By Elwood Brehmer

Gov, challengers square off for support at oil and gas conference debate

Two challengers for governor took their swings at the incumbent during the Alaska Oil and Gas Association’s gubernatorial debate on Thursday afternoon yet the mood was generally light and there was even a fair amount of laughter. But then again, it is still early in the campaign and the full field wasn't yet set as former U.S. Senator and Anchorage Mayor Mark Begich entered the race on Friday according to Matt Buxton at Midnight Sun, sending Walker out of the Democrat primary and into an independent bid for reelection. Later, former Lt. Gov. Mead Treadwell also announced he was entering the GOP primary. Journal Managing Editor Andrew Jensen moderated the hour-long debate that focused on oil and gas production, government regulation, the Alaska LNG Project and a few non-related topics submitted from the audience and those watching on Facebook Live. Republican hopefuls Scott Hawkins, an Anchorage businessman, and former state Sen. Mike Dunleavy of Wasilla also stressed continued budget cuts and the prospect of growing the state’s resource development economy by making permitting more efficient. Walker noted the reduction in future deficits via the passage of his landmark legislation to employ a 5 percent structured annual draw on the Earnings Reserve Account of the Permanent Fund and his efforts to lobby federal officials on behalf of ConocoPhillips regarding the company’s North Slope projects. “We closed 80 percent of the fiscal gap. That’s a significant step for the future of (the oil) industry and the future of this state,” Walker said in his opening remarks, adding that he ran for governor in 2010 and 2014 on a resource development platform. Dunleavy and Hawkins are vying for the Republican nomination. Gubernatorial candidate and longtime Republican Kenai Peninsula Rep. Mike Chenault was unexpectedly absent from the debate and announced late Thursday night he is withdrawing from the race. Dunleavy and Hawkins also questioned the role Chinese state-owned companies might play in the $43 billion Alaska LNG Project if it is built. In November Gov. Bill Walker and Alaska Gasline Development Corp. President Keith Meyer signed a nonbinding framework agreement to have oil and gas giant Sinopec buy LNG from the project with the Bank of China and China Investment Corp., the country’s sovereign wealth fund, financing up to 75 percent of the project’s cost. The deal also leaves open the prospect of Sinopec having engineering and construction roles in the project. Dunleavy said he voted for gasline legislation in 2014 that made the state a partner in the project with BP, ConocoPhillips and ExxonMobil, but he questioned how Walker’s administration has handled it now that the state is leading the gasline effort. “I don’t have faith in the administration that they’re going to be able to pull it off,” Dunleavy said of Alaska LNG. He added that if the state is not cautious in negotiating contracts with the nationalized Chinese companies “they’ll tie us in knots.” Hawkins said it is very important for the private sector to lead construction and management of the gasline. Walker responded that China is already Alaska’s largest trading partner, buying much of the state’s seafood, minerals and timber. “When we start drawing lines and saying 'you can invest, you can’t invest,' I think that’s a dangerous road to go down,” the governor said. Hawkins, the former CEO of the Anchorage Economic Development Corp. and the owner and founder of Advanced Supply Chain International, a logistics firm, contended the state has a “toxic reputation on Wall St.” because Walker vetoed full payment of oil and gas tax credit certificates in 2015 and 2016. The vetoes, totaling $630 million — and followed by the Legislature’s statutory minimum tax credit appropriation in 2017 — caused small explorers and producers that took out loans underpinned by the credits to default on their payments, ostensibly leading to a credit freeze on the industry in the state. Hawkins called the credits a “tremendously successful” program. He said the credits, which in some instances had the state fund more than two-thirds of oil and gas projects, were probably overly generous but he would be open to a similar program in the future. In response to a question regarding whether the state’s royalty share of North Slope gas should be sold to in-state consumers at a discount to maximize the public benefit if the gasline is built, Hawkins said it would need to be sold at market rates. “Generally, it’s a bad idea to subsidize things,” he added. Walker noted that his administration led the push to pass House Bill 331 this year, allowing the Department of Revenue to sell bonds to pay off the nearly $1 billion outstanding credit obligation once the Legislature passed a long-term solution to the state’s deficit. HB 331 requires the companies to accept a discount of up to 10 percent on the value of the certificates they hold to prevent the state from incurring additional interest costs. A lawsuit has been filed against the administration challenging the constitutionality of the tax credit bonds, as well. Walker hasn't signed the bill yet. Hawkins also expressed concern over the Alaska Industrial Development Authority’s strategy for getting more natural gas to the Fairbanks area since Walker took office. AIDEA purchased Fairbanks Natural Gas for $52 million in 2015, a deal that set the stage for consolidating the area’s gas utilities, which Interior Energy Project leaders believe will result on operational efficiencies, economies of scale and ultimately lower gas prices to consumers. He said the project is important but it’s become “too government driven.” Dunleavy called it a “work in progress,” while Walker highlighted that regardless of the economic challenges of the project brought on by lower oil prices it is a fundamental way to improve air quality in Fairbanks, which is often the worst in the country during the winter months. Elwood Brehmer can be reached at [email protected]

ConocoPhillips strikes oil in six exploration wells

The winter North Slope exploration season went so smoothly for ConocoPhillips the company was able to drill an extra well while hitting oil everywhere it tried, according to a statement issued April 16.  Last fall ConocoPhillips announced it would be drilling five greenfield wells over the winter, which would make 2017-18 the company’s busiest exploration season in 15 years. However, “improved drilling efficiencies” allowed ConocoPhillips to drill a sixth well to further appraise its Willow oil discovery announced in January 2017, the company release states.  The three Willow appraisal wells largely confirm the initial estimate that the prospect in the National Petroleum Reserve-Alaska holds at least 300 million barrels of recoverable oil.  ConocoPhillips Alaska spokeswoman Natalie Lowman said the early results from the wells, which are still being evaluated, indicate Willow could produce oil at rates on the high end of the company’s estimates as well.  “I think the results of the well tests we did support that Willow could produce up to 100,000 barrels per day. That’s what this season was good for, that kind of confirmation,” Lowman said.  That level of production likely necessitates a larger development by ConocoPhillips.  “I think we’re probably leaning towards a standalone (processing) facility as opposed to a tieback and that’s what we’re going to continue to work on in the coming year,” Lowman added.  ConocoPhillips Alaska leaders had previously couched production estimates for Willow on the grounds that it would need its own production facilities to approach the 100,000 barrels per day estimate and if the reservoir could not support that investment over the long-term Willow would likely be developed to produce at a much lower rate.  Under that scenario, the oil from Willow would be processed through existing facilities at the company’s other large oil fields, such as the Alpine field just to the east of Willow.  ConocoPhillips continues to peg 2023 for first oil from the prospect, according to Lowman.  Test results from the other exploration wells — Putu and Stony Hill — drilled to the southeast of Willow aren’t available yet, but Lowman said the company is planning to turn those prospects into tieback developments in which produced oil is fed via pipeline to other processing facilities on the Slope.  If developed, that would put production from Putu and Stony Hill in the 20,000 barrels per day range based on very general company estimates.  All of the wells targeted the shallow Nanushuk oil formation popularized on the western portion of the industry’s North Slope reach by the billion-barrel-plus Pikka discovery made by the Repsol-Armstrong Energy partnership in 2015.  ConocoPhillips drilled the Putu well and sidetrack this winter after deferring the work during the 2016-17 season due to concerns brought by residents of the nearby Native village of Nuiqsut as to how the exploration drilling might impact life in the village.  Deferring the Putu drilling sparked a contentious situation between the company and Department of Natural Resources Commissioner Andy Mack, who in late 2016 transferred the acreage to ConocoPhillips from former leaseholder Brooks Range Petroleum Corp. on the understanding the well would be drilled that winter.  Mack eventually agreed to allow ConocoPhillips to keep the leases conditioned on the company drilling the well in 2018 and then making a $3 million payment by Aug. 15 to DNR in-lieu of the cash the state could expect if the sought-after acreage were put back up for bid in a state lease sale.  Lowman said it’s too early to know if the company plans to make that payment and continue to hold the Putu-area leases.  Drilling records  On April 10 ConocoPhillips announced that with the help of Doyon Drilling’s Rig 19 it has set a North American record for the longest horizontal lateral well at its CD-5 oil development in the NPR-A.  The CD-5-25 well was drilled to a depth of about 7,900 feet but the record-setting lateral offshoot went another 21,748 feet into the Alpine A sand formation, according to the company. When combined with an Alpine C sand lateral, the CD-5-25 well reached a total drilling length of 42,993 feet from a single wellhead, which is an Alaska record as well.  “Improved technology like extended reach drilling and multi-lateral wells allow for ConocoPhillips to maximize production while minimizing our environmental footprint,” Alaska drilling manager Shon Robinson said in a company release. “CD-5-25 will produce from over four miles of reservoir in the long lateral and from over 6 miles of reservoir when both laterals are included. Innovation and teamwork were a huge part of safely drilling this well.”  Originally projected to produce 16,000 barrels per day from 15 wells when it came online in October 2015, the CD5 development has out-produced expectations nearly from the outset, which has led the company to add more wells to the development.  CD-5 is averaging about 37,000 barrels per day this year, according to ConocoPhillips, and another round of new wells is planned for 2019, which will bring the total number of wells at the project to 33.  The company also plans to start producing oil from its Greater Mooses Tooth-1 project late this year, with a projected peak rate of 30,000 barrels per day.  Elwood Brehmer can be reached at [email protected]   

Environmental coalition sues Interior over King Cove road deal

An Alaska law firm is leading local and national environmental groups in a lawsuit to stop a land transfer approved by Interior Secretary Ryan Zinke that would allow for a road to be built through the Izembek National Wildlife Refuge. Attorneys for Trustees for Alaska filed suit against Zinke Wednesday in the U.S. District Court of Alaska, just nine days after he signed an agreement with King Cove Corp. that would allow the Alaska Peninsula Native village corporation to trade up to 500 acres of its land for an equal-value chunk of the Izembek Wildlife Refuge — enough refuge land to build a 12-mile, single-lane road on. Also listed as plaintiffs are Friends of Alaska National Wildlife Refuges, the Alaska Wilderness League, the National Audubon Society, The Wilderness Society and the Sierra Club among other groups. They contend the road would be a major blow to critical waterfowl and caribou habitat in the refuge that separates King Cove from the neighboring community of Cold Bay. At various times of the year the 315,000-acre Izembek Refuge is home to nearly the world’s entire population of Pacific black brant geese and other migratory birds that use it as breeding grounds and a resting place on their annual travels, according to the U.S. Fish and Wildlife Service. Alaska’s congressional delegation and state lawmakers insist the road is the only way to provide truly safe access to medical care for the roughly 950 residents of King Cove. Those in need of urgent medical care in King Cove currently must be flown via small plane or boated across the waters of Cold Bay to reach Cold Bay’s airport with its 10,000-foot runway that provides more reliable jet service during bad weather. The environmental groups also stress that building the road through lands designated as wilderness — the highest classification of federal conservation lands — would set a terrible precedent not only in Alaska but nationwide. For many, it is their greatest fear about the long-proposed road. “Breaking Izembek isn’t an option; it’s a ruse that opens the door to full-on development and we’ll fight it every step of the way,” Audubon Society CEO David Yarnold said in a formal statement. “It’s called a refuge for a reason. It’s a place where birds and other wildlife can raise their young and live the way nature intended.” Rep. Don Young referred to worries that the road would unacceptably damage waterfowl habitat in the refuge as “pure poppycock or goose you-know-what” in a Jan. 22 call with reporters about the land swap. 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 impact statement determined the road would irreparably damage critical waterfowl habitat in the refuge. King Cove Native organizations and the State of Alaska subsequently sued Jewell over her decision to block the road, but the suit was dismissed in federal District Court and an appeal to the 9th Circuit Court of Appeals was later dropped. That swap 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. This time, Zinke invoked his authority under Section 1302(h) of the 1980 Alaska National Interest Lands Conservation Act — the same monumental public lands bill that designated nearly all of Izembek as wilderness — as the means for making the land swap. That portion of ANILCA lays out the Interior secretary’s ability to make equal-value land exchanges with Alaska Native corporations and other private groups. While Zinke pointed to his power in Section 1302 of ANILCA, the complaint filed Wednesday argues he did not follow Title XI of the same law, which prescribes the process for developing transportation corridors through conservation lands in Alaska. Title XI of ANILCA lays out a public process under which the Interior secretary must consult with other federal agency leaders, including the Transportation secretary, on any application to construct a transportation corridor through conservation areas. It also states that Congress must approve any corridor through wilderness-designated areas. The complaint notes that Zinke knew the land swap would facilitate the road construction; however, whether his authority to trade land to a private group first is a legal way around the Title XI requirements is for the courts to determine. The suit also alleges Zinke violated the National Environmental Policy Act, which mandates the drafting of an environmental impact statement for “major federal actions significantly affecting the quality of the human environment,” by not having an EIS written prior to approving the land swap. The agreement also goes against the 2013 recommendation of the Fish and Wildlife Service following the EIS of that proposed land exchange. The members of the congressional delegation said the ANILCA provisions hadn’t been used during other Republican administrations that would seemingly be more open to the plan because key officials in President George W. Bush’s administration, for example, opposed the road through Izembek.   Elwood Brehmer can be reached at [email protected]

Active state Slope sales net $21.2M, NPR-A quieter

Interest was again high among oil and gas lease bidders for state acreage on the North Slope in Dec. 6 lease sales but that was not the case for the federally controlled National Petroleum Reserve-Alaska. Winning bidders spent $21.2 million for 216,000 acres of state land and water across 119 lease tracts. The vast majority of that, $19.9 million, was for 179,000 onshore acres and the remaining $1.2 million was for 37,000 acres of state-owned, near shore waters of the Beaufort Sea. It was the third most spent to win state lease bids in the past 20 years, according to Division of Oil and Gas Director Chantal Walsh. She said the results of the annual sales are exciting given last year’s strong response from explorers despite continued lower oil prices. “It’s particularly fun to see competitive bidding going on,” Walsh commented shortly after the bid opening. Last year’s Slope and Beaufort sales drew $17.8 million in winning bids but that was for 391 lease tracts covering more than 630,000 acres. Again, no one bid on state leases in the North Slope Foothills area. Spanish major Repsol, which holds a 49 percent stake in the large and in-permitting Nanushuk oil project, dominated the onshore Slope sale, spending up to $293 per acre in some bids to win 45 tracts. Much of that acreage is in the few tracts south of the Pikka Unit that holds the Nanushuk project that were not leased and open for bidding. The value of some of the winning bids, which averaged $110 per acre, is the highest since the state started the areawide lease sales in 1998, according to the Department of Natural Resources. In an interesting turn, Repsol also outbid its outgoing Nanushuk partner, small independent Armstrong Energy, on about a dozen tracts in that area south of Pikka. In late October Armstrong sold part of its stake in Nanushuk to Oil Search — an Australian company that operates primarily in Papua New Guinea — for $400 million. Oil Search will become the operator of the Nanushuk project next June and company leaders said they plan to exercise an option to fully buy Armstrong out of the project for another $450 million by July 2019. "Today's results are yet another indication the State of Alaska is highly attractive to oil and gas investors around the world, and we are open for business," Gov. Bill Walker said in a DNR release. "I am particularly pleased to see Repsol E&P adding to its promising North Slope portfolio and showing strong interest in exploration south of its existing leases in the Pikka Unit." Despite the competition, Armstrong still won about two-dozen tracts, most of which are just south of the ConocoPhillips’ Kuparuk River field. ConocoPhillips also picked up a handful of leases south of Kuparuk. Accumulate Energy, a subsidiary of Australian 88 Energy, won 12 leases further to the south. 88 Energy is exploring an unconventional oil play along the Dalton Highway about 60 miles south of Deadhorse.   NPR-A Despite offering all 10.3 million acres available for leasing, the Bureau of Land Management received only seven bids for 80,000 acres in the NPR-A, all of which came from ConocoPhillips. In a partnership with Anadarko Petroleum Corp., ConocoPhillips spent $1.1 million with BLM to expand its holdings in the eastern portion of the NPR-A. Conoco is in the midst of developing its two Greater Moose’s Tooth projects in the 23 million-acre federal reserve and has plans to drill four other wells in the NPR-A this winter; three to delineate its 300 million-barrel Willow oil discovery announced about a year ago and another separate exploration well. Half of the federal lease revenue will go to the State of Alaska, as part of revenue sharing arrangements for the NPR-A. Last year’s NPR-A sale netted more than $18 million in high bids for 613,000 acres, mostly from ConocoPhillips, which has led the foray into the vast undeveloped area.   Elwood Brehmer can be reached at [email protected]  

AIDEA moves to advance Interior gas project, shed utility

The Alaska Industrial Development and Export Authority board of directors unanimously approved a resolution to fold Fairbanks Natural Gas into the borough-owned startup utility Wednesday afternoon. Consolidating Fairbanks Natural Gas, and more specifically its parent company Pentex Alaska Natural Gas Co., into the Interior Gas Utility is a key step to ensure the success of the Interior Energy Project, according to just about everyone involved. That’s because a single gas utility under local government control should be able to reap business and operational efficiencies to help lower the cost of natural gas to Fairbanks-area customers. AIDEA’s resolution followed a similar action by the IGU board a day prior. The state-owned authority and local utility will now try to hammer out the final details of a $333.6 million utility sale and lending package by March 31, per the terms of a draft memorandum of understanding made public about a week earlier. The tentative agreement projects a delivered natural gas price of $15.50 per thousand cubic feet, or mcf, of gas; in line with AIDEA’s longstanding target of $15 per mcf, which roughly equals $2 per gallon heating oil. It also includes the sale of Pentex to IGU for $58.2 million. Payment for Pentex will be rolled into repayment of loans and bonds AIDEA will lend to expand IGU’s infrastructure as customer demand grows if the deal is culminated. The financing portion of the larger deal would come from the $332.5 million worth of low-interest loans, bonds and grant money approved by the Legislature in 2013 for the Interior Energy Project. Those funds cannot be accessed, however, until AIDEA and IGU have secured a gas supply contract from a Cook Inlet natural gas producer. That is due to a clause in the 2015 legislation that allowed ADIEA to change the IEP to an Inlet-sourced LNG trucking project after efforts to build a North Slope LNG plant were deemed too expensive. AIDEA purchased the formerly private utility company in 2015; a deal which drew mixed reviews politically but ended up lowering rates for Fairbanks Natural Gas customers slightly because under state control the small gas utility does not have to account for the same tax and profit considerations as it did under private investors. AIDEA board member and former state senator from Fairbanks Gary Wilken was briefly emotional before the board’s vote on the resolution. Wilken has been with AIDEA since the inception of the Interior Energy Project, which has undergone major changes and of-late has been challenged by low oil prices — leading to lower fuel oil prices and lessened financial incentive for Interior residents to invest in converting to natural gas. “There’s been a tremendous amount of work, angst, discussion, but we are where we are and I’m privileged to be associated with the team that has brought us this far,” Wilken said. “Seldom in your life do you get a chance to participate in something that provides benefits for generations to come and this is what we are doing today. This is the first step; because people that come long after us — after we’ve all assumed room temperature — will benefit from the work that’s been done (on the IEP) the last couple of years and I just can’t tell you how proud I am of what we’ve done. “I’m not ready to pop the champagne corks, but I’m ready to take it out of the case and put it in the refrigerator because I feel good about where we’re headed. I feel good about getting the last piece in place and I feel good about what we’ve done and what we’re going to do for the second biggest city in Alaska — to get clean energy and lay the basis for economic development for Fairbanks and North Pole.” In nearly the same breath, Wilken also issued a stern recommendation to IGU and Interior Energy Project managers to include language in the final lending and sale contract requiring the utility board to raise customers’ rates when need be, regardless of the popularity of the decision. He noted that four of the seven members of the IGU board are elected to the post by Fairbanks North Star Borough residents, a fact that has the potential to lead to political, not prudent board voting, he added. The remaining three IGU board members are appointed each by the mayors of North Pole, Fairbanks and the borough. Wilken said he is concerned that “we’ll have four elected folks who will not act not as public servants but as politicians and will set rates based not on what’s good for the utility but what’s good for their reelection.” The worry stems from watching that exact scenario play out with the former City of Fairbanks Municipal Utility System, he said, which deteriorated financially due to elected officials who ignored the recommendations of utility staff to raise rates and sell bonds because the actions would have been politically unpopular, according to Wilken. “It distresses me that this may happen in 10 years with IGU,” he added. AIDEA’s IEP team lead Gene Therriault said the tentative agreement has language to hold the IGU board liable for its debt to AIDEA. Authority board chair Dana Pruhs said he shares Wilken’s concern and urged the final contract to also explicitly require the IGU board to set aside funds for infrastructure upkeep.   Elwood Brehmer can be reached at [email protected]

Walker’s budget cuts spending again

Hidden behind the Dec. 9 unveiling of Gov. Bill Walker’s long-term state fiscal and tax plan was the release of his 2017 fiscal year budgets. The total unrestricted general fund spend for both the operating and capital budgets would be just more than $4.8 billion, down 3.1 percent from slightly more than $5 billion for the current 2016 fiscal year, as proposed by the Walker administration. Statewide agency operations would be cut by $140 million in the unrestricted portion of the budget, a cut of 3.4 percent. Overall, the operating budget would be reduced by about $100 million, as a $38 million appropriation to the Alaska Gasline Development Corp. is needed to continue the state’s work towards the Alaska LNG Project, Office of Management and Budget Director Pat Pitney said. Republican leaders in the Legislature have said they will demand budget cuts deeper than Walker is proposing if taxes the governor also proposed are going to be a part of the solution to the state’s $3.5 billion budget deficit. When last year's cuts are included, all told, state spending would be cut by nearly $1 billion over two years under Walker’s latest budget proposal. The capital budget “looks and feels a lot like last year’s capital budget,” Pitney said, meaning it will be minimal and rely heavily on federal dollars. The state’s $195 million will cover matching dollars for the feds $957 million capital investment in Alaska, small contributions to energy and housing programs, deferred maintenance of state facilities and some school repairs, according to the governor’s budget. The capital budget funds reconstruction of the Bethel Regional High School kitchen, recently damaged by fire at $7.1 million, as well as construction of a new Kachemak Selo K-12 school at $10.8 million, which Pitney said is the most needed school replacement in Alaska. More significant capital projects across the state will be rolled into a multi-year general obligation, or GO, bond package that will have to be approved by the Legislature first and then voters in the upcoming general elections, Revenue Commissioner Randy Hoffbeck said.   Elwood Brehmer can be reached at [email protected]
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