowered. She further noted that oil recovery becomes exceedingly difficult in rough seas. Alyeska Pipeline Service Co. leaders see it differently. They contend current training regimens with more than 200 drills annually, which are not usually predicated on sea conditions, and the stronger, more advanced Edison Chouest tugs offer robust spill protection while not putting crews at unnecessary risk. Alyeska spokeswoman Michelle Egan said the company is proud of the escort system and is committed to continually ensuring it’s the best it can be. “It’s a professional disagreement about what is the right balance between demonstrating what we can do and protecting human life and the environment because there’s certain environmental risks associated with going out in those (rough) conditions,” Egan said. “We’ve worked with our regulators on that and we’re comfortable that we’ll be able to respond. But it’s really about prevention; that’s our focus.” The Alaska Department of Environmental Conservation directed Edison Chouest to train in certain unfavorable conditions in preparation for taking over the SERVS contract, but Schantz noted that will not be a regular requirement going forward. One of the things they agree on is that the contracted fleet of roughly 400 fishing vessels and 1,600 crew members trained in spill response across Southcentral Alaska provide a massive response force should prevention efforts ever fail. Schantz, who’s been with the council for 20 years, said she’s confident its oversight has helped retain high standards around oil transport in Prince William Sound. The council regularly reviews operating permits, contingency plans and recommends improvements or flags potential changes deemed to potentially degrade spill defenses. “We want to make sure that all the protections put in place after the Exxon Valdez oil spill, that we maintain those, because it’s easy to say, ‘well, we haven’t had another major oil spill, maybe we don’t need all of this,’” Schantz described. Our position is, ‘hey, we haven’t had another major oil spill. Let’s not dismantle a system that’s working well.’ We can’t weaken it; we can’t go backwards.” ^ Elwood Brehmer can be reached at [email protected]

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