Elwood Brehmer

Cook Inlet independent develops new drilling to reach oil

BlueCrest Energy is drilling from the bottom up to reach oil offshore in Cook Inlet. Benjamin Johnson, CEO of the small Texas-based independent, told members of the state House Resources Committee May 1 that the company has developed new long-range drilling techniques with lower costs to access the oil. BlueCrest is developing the Cosmopolitan oil and gas field near Anchor Point on the southern Kenai Peninsula. The Cosmo field has long been known to hold significant resources but development of Cosmo has been a slow process. A prior owner drilled the first exploration well in 2001. “We know for a fact that we have about half a billion barrels of oil in the ground in the field, but what we don’t know is how much of that oil we’re going to get out of the ground,” Johnson said to legislators. The Cosmo oil reservoir is relatively shallow — down to about 7,000 feet — and about three miles offshore so drilling is being done from an onshore pad. The long, angled wells have been drilled to upwards of 30,000 feet, according to Johnson, using what he often notes is currently the most powerful drill rig in Alaska. BlueCrest began producing small amounts of oil from the original well in 2016 and since has drilled another 11 wells into the field, he said. Company leaders initially planned to tap Cosmo with a series of wells drilled about 800 feet apart. Each of those wells were to be fractured once at the end to encourage oil to flow through the multiple layers of the reservoir and into the wellbore, which is a common practice to produce oil from thick, layered fields, Johnson said in an interview. However, fracking is expensive and inexact, as it’s difficult to control the fractures at the end of the well. That led the company’s drilling experts and consultants to theorize about new ways to drill into Cosmo by fully utilizing the capabilities of BlueCrest’s rig. Johnson said the drillers were very successful at steering the rig to drill pretty much wherever they wanted and it occurred to BlueCrest leaders that they could probably drill through the layers of the reservoir from underneath the oil. The technique utilizes the now common practice of drilling multiple sidetrack wells off of a main wellbore; but those sidetrack wells are usually horizontal wells targeting a specific layer in a reservoir. “We weren’t sure how it would work, how successful it would be but it turned out that it has been successful. We’ve got good wells and we were able to replicate it over and over,” he said. The Cosmo field also has a significant natural gas cap above the oil. It’s believed developing the gas would require an offshore drilling platform. The “fishbone” wells allow BlueCrest to punch numerous holes into Cosmo with fewer main wellbores and without fracking. By drilling up through the layers the company is “drilling the fractures,” Johnson described. The technique provides the same penetration as if the wells were being drilled from the surface every 800 feet. “To our knowledge we’ve never seen anybody drill vertically but we’ve been able to do it ourselves,” he said. While company leaders and state regulators stressed the fracking company officials originally planned to conduct was environmentally safe, many residents of the area expressed concerns when BlueCrest was seeking drilling permits that it could impact marine life and possibly groundwater. “The rock is very good; that’s the other thing that makes this work is our rock doesn’t cave in,” Johnson added. “Other places, if the rock is not consolidated enough the formation would cave in and that would be a problem.” The fishbone wells have increased oil production at Cosmo from a few hundred barrels per day in 2016 to between 1,800 to 2,000 barrels per day now. Now BlueCrest leaders are looking to expand on the bottom up fishbone technique in up to 20 more wells by splitting the main well into three spines, each with its own fishbone ribs for what they are calling a “trident fishbone,” according to Johnson. “It makes it faster, more efficient, less cost and it improves the economics to try to pay for these wells,” he said. Over the next year Johnson said oil production could reach the 3,000 to 4,000 barrels per day range. BlueCrest is also likely to eventually add injection wells to maintain pressure in the oil reservoir. Elwood Brehmer can be reached at [email protected]

PIP Printing marks 40 years with SBA award

Some people don’t find a lifelong career because of an intense calling to a specific field. They pursue happiness instead by avoiding what they don’t want to do: work for somebody else. That was the case for John Tatham, who, along with his wife Jan and her sister Shelley Bramstedt started Anchorage’s PIP Printing of Alaska nearly 40 years ago. The trio was recognized earlier this month as the Alaska Small Business Persons of the Year by the U.S. Small Business Administration. “I didn’t have printer’s ink in my veins or anything,” John Tatham said. “I just wanted to be in business for myself. I didn’t have any money, so I just starting casting around for something to do.” A college friend of John’s knew the owner of the PIP corporate franchise at the time and connected him with John, who inquired in the 1970s about opening a store in Anchorage. However, they were told Anchorage was too remote to justify a store, Jan recalled. That lasted for about nine months until John got a call from company officials asking if they were still interested. They said yes and proceeded to grow their printing shop from the three of them to a total of 38 employees today. “We started with just copy machines and one press,” Jan said. Today, PIP offers traditional printing services, vehicle wrapping, design and virtually every type of sign imaginable. John acknowledged during a tour of the Third Avenue complex they’ve been in for 30 years that the printing portion of the business is contracting. He expects the future of the business is in its sign shop. “Nothing ever really goes away but it does shrink and force you to change your business model,” he said. Early on, the trio managed three stores at the behest of corporate leaders who felt more storefronts was the best way to grow the business. They felt that was inefficient and instead consolidated to their current location and developed an outside sales staff to expand. Jan said the freedom to make their own business decisions was a primary reason for wanting to start a PIP franchise. John noted that PIP corporate liked the idea of outside sales personnel so much they adopted it into the company’s business plan. “We’ve done a couple innovative things like that that put us on the map with the franchise,” he added. PIP President Richard Lowe said in a release recognizing the three that he’s not surprised they earned the award from the SBA. “They invest heavily in technology to support their customers. They have an excellent team and over 40 years of experience in the marketing, signs and print industry. We are very proud of their accomplishment,” Lowe said. Jan said their success started with a $100,000 loan underwritten by the SBA that allowed them to open the business. She said they couldn’t get financed through a private bank because they simply didn’t have a track record in business. “When you don’t have it and you need it, it is huge and the SBA was there for us when we needed them,” John added. SBA Alaska economic development advisor Kimberlee Hayward wrote via email that the PIP group was selected because they are downright great business owners. PIP offers retirement benefits, health insurance and bonuses not provided by many small businesses, Hayward said. Additionally, a large portion of their workforce has been with them for up to 30 years and the company has a great reputation amongst its customers. They are also celebrating their 40th year in a challenging line of work, Hayward noted. “This is a huge feat as the industry they are in has seen huge changes due to technology. They have successfully reinvented themselves and rolled with the times,” Hayward said. SBA Regional Administrator Jeremy Field said after a tour of PIP that what’s particularly impressive about the operation is how responsive they have been to their clients’ needs, which he emphasized is common among successful entrepreneurs. Honoring people who have made the most of the help the SBA was able to offer them — whether loans or counseling or something else — and be a positive force in their community is a highlight of his job, Field said. “It’s not like we’re in the Constitution; we’re not here to defend the country from invaders, but the value that the SBA brings…you can’t quantify it because it gives opportunities to business people that might not otherwise have it,” he said. Elwood Brehmer can be reached at [email protected]

Resource potential expands at Alaska graphite prospect

The potential of a unique Western Alaska mineral deposit keeps growing as its developers inch closer to making it a mine. Stan Foo, chief operating officer of Graphite One Inc., told a gathering of the Alaska Support Industry Alliance on May 9 in Anchorage that infill drilling done last year at the company’s Graphite Creek prospect on the Seward Peninsula helped significantly increase the resource estimates for the deposit. “We’re very excited about the improvements we made. We increased the resource by about 14 percent last year,” Foo said. Located on the northern face of the Kigluaik Mountains about 40 miles north of Nome, the Graphite Creek deposit holds measured and indicated resources estimated at nearly 11 million metric tons of ore at an average grade of about 8 percent graphite. The inferred resource is now at approximately 92 million metric tons of ore at 8 percent graphite, a 29 percent increase from figures released in a June 2017 preliminary economic assessment of the project. Overall, Graphite One now believes the deposit could hold more than 7.3 million metric tons of graphite, according to company filings. Foo said some areas of the deposit are more than 20 percent graphite and chunks of the mineral are scattered on the ground in the exploration area. “Some of this graphite is so continuous it looks like an oversized pencil lead when you see the core box (drilling samples),” he said. “It’s a very prominent mineral in the area.” Formerly Graphite One Resources Inc., the company recently dropped “Resources” so its name would better reflect plans to become an integrated graphite producer and manufacturer, instead of being solely a mine operator, according to Foo. Small-scale mining took place in the early 1900s but the area has mostly gone undeveloped since. Graphite One leaders envision a mine that would be much larger than what was done in the area previously, but would still be fairly small by today’s standards, Foo said. Current plans are for mining about 1 million tonnes of ore per year, which would be distilled at an on-site processing plant into about 60,000 tonnes of 95 percent graphite concentrate. The rough concentrate would then be shipped to a purification plant the company hopes to develop somewhere in the Pacific Northwest, where it would be refined into several types of more than 99 percent pure graphite concentrate. Graphite One partnered with the Alaska Industrial Development and Export Authority in 2017 to analyze the prospect of siting the purification plant in Alaska; however, access to lower-cost power in the Pacific Northwest drove the decision to site the plant further south, according to Foo. Overall development cost for the mine and processing plant was pegged at $233 million in a 2017 preliminary economic analysis of the project. The purification-manufacturing plant would cost another $130 million. Full development would also require about 270 employees at the mine, according to the PEA. The mine itself would be a relatively small open-pit operation, Foo said, and the ore would be processed using basic flotation methods. Other Graphite One officials have characterized the prospective mine as an “oversized gravel pit,” as there is no need for the chemical leaching processes commonly found at metal mines. The Graphite Creek deposit contains four types of graphite — a rarity — which led Graphite One to coin the term “STAX” graphite for its spherical, thin flake, aggregate flake, and expanded flake graphite structures, Foo said. The various types of graphite each have characteristics that make them suitable for different applications, but demand for the mineral these days mostly comes from lithium ion battery makers for use in electric vehicles and other high-stress battery applications. “These are all naturally occurring qualities of this deposit, which makes it very unique and the (U.S. Geological Survey) will be studying our deposit this year to determine exactly why this occurrence has these qualities and can we find others in the United States,” he said. He also noted that lithium ion batteries have 10 to 30 times more graphite than lithium. “We like to think they should be called graphite ion batteries. You talk to the cobalt guys; they’d like them to be called cobalt ion,” Foo quipped. In addition to being a primary component for modern energy storage, graphite has long been a popular dry mechanical lubricant. Its resistance to heat also makes it useful in high-temperature applications and its strength and flexibility make it the go-to material for fishing rods and many other uses — in addition to pencils. If developed, Graphite Creek would be the sole domestic source of graphite. China currently controls most of the world’s supply and graphite is on the U.S. Geological Survey’s critical minerals list as a strategically important material for which the country relies on imports. This year, the company will continue its resource evaluation and environmental baseline data collection work while also conducting a pre-feasibility study to evaluate the viability of the project in more detail, Foo said. He added that environmental permitting could be “very straightforward” and suggested the project could warrant a simpler environmental assessment — avoiding the rigorous environmental impact statement process — depending on the U.S. Army Corps of Engineers’ determination on the likely impacts to wetlands. If it all goes as planned, Foo said Graphite One could be turning ground in about four years. Elwood Brehmer can be reached at [email protected]

Legislature, RCA press utilities to coordinate as talks stall

The legislative session is winding down but work continues on efforts to compel the six Railbelt electric utilities to act more as one. The House Energy Committee introduced legislation May 3 to give the Regulatory Commission of Alaska the authority to enforce the standards of an electric reliability organization and jurisdiction over some utilities’ large capital decisions. House Bill 151 comes just as the RCA is preparing to send lawmakers a progress report on the utilities’ current voluntary efforts to pool generation capacity for fuel efficiency and cost savings to ratepayers, which the five-member commission says have stalled. The RCA issued a series of recommendations in a June 2015 letter to the Legislature that outlined ways the electric utilities operating from Fairbanks to Homer could work together, such as combining their generation and transmission assets, as a means to ultimately achieve a more efficient and reliable system. The Legislature requested insight into Railbelt utility operations the year prior. In the letter, the commission characterized the Railbelt electric system at the time as “fragmented” and “balkanized.” It also insisted that if the utilities would not voluntarily work together for the betterment of their customers, the commission would do what it could to mandate better cooperation, either through its own regulations or by seeking statutory help from the Legislature. Some critical observers of the Railbelt electric system contend the six utilities — spread over a large area but with collective demand less than many single Lower 48 utilities — have overbuilt generation capacity in recent years while ignoring transmission investments that could make it more cost effective to move lower cost power from one end of the system to the other. The 2015 letter notes the utilities had spent roughly $1.5 billion on new generation facilities over the previous five years. Utility leaders spent much of the interim period investigating the viability of establishing a transmission company, or transco, that would make large capital decisions based on the system-wide need for an investment. Concurrently, they also looked at establishing a unified, or independent system operator structure, which at a basic level would act as a system-wide power dispatch organization. When properly combined, proponents say the transco and system operator groups would reform the Railbelt grid to resemble more integrated Lower 48 electric utility operations. Currently, the Railbelt utilities continuously buy and sell power to each other; however, they also each apply their own transmission, or wheeling, tariffs, when power is sent across the portion of the main transmission lines they own. This can lead to situations where tariff “pancaking” disincentives power transactions that could otherwise maximize the efficiency of the system as a whole. Renewable energy advocates, in particular, stress that an open-access transmission system with a flat wheeling tariff would allow independent power producers to compete on a level playing field with current power plants for power sales and would incentivize more investment renewable projects in the region. The Alaska Energy Authority released a study in early 2014 estimating that a $900 million overhaul to the transmission system would provide additional power moving capacity that could save Railbelt ratepayers up to $240 million per year by maximizing transmission efficiency and economies of scale in the system. Utility leaders have largely questioned the conclusions of that study, contending the need for investment and corresponding benefit figures are overblown. AEA commissioned a revised Railbelt transmission study in 2017 that reached mostly similar conclusions. In January 2017, Matanuska Electric Association, Anchorage Municipal Light and Power and Chugach Electric Association announced a power pooling and joint dispatch agreement that had accompanying estimated savings in fuel costs — primarily through burning less natural gas — totaling up to $16 million per year collectively. Since early 2013, each of the utilities in the pooling partnership has built new, higher efficiency natural gas-fired power plants. While the plants are individually more efficient than the generation they replaced, jointly orchestrating how they are used can take that efficiency further, according to utility officials. Utility leaders said at the time that the short-term agreement was a step towards a firm 20-year pooling partnership. But during a May 8 meeting, Commissioner Bob Pickett, who has led the RCA’s review of the Railbelt utility operations, said that progress towards the long-term arrangement has stopped. He said it is time for the commission and the Legislature to move toward mandating the utilities work closer together as their voluntary efforts have not been wholly successful. “This does not mean, however, that no value has resulted from the utilities’ efforts over the past four years,” Pickett said. “There has been increased interaction between the dispatch centers and a better understanding between the electric utilities of each other’s generation units and heat rates, operation and maintenance costs. This has provided a better foundation for discussions about pricing and development of transactions.” He continued to note that it’s unlikely the voluntary efforts will resume until 2021, when Chugach’s proposed $1 billion purchase of MLP is likely to be formally completed. Chugach spokeswoman Julie Hasquet wrote via email that efforts to achieve a firm, or tight power pool are continuing. The three Anchorage-area utilities in October notified the RCA that they would pause the three-party negotiations to focus on the utility merger, Hasquet said, adding that Chugach’s acquisition of MLP will realize most of the savings from a tight power pool. “Chugach has committed to MEA that we will continue to negotiate the tight pool following the RCA process on acquisition. The processes developed to operate as a tight power pool can easily be expanded throughout the Railbelt,” she said, “and we welcome the other utilities to join in.” In late February, four of the six Railbelt utilities — minus Chugach and MEA — applied with Wisconsin-based ATC Development Company LLC to the RCA to form Alaska Railbelt Transmission LLC, a transmission-only utility based on the transco model. MEA leaders have long said they believe a complex transco is unnecessary to realize efficiencies in the system and could force utilities into making investments that are ultimately detrimental to their operations, which would be counter to their obligations to their own ratepayers. MEA officials contended in comments on the transco application that it does not demonstrate how the transmission utility’s proposed activities would serve the public interest. MEA also questioned the ability of the startup utility to provide the touted benefits. Lee Thibert, CEO of Chugach, which did not join Alaska Railbelt Transmission, said in comments to the RCA that the utility has concerns about how being a member the for-profit transmission utility would impact the cooperative’s tax-exempt status and how its formation could impact Chugach’s potential purchase of MLP, among other issues. ^ Elwood Brehmer can be reached at [email protected]

Fire from ice: Research advances into unlocking methane hydrate

A research well drilled last winter into the Prudhoe Bay oil field could be a key to unlocking vast stores of yet untapped energy. Last December, a consortium of scientists from the U.S. Geological Survey, Department of Energy and Japan Oil, Gas and Metals National Corp. partnered with BP to drill a shallow test well from an unused pad in the western portion of the large Prudhoe field into the rock layers above the oil and gas pools . The well successfully targeted two formations of natural gas hydrate, according to an April USGS release. It was also the start of a multi-year research endeavor with the ultimate goal of better understanding the viability of commercial gas hydrate production. USGS Senior Scientist and University of Alaska Fairbanks graduate Tim Collett said the Prudhoe well represents what is likely the first gas hydrate research that goes beyond the realm of experimentation and into an actual production test. “The (research) world pretty much knows this project well and points to it as a real pivotal event in gas hydrate, as you can imagine,” Collett said in an interview. While an emerging and understudied potential energy source, the fundamental elements of gas hydrate are simple and well understood. Gas hydrate is ostensibly made of natural gas trapped in ice crystals. On the North Slope it is known to occur above the Prudhoe Bay and Kuparuk River oil and gas fields in conventional porous sand formations, according to Collett. It forms under a range of temperature and pressure conditions — just below the freezing point in permafrost as shallow as 1,000 feet down to temperatures as high as 50 degrees at depths of about 3,000 feet. The ideal pressure for gas hydrate is in the 1,500 pounds per square inch range, he said. “It’s basically just a cage of water molecules organized around a gas molecule under a certain range of PT (pressure-temperature) and under those conditions the cage becomes rigid, so it’s a solid,” Collett described. Gas hydrate reservoirs are appealing because they generally have more capacity to store than conventional gas reservoirs and they consistently form at relatively shallow depths, he added. The Prudhoe well struck reservoirs at about 2,300 feet and 2,770 feet below the surface. Gas hydrate was found to be filling 65 percent to more than 80 percent of the spaces, or porosity, between the grains of sand and silt in the upper reservoir that comprise the rock formation, according to the USGS. The gas hydrate accumulations on the North Slope hold the same natural gas as is found in the conventional reservoirs. When the hydrocarbon-bearing formations of Prudhoe Bay were charged 60 million to 120 million years ago they were tilted into an uplifted position and some of the gas and oil migrated to the upper end of the structure, Collett explained. Much of the gas that moved upward ended up in the zone where pressure and temperature conditions would eventually become suitable for hydrate formation. “About 1.6 million years ago, when Arctic conditions were established and permafrost originally formed — this is the period of glaciation — those gas accumulations were converted to hydrates,” Collett described. Solid estimates The greater gas storage capacity in hydrate reservoirs comes from the fact that it is in a solid form. “If I had a block of gas hydrate on my desk that was 1 square-foot it would produce approximately 164 cubic feet of gas and about 0.9 cubic feet of water,” Collett said. A 2008 USGS assessment estimated there are roughly 85 trillion cubic feet, or tcf, of technically recoverable natural gas trapped in hydrate form beneath the surface of the Slope. For comparison, the North Slope’s massive conventional proven gas resources total about 35 tcf. Collett noted that about one-quarter of the world’s land mass is underlain by permafrost and has the potential to hold gas hydrate. It is also found in some of the first layers of sediment where the ocean reaches depths of about 1,500 feet or more. Those are the places where the pressure and temperature regimes are favorable for hydrate formation. Beyond that, Collett said, hydrate needs the same processes and conditions needed to form conventional hydrocarbon occurrences. Global hydrate estimates “are on order of tens of thousands trillion cubic feet” of gas, compared to about 7,000 tcf of proven gas resources worldwide, according to the Department of Energy. With hard-to-fathom potential, it’s natural to wonder why more work has not been done to commercialize gas hydrate. For starters, “The samples are very difficult to collect and take back to a lab and study,” said Ray Boswell, a geologist with the National Energy Technology Laboratory. Additionally, the deep sea hydrate tests are exceedingly expensive and difficult to conduct long-term, Boswell said; and previous tests at Prudhoe in 2012 and Canada’s Mackenzie Delta 15 to 20 years ago were done on ice pads, which limited their duration to weeks instead of months or years. Collett said gas hydrate was first identified in the 1940s in natural gas pipelines in Siberia; they would form and plug pipelines and that is still industry’s primary interest in hydrate formation. The first samples from gas hydrate reservoirs were not taken until the mid-1990s, according to Collett. Producing interest U.S. government agencies have been studying gas hydrate for about 35 years and that work has mostly been focused on identifying the conditions needed for it to form, according to the researchers. Boswell said the current test — fortuitously on an old, mostly unused gravel exploration pad — is focused on determining if gas hydrate can be produced long-term. Japan Oil, Gas and Metals National Corp. is involved to learn more about gas hydrate on the hope of eventually being able to produce natural gas from subsea hydrate occurrences near the country, according to Collett. He said Japan and China in particular are interested in advancing gas hydrate development through their national oil companies because they currently import large amounts of energy through coal and liquefied natural gas. Natural gas is produced from hydrate by depressurizing or warming the reservoir, which dissociates the gas and water. Depressurizing the reservoir can be as simple as drilling a well into it, but maintaining those conditions can be difficult. The researchers also noted that heating a hydrate reservoir requires heating all of the associated rock formation, which requires a lot of energy. Finally, the dissociation of the water and gas is an endothermic reaction, meaning it results in cooling that drives the hydrate back into equilibrium — yet another challenge. “The reservoirs are in a solid state and they like it that way,” Boswell said. As for the Slope study, BP Alaska spokeswoman Meg Baldino said the company allowed access to the pad, drilled the well using one of its contracted rigs owned by Parker Drilling and has supported hydrate research for decades. Boswell said the Prudhoe owners — BP, ConocoPhillips and ExxonMobil — also let government researchers review confidential data that helped in the site selection process. Collett surmised that private industry has been slow to investigate gas hydrate commercialization because it is such a new realm of study and recent breakthroughs in unconventional oil and gas production mean there are ample opportunities for less speculative investments. The next couple years will be spent turning the test well into a well to monitor another yet-to-be-drilled well for production tests. A third well will also drilled to monitor production tests, according to Collett. When those additional wells will be drilled is unclear at this point, as the agencies need to coordinate with the companies to work out when a drilling rig will be available again. He said BP used drilling the first well “as an opportunity before the winter drilling season to, quote, ‘warm up a rig,’” and then moved on to the rest of their work. With so many variables, the final cost of the research is also unclear at this point, but “as with anything in Alaska it’s not cheap,” Collett noted. The data from the test and monitoring wells will eventually be entered into models that can estimate hydrate production over many years, which he said researchers are confident in. However, they have never had access to enough data to fully form the models. “There’s many variables in this story and we try to simulate those in production models but without long-term tests to calibrate them you’re just at a limit to how much you can trust your modeling,” Collett said. Melting methane Melting permafrost has also been identified as a potential unwanted source of greenhouse gases; that is, if much of the world’s permafrost were to melt it could release the methane stored in gas hydrate form into the atmosphere. Such a process could exacerbate climate change because methane — pure natural gas — is a much more impactful greenhouse gas than carbon dioxide. Collett and Boswell said recent research by USGS scientists has largely quelled that fear. A 2017 report by Carolyn Ruppel and John Kessler entitled “The interaction of climate change and methane hydrates” concludes that large releases of gas hydrate-derived methane are unlikely in the near future simply because most of the landside hydrate formations are beneath more than 1,000 feet of permafrost. “If we changed the temperature at the surface at Prudhoe Bay onshore 20 degrees (Fahrenheit) the base of the permafrost would not even see that change for 10,000 years,” Collett described. “That’s well documented; it’s good science.” He said shallow subsea Arctic hydrate formations, such as under the Beaufort Sea, could release methane sooner as ocean temperatures rise, but it’s unlikely that would occur over a “human timeframe” — hundreds or thousands of years. However, he acknowledged that does not change the fact that gas hydrate is another form of fossil fuels that if developed would add to global carbon emissions. “You go down that (hydrate) pathway, you start dealing with the role of natural gas relative to coal, relative to renewables. There’s a whole series of additional discussions,” he said. Boswell, Collett and the 2017 study all also note that methane releases from gas hydrate formations is a different issue than potential releases of carbon sourced from organic microbial processes trapped in shallow, discontinuous permafrost. ^ Elwood Brehmer can be reached at [email protected]

Senate bill would strike down initiatives modified in court

A bill that would make it a little harder for Alaska voters to change or make laws on their own is halfway through the Legislature. The state Senate passed Senate Bill 80 on a 15-4 vote May 2, which would require the lieutenant governor to automatically reject a voter-sponsored initiative if the courts deem a portion of the initiative unconstitutional. SB 80 sponsor Sen. Chris Birch, R-Anchorage, said during floor debate that the bill is aimed at assuring an initiative — a proposed change to state law — that makes it on a statewide ballot matches what voters signed for early in the process. Alaska is one of 24 states that allow citizens to enact legislation through a voter-driven initiative. In Alaska, initiative sponsors have up to one year after the lieutenant governor certifies their application to collect signatures from registered voters at least equal to 10 percent of the number of voters in the prior general election with voters from at least 30 of the 40 state House districts. From there, the sponsors file the petition booklets with the Division of Elections for review. The division and the lieutenant governor, whose primary responsibility is overseeing elections, then have 60 days to certify the initiative as eligible to appear on a statewide ballot or reject it. However, the timing in that process can sometimes lead to incongruities between what initiative supporters sign their names to and what actually appears on the ballot. It’s what happened last year with the “Stand for Salmon” initiative and what Birch says SB 80 seeks to avoid. “Voters should be assured that the language on the ballot has not changed from the language in the petition booklets supported with signatures,” Birch said. According to the Department of Law, just two voter-sponsored initiatives have been amended by state courts and appeared on the ballot: the salmon habitat initiative and another, which also failed in 1988, relating to the state university system. Overall, Alaskans have voted on 54 ballot initiatives since statehood, according to Division of Elections records. The sponsors of the Stand for Salmon initiative — which sought to overhaul the state’s salmon habitat permitting regime and set higher bars for development projects in those areas — had their petition application rejected by former Lt. Gov. Byron Mallott in September 2017. Mallott rejected the proposed initiative language on the advice of Department of Law officials who said the salmon habitat initiative violated aspects of the state Constitution. That led to a Superior Court review of the initiative language and Judge Mark Rindner in October 2017 overturned Mallott’s decision, allowing the initiative to proceed. Rindner’s decision, in turn, was appealed by the Department of Law to the Alaska Supreme Court while the Stand for Salmon sponsors were gathering the more than 32,000 signatures needed to get their initiative on the fall 2018 ballot. The Supreme Court ultimately ruled unanimously in August 2018 that the most restrictive requirements the proposed initiative would have placed on development proponents were unconstitutional. The justices stripped those portions of the initiative out and allowed the remaining aspects to move ahead for a public vote because they determined it remained substantially similar to the original, but the version of Stand for Salmon that appeared on the ballot did not match what signatories supported; it was watered-down. The Stand for Salmon initiative eventually lost by nearly a 2-1 margin after an intense campaign. Birch, who strongly opposed Stand for Salmon, said in an interview that SB 80 is in response to how the salmon habitat initiative played out, but he noted that it “cuts both ways” for future initiatives if SB 80 passes. Public support in Senate hearings for the bill came primarily from pro-development groups that campaigned against Stand for Salmon last year, such as the Resource Development Council for Alaska, the Alaska Chamber and the Alaska Support Industry Alliance. “I think when you sign something in front of the REI store the expectation is presumably whatever you sign is going to be on the ballot and not substantially rewritten by the courts,” Birch said. Those groups stressed in written testimony that the language of a ballot initiative needs to remain wholly intact throughout the process and if it is changed by a court the Legislature should have an opportunity to review the modified initiative. The Legislature can nullify an initiative by passing a law that is “substantially the same” to the initiative, according to the Constitution, which lawmakers did last year in response to an initiative dealing with legislative pay and conflict of interest laws. The groups also contend SB 80 would limit the number of protracted legal battles over voter initiatives and discourage sponsors from drafting ambitious language with an implicit understanding that the courts can do the requisite editing. Sen. Jesse Kiehl, D-Juneau, said during floor debates that SB 80 would likely result in the opposite; opponents of an initiative could challenge it and hunt for any small inconsistencies that could result in the whole thing being sent back to square one. Valerie Brown, legal director for the environmental law firm Trustees for Alaska represented the Stand for Salmon sponsors in front of the Supreme Court, dismissed the notion that sponsors “shoot for the moon” in drafting an initiative and rely on the courts to refine its legality. “That whole (legal) process — you don’t want to go through it if you don’t have to. It’s time consuming; it’s expensive. You want language that adheres to the allowable restrictions on initiatives that do exist,” Brown said in an interview. She characterized SB 80 as a way to restrict citizens’ voices in the lawmaking process. “They saw a citizens’ uprising essentially demanding better protections for salmon and now we have this bill that’s an attempt to add another restriction to how you can use initiatives,” she said. SB 80 also faces legal questions of its own. An April 23 memo to Kiehl from Legislative Legal Services attorney Alpheus Bullard surmises that the bill could be unconstitutional because it would place additional restrictions on the initiative process beyond what is called for in the Alaska Constitution. Article XII of the Constitution, according to Bullard, requires that the rules for direct citizen lawmaking cannot be more restrictive than what the Legislature must abide by; and bills going through the traditional legislative process can be parsed. For his part, Birch points to Article XI, which states that, “Additional procedures (beyond those in the Constitution) for the initiative and referendum process may be prescribed by law.” “I understand protecting the public’s right for redress and petitioning their government but at the same time there’s an issue of overreach,” he said. “You can just put anything willy-nilly into the legislation and then it finds its way onto the ballot and you’ve got a huge (campaign) cost and impact.” More than $10 million was spent on a campaign opposing Stand for Salmon, while its supporters spent roughly $3 million. Brown suggested as an alternative to SB 80 that a formal process be set up in which initiative sponsors could consult with Department of Law officials about the constitutionality of their proposal. Currently, she said, it’s up to the department if such guidance is going to be offered. In the case of Stand for Salmon, Law attorneys first notified the sponsors before Mallott rejected it that several aspects of the initiative likely did not pass constitutional muster. The sponsors subsequently resubmitted a new version of their habitat permitting law change — which again was ultimately rejected by Mallott — but Law officials were criticized by opponents of the initiative for their assistance. “They caught a lot of flak for even being willing to tell us what they thought was wrong, so if they had an administrative process where in good faith the sponsors could work with the Department of Law that would be a chance to keep some of these challenges out of court,” Brown said. Ballot measure spending The version of SB 80 that passed the also includes a late amendment by Sen. Bill Wielechowski, D-Anchorage, that would prohibit state money from being spent to influence ballot measures such as initiatives, referendums, recalls and proposed constitutional amendments. Wielechowski said he thinks most people likely already believe it is illegal for state money to be spent on a ballot measure campaign; however, it is legal if the funds are specifically appropriated for that purpose. “The state’s role in the ballot process should be to conduct fair elections and then should be to implement the will of the people,” he said during debate on SB 80. To that end, the bill could make Gov. Michael J. Dunleavy’s radio ads promoting his administration’s proposed constitutional amendments illegal. Officials in the Governor’s Office said in a March 21 press release that a series of radio spots costing approximately $9,000 in support of his plan to enshrine the Permanent Fund Dividend in the Constitution would air in the Kenai, Mat-Su and Fairbanks areas. SB 80 is now up for consideration in the House, where it has been referred to the State Affairs and Judiciary committees. No hearings have yet been scheduled. ^ Elwood Brehmer can be reached at [email protected]

Dunleavy poised to lose battle over education budget cuts

Funding for public education is an omnipresent issue nationwide, but it can become particularly contentious in Alaska where often unavoidably high costs meet standardized test scores that rank near the bottom nationally. While the debate usually falls along party lines, this year Republican Gov. Michael J. Dunleavy’s administration has pitted itself against legislators of all political stripes. Dunleavy has repeatedly cited poor standardized reading and math test scores for Alaska 4th and 8th graders as reasons the state needs to overhaul its K-12 education system. Correspondingly, his budget proposal released in February calls for cutting the Department of Education budget by $325 million, or about 24 percent, of the $1.3 billion budget, which administration officials have said is a precursor to overall education reform that will focus on reading proficiency in early grades and algebra in middle school. The vast majority of that cut, $269 million, would be to the block of money that funds the state base student allocation, or BSA, formula that calculates how much state money each school district gets per student. Dunleavy also proposed pulling back a $30 million one-time appropriation for school districts that the Legislature last year for the upcoming 2020 fiscal year. The $30 million is in addition to the larger BSA block that the Legislature forward-funded in last year for the upcoming budget. However, Attorney General has Kevin Clarkson outlined the administration’s position that forward-funding state appropriations could violate the constitutional prohibition on dedicating revenue and the governor’s authority to veto appropriations. Attorneys for Legislative Legal Services contend that the future appropriations signed into law last year by former Gov. Bill Walker are not eligible for Dunleavy to veto unless the Legislature amends or repeals them. The administration has also withheld a $20 million supplemental payment approved for the current budget until the Legislature officially rejects a proposal in the supplemental budget to repeal it, prompting a lawsuit by the nonprofit Coalition for Education Equity. Legislators from every caucus — including the House Republicans who have been most supportive of Dunleavy’s policies — have supported funding K-12 at least at last year’s levels. Dunleavy said during a March meeting with the Journal and Daily News that the $269 million formula reduction close to matches what Alaska’s 53 school districts had available in reserves statewide. The districts could use that money to mitigate the impacts of the budget cuts as the policy reforms are implemented, according to the governor. “In my mind, I’m thinking, how can we do this so school districts have some money to work with so they can do a step down,” Dunleavy said. The governor’s spokesman Matt Shuckerow provided a chart indicating districts collectively had $291 million in operating, pupil transportation and capital funds in fiscal year 2017. The governor said at the time that his administration would be releasing education reform bills within weeks, but those have not yet been submitted. A March 8 letter from OMB Director Donna Arduin to the Senate Finance co-chairs states that the 2018 district fund balance totals weren’t fully available, but the administration estimated it would be $143 million. Association of Alaska School Boards Executive Director Norm Wooten said the districts use the reserves to manage cash flow and respond to unforeseen expenses as most other types of organizations do and it’s not in a district’s purview to have more money than they need to operate. State law limits districts’ reserves to 10 percent of their annual budgets. “It’s disingenuous to think we can run schools without a fund balance and there’s not a school district in the state to my knowledge that has an excess amount of fund balance that they are socking away,” Wooten said. The House and Senate have also agreed to at least partially fund the portion of school construction bond debt the state agreed to pay in prior years. The House budget funds half of the state’s $107 million prorated share, while the Senate fully funded the commitment. Dunleavy proposed eliminating the payments in his budget. Elwood Brehmer can be reached at [email protected]

PFD is TBD entering final week of session

As is often the case, activity in Juneau is ramping up as the legislative session is winding down. The budget is at the center of almost everything legislators have done so far, but lawmakers in the House are also close to sending an omnibus crime bill to the Senate. That legislation, House Bill 49, would roll back many of the provisions of Senate Bill 91, the 2016 criminal justice reform package aimed at reducing state incarceration rates that has drawn ire from the public. SB 91 has largely been blamed for the statewide spike in property crimes in recent years, although Alaska’s concurring opioid epidemic and drawn-out recession have also been cited as reasons for the rise in crime. However, it’s unclear at this point what the Senate will be able to do with HB 49 with only about a week left in the regular session and the budget still unresolved. Gov. Michael J. Dunleavy has said he would be willing to call a special session if crime legislation is not addressed this year, but those calls will likely be left for after May 15, the last day of the regular session. House and Senate Finance leaders convened briefly May 7 for the initial operating budget conference committee meeting. The joint operating budget conference committee is being chaired by House Finance co-chair Neal Foster, D-Nome. At the highest level and on items other than the Permanent Fund dividend, the Senate’s unrestricted General Fund budget is $2 million less than what passed the House in April. Both budgets contain about $720 million more for agency and statewide spending, such as debt service, than Dunleavy proposed in February. While Dunleavy has emphasized closing the roughly $1.6 billion budget deficit without new revenues or reductions to the PFD, nearly half of his plan to close the budget gap came from redirecting existing state funds or diverting local petroleum property and fishing landing tax revenues to the state. The administration’s bills to shift the local taxes to state coffers have mostly been ignored by the Legislature. On the big budget items, legislators, to varying degrees, have split the difference between Dunleavy’s budget and current state spending levels. The Senate approved just more than $1 billion for the Department of Health and Social Services, while the House included an additional $54 million on public health and assistance programs. The difference is largely due to differing beliefs regarding how much of the administration’s roughly $100 million in regulatory and efficiency cuts to Medicaid can be achieved this year. Many of the administration’s cuts in DHSS to areas other than Medicaid were scaled back by legislators. The Senate DHSS budget is $142 million less than current, fiscal year 2019 spending, while Dunleavy had proposed $309 million in Health Department cuts. State hospital leaders said the administration’s original plan to cut upwards of $270 million from the state’s portion of the Medicaid program — which would mean forgoing approximately $470 million in federal matching funds — would severely strain the finances of smaller hospitals in the state, discourage providers from accepting Medicaid and would greatly harm the state’s already fragile economy. The Senate also roughly halved the governor’s $95 million cut to the Alaska Marine Highway System with a $44 million reduction that would keep the ferries running at reduced levels year-round. The House cut ferry funding by just $10 million. The governor’s plan to shut down the ferry system Oct. 1 while in the meantime studying alternative management structures was admonished by many coastal residents and legislators, particularly given statements during his campaign that he did not plan to drastically curtail ferry service. Dunleavy’s $134 million cut to the University of Alaska system was also largely disregarded. The House agreed to a $10 million university cut; in the Senate it’s $5 million. The Senate also chose to add $11 million above current levels to the Department of Corrections current $291 million budget, while the House landed on a $14 million cut and the governor proposed a $19 million reduction to Corrections spending. Both bodies also added about $10 million to the Public Safety budget, while Dunleavy planned to cut it by $3 million. They also left Department of Education funding largely unchanged from current levels after forward funding it last year. The Senate Finance Committee is also in the midst of finalizing its version of the capital budget. The Senate’s capital spending plan calls for $172 million in unrestricted General Fund spending largely to match just more than $1 billion in federal funds, mostly for highway and airport projects. The governor’s capital budget calls for $95 million in discretionary General Fund appropriations. The latest version of the capital budget also restores Alaska Marine Highway vessel maintenance and Tustumena ferry replacement funding. It also funds the Alaska Housing Finance Corp.’s popular home weatherization program and its Cold Climate Housing Research Center. What will be the final totals for both budgets is unclear at this point and Dunleavy’s expressed willingness to veto parts or all of the state’s budgets adds another major wrinkle to the situation. However, the strong and unusual bipartisan support for the budget in the Senate — it passed 19-1 — is an indicator that there could be enough support for the Legislature’s final budget to override any vetoes. Overriding a budget veto requires support from 45 of 60 legislators. Permanent Fund budgeting There are glaring holes in different places related to the PFD in both the House and Senate budgets. Despite being crafted by Republican Finance co-chairs Sens. Bert Stedman of Sitka and Natasha von Imhof of Anchorage — both of whom have stressed the need to protect the Permanent Fund and recalculate the dividend formula — the Senate’s budget contains full funding for a roughly $3,000 PFD. However, the large dividend results in a $1.2 billion deficit in the Senate’s plan. A fully funded 2019 PFD will cost the state slightly more than $2 billion, according to the Legislative Finance Division. The Senate’s budget would balance with funding to support roughly $1,200 PFDs, according to Finance figures. On the House side, the issue is the complete lack of a PFD in the budget. House leaders have said the PFD would be addressed in separate legislation; but the huge discrepancy leaves ample room for a compromised PFD amount to be worked out in the conference committee, which Stedman and von Imhof have indicated was at least partly behind their thinking to initially appropriate for full dividends. As a counterbalance, the Senate budget would also move $12 billion from the spendable, $18 billion Earnings Reserve Account of the overall $65 billion Permanent Fund to the constitutionally protected corpus of the fund. Such a transfer would discourage legislators from violating the 5.25 percent of market value draw limit on the Permanent Fund established last year, but could also put the Earnings Reserve at risk of being depleted if financial markets have several successive down years. This year’s 5.25 percent draw calculates to approximately $3 billion to be split for PFDs and government services. Completely draining the Earnings Reserve through ad hoc draws, poor returns, or a combination would leave no money for dividends or government support in future years. The House Finance Committee on May 6 sent a proposal to the floor from Sitka Democrat Rep. Jonathan Kreiss-Tomkins to transfer $8 billion from the Earnings Reserve to the Permanent Fund corpus. The smaller transfer is seen as a way to still protect billions from being spent while leaving additional headroom in the event of market downturns. Elwood Brehmer can be reached at [email protected]

FWS wants most conservative ANWR option

The federal agency tasked with managing the Arctic National Wildlife Refuge is recommending the most conservation-minded option available for oil and gas development in the Coastal Plain. The U.S. Fish and Wildlife Service Alaska officials asked the Bureau of Land Management to select Alternative D-2 from the draft environmental impact statement published in December for leasing areas of the roughly 1.5 million-acre Coastal Plain. The alternative request and other management recommendations were made in 59 pages of comments on the draft EIS submitted to BLM March 13. Alternative D-2 would open just more than 1 million acres to oil and gas leasing; however, activity on 708,000 of those acres would be restricted by a “no surface activity” designation and another 328,000 acres would be subject to some limitations on type and timing of use to minimize development impacts on wildlife. The D-2 management option would meet the requirements of the tax reform bill while also best preserving the wilderness features prescribed in the 1980 Alaska National Interest Lands Conservation Act, according to the memo signed by FWS Alaska Director Greg Siekaniec. The act, best known as ANILCA, doubled the size of the refuge and also opened the door to potential oil and gas activity in the Coastal Plain. Additionally, the FWS preferred alternative would maintain the natural qualities of rivers within the refuge that could qualify to be added to the National Wild and Scenic River System and best aligns with Endangered Species and Marine Mammal Protection Act management requirements, the memo states. For comparison, the least restrictive alternative would open all 1.5 million acres for leasing and just 359,000 acres — mostly along rivers in the refuge and near Kaktovik — would fall under the designation for no surface occupancy. BLM Alaska officials noted that winter exploration activities could be conducted on no surface occupancy areas, which could be developed using directional drilling from adjacent facilities, but permanent infrastructure would be prohibited. Alternative D-2 would place areas across the Coastal Plain under the no surface occupancy designation and 526,000 acres mostly in the southeast portion of the refuge would be off-limits to leasing to protect Porcupine caribou herd summer calving grounds. The eastern Alaska-western Canada caribou use large swaths of the Coastal Plain as calving grounds and what impact oil development could have on the herd has been a primary debate point in the battle over ANWR oil exploration. The ANWR rider to the Tax Cut and Jobs Act passed in December 2017 directs the Interior Department to hold two oil and gas lease sales, each covering at least 400,000 acres of the coastal plain before 2025. It limits permanent development to 2,000 acres of federal land. FWS and BLM are sister agencies under the Interior Department umbrella. The Alaska Native village corporation Kaktovik Inupiat Corp. also owns about 92,000 acres around the coastal village of Kaktovik within the refuge that would also be open to development. FWS Alaska officials also stressed a desire for in-depth consultation with their BLM counterparts to reach a consensus on oil and gas decisions that would impact the wildlife and aquatic resources managed by the service. Interior spokeswoman Molly Block noted in response to questions about how the BLM will weigh the FWS comments in the final EIS that more than 1 million comments were submitted on the draft Coastal Plain EIS. “BLM has an obligation to consider all of these comments — including those from its sister agency and the federal family — and anticipates they will inform the final EIS in multiple ways,” Block wrote via email. Interior leaders have stressed a desire to hold a Coastal Plain lease sale late this year and public meeting presentations indicate the final draft of the EIS could be released in late summer. Exactly what level of interest industry will have in the Coastal Plain leases is also unknown. The most recent U.S. Geological Survey assessment of the oil and gas underneath the coastal plain, done in 1998, put the mean oil estimate at 7.6 billion barrels for the Coastal Plain 1002 area. A plan for a 3-D seismic survey over much of the Coastal Plain last winter was scuttled by the extended government shutdown and a lengthy review by Fish and Wildlife regarding the impacts of the survey on denning polar bears. The FWS comments also detailed a strong belief that polar bear denning habitat should be given significant consideration when lease offerings and associated stipulations are made. The Coastal Plain is a primary area of the Slope the bears use for denning and surveys of denning habitat should be required under all development options, according to FWS officials. The importance of those surveys will likely continue to escalate as land-based denning increases while sea ice declines, the memo states. FWS officials are also requesting that the final EIS explain how BLM will define the areas of the Coastal Plain with the highest hydrocarbon potential because the law authorizing exploration explicitly states that the 400,000-plus acres offered in each lease sale must correspond to the areas deemed to have the best resource potential. “Specifically, it is not clear how the draft EIS arrives at delineating an area of moderate potential and how this area meets the high (hydrocarbon potential) criteria set forth in the Tax Act for lease sales,” the memo states. The draft environmental review also lacks sufficient description of how BLM plans to prevent or deal with the introduction of invasive species to the refuge from oil development, according to the memo. Finally, FWS officials want more examination of how the rapidly warming Arctic climate will impact the Coastal Plain and oil and gas infrastructure in particular. Their memo cites a recent study that concluded melting permafrost “will be an engineering hazard to (North Slope) infrastructure by mid-century.” “Effects of these changes have shown to be more severe in areas with topographic complexity such as the (Coastal Plain),” it states. “We recommend that studies like these be included in the analysis of potential impacts to various development scenarios.” Elwood Brehmer can be reached at [email protected]

Severe winter weather costs Alaska Airlines in first quarter

Alaska Airlines muddled its way through unusually bad winter weather on its home turf to lead its parent company to a $4 million profit to start 2019. Seattle-based Alaska Air Group Inc. operates Alaska Airlines and regional carrier Horizon Air. Company leaders said during an April 25 first quarter earnings call with investors that February storms made for the most significant winter weather the Pacific Northwest has seen in almost 50 years and led to roughly $15 million in forgone revenue. “Our teams went above and beyond to keep our guests and each other safe and to minimize the number of flights we had to cancel,” CEO Brad Tilden said while noting Alaska and Horizon canceled approximately 1,100 flights as a result of the winter storms. Tilden also said lower than expected market rates for last minute tickets on transcontinental flights challenged revenue generation as well. The $4 million net income in the first quarter — easily the slowest period in the airline business — matches Alaska Air Group’s results to start 2018 when the company was focusing on integrating Virgin America employees and aircraft into its network. The profit equates to 3 cents per diluted share of Alaska Air Group stock, which has rebounded from a 2.9 percent post-earnings call dip since April 25 and opened trading May 1 at $62 per share. Alaska Air Group paid a dividend of 35 cents per share and repurchased approximately $13 million worth of shares during the quarter. Tilden said the work to blend Virgin America into Alaska Airlines that has been ongoing since late 2016 is pretty much complete and the company is “on track to realize $330 million in revenue synergies this year.” Virgin and Alaska flight attendant crews were fully integrated as of Jan. 31 and the last of Virgin’s fleet of 71 Airbus aircraft will be repainted in Alaska livery by June, according to Air Group leaders. Alaska Airlines also added four new Boeing 737-900ER aircraft to its fleet in the first quarter. The airline, which for years before buying Virgin solely flew the popular 737 series, does not have any of the 737 MAX aircraft that have been grounded worldwide. The $4 million profit stemmed from nearly $1.9 billion in quarterly operating revenue, a 2 percent year-over-year increase on 0.2 percent capacity growth. While Alaska Air Group saw small growth in its passenger and smaller ancillary revenue segments, the company enjoyed 22 percent growth in its cargo business, which generated $50 million during the quarter. Alaska Airlines has used the formerly Virgin America Airbus fleet in part to expand its Lower 48 cargo offerings. Last summer it also began flying three cargo-dedicated Boeing 737-700s across Alaska. The new cargo jets are more fuel efficient than the much older Boeing 737-400 “combi” aircraft that were well known to in-state Alaska travelers for years and collectively offer 20 percent more cargo capacity, according to the airline. Alaska Air Group’s two largest expenses, wages and fuel, increased by 4 percent and 3 percent respectively, compared to 2018. The company generated $470 million in operating cash flow and held roughly $1.4 billion in cash at the end of the quarter, according to the earnings report. Its debt-to-capitalization ratio held steady at 47 percent. Looking ahead, company executives said near-term growth will be slower and more work needs to be done to control costs but they are generally positive about the future. Tilden said the previously stated goal of consistently hitting profit margins in the 13 percent to 15 percent range is achievable and “viewed through that lense our first quarter results were solid.” “On factors we can control that drive long-term value we’re headed in the right direction,” he added. Chief Financial Officer Brandon Pedersen said the company continues to renegotiate agreements with vendors for greater cost containment and thanked the companies Air Group works with that have been willing to make those adjustments. For the second quarter Air Group expects costs per seat mile to increase about 5 percent on a 1 percent increase in capacity because of capacity growth weighted to regional flights and aircraft maintenance that is often frontloaded to the first half of the year. Full-year consolidated capacity growth is forecasted at about 2 percent with per-unit costs expected to increase 2.1 percent. “We’ve slowed our growth to let recent investments mature and to focus our energies on making better use of what we have,” Tilden said. “We’re investing in our people, our product and we’re coming together as one team to realize the great potential of our platform.” ^ Elwood Brehmer can be reached at [email protected]

ConocoPhillips boosts Alaska output by 20% in 1Q

ConocoPhillips continued its run of strong returns to start 2019 with its third consecutive quarterly profit of $1.8 billion as its Alaska oil production increased nearly 20 percent. The Houston-based explorer and producer netted $384 million in the first quarter from its North Slope operations compared to $445 million in 2018, according to its earnings report released April 30. In turn, ConocoPhillips paid $249 million in taxes and royalties to the State of Alaska, according to spokeswoman Natalie Lowman. The $1.8 billion first quarter profit companywide was a drastic improvement over the $888 million ConocoPhillips earned in the first quarter of 2018. The recent profit translates to $1.60 per share and came on the back of $10 billion in revenue. ConocoPhillips generated $1.3 billion in free cash flow and with that repurchased roughly $800 million worth of stock shares and paid another $300 million in dividends, according to a company release. It ended the quarter holding $6.5 billion in cash. Venezuela was also ordered to pay ConocoPhillips $8.7 billion via a ruling issued during the quarter from the International Centre of Investment Disputes for its previous expropriation of the company’s assets in the country. CEO Ryan Lance said in a formal statement that the company’s efforts to better insulate itself from volatile oil and gas markets are paying off. ConocoPhillips leaders Alaska have said they set a “breakeven” goal of $40 per barrel for their operations in the state after the 2014-15 oil price decline, in large measure to compete with ever-cheaper to produce Lower 48 shale oil prospects. “We continue to execute and deliver on a plan that’s resilient to lower prices, while offering investors upside at higher prices. We approach the business with an aim to level-load our investment and distribution programs, rather than chase cycles up or down, because we believe that is the best way to create sustained value in the energy sector,” Lance said. “By focusing on free cash flow generation and distributing a significant portion of cash flows to shareholders, we offer the market a path to value creation in this cyclical business.” ConocoPhillips stock sold for $63.12 per share when markets closed April 30, up slightly from a pre-earnings report April 29 closing price of $62.65 per share. Specifically to Alaska, ConocoPhillips produced an average of 210,000 barrels of oil per day in the state, up significantly from an average of 174,000 barrels per day to start 2018, according to the report. The company operates the large Kuparuk River and Alpine oil fields on the North Slope and oil production at its Greater Moose’s Tooth-1 project — an Alpine satellite with peak production near 30,000 barrels per day — began last October. GMT-1 startup marked the first oil produced from federal leases within the massive National Petroleum Reserve-Alaska on the western Slope. ConocoPhillips Alaska oil and gas production accounted for 16 percent of the company’s worldwide production, while its earnings from the state accounted for 21 percent of its quarterly profit. Work is ongoing at its slightly larger GMT-2 project. The company is also in the midst of permitting its large Willow oil prospect, also in the NPR-A, which has been estimated as a roughly $5 billion undertaking to fully develop. ConocoPhillips spent $410 million on North Slope capital investments during the quarter — about 25 percent of its overall investment portfolio. Alaska investments have accounted for about 20 percent of the company’s capital budget in recent years. BP, which operates Prudhoe Bay, reported a $2.4 billion replacement cost quarterly profit April 30 and ExxonMobil also netted $2.4 billion to start 2019, according to an April 26 release. Elwood Brehmer can be reached at [email protected]

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]

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