Elwood Brehmer

ConocoPhillips accepts state terms to obtain leases

ConocoPhillips has agreed to comply with a long list contingencies demanded by Natural Resources Commissioner Andy Mack to allow the company to control a prized parcel of North Slope oil acreage. ConocoPhillips Alaska Land Manager John Schell Jr. wrote to Mack in a brief Aug. 11 letter that the company accepts DNR’s terms to expand the Colville River Unit to include 9,100 acres of the now-defunct Tofkat Unit. Mack sent a 21-page decision to the company Aug. 1, which lays out a strict drilling and payment schedule the oil major must meet in order to retain control of the area. In it, he required ConocoPhillips to drill an oil exploration well into the Nanushuk geologic formation by May 31, 2018, and make a total of $7 million in payments to DNR. The $7 million is in lieu of the money the department could expect to receive in winning bids if the area were to be put up for bid in the state’s annual North Slope lease sale. Further, ConocoPhillips must also decide by Aug. 15, 2018, if it wants to continue exploration and commit to drilling another well by June 2020. It operates the large Colville River oil field, commonly known as Alpine. While a relatively small area in North Slope terms, the 22 former Tofkat leases are adjacent to the southern edge of the Colville Unit and also close to the Armstrong Energy’s massive Nanushuk oil discovery in the Pikka Unit just to the east. It’s a highly prospective area. ConocoPhillips held the acreage in the early 2000s but had to give it back to the state after failing to meet drilling requirements. If the company misses any of the benchmarks or decides to give up on exploring the area it will immediately relinquish the leases back to the state, according to Mack’s ruling. The decision, with the hefty legal title of, “Colville River Unit: Reconsideration of the Denial of the Fifth Expansion of the Unit Area with Modifications Under Which Approval will be Granted,” gave ConocoPhillips until Aug. 14 to decide whether or not it would comply; it was made public Aug. 3. Schell wrote that the company doesn’t agree with all of Mack’s assertions and therefore accepts only the drilling and payment requirement portion of the decision, but continued that, “it is not necessary to resolve or address those disagreements at this time and CPAI (ConocoPhillips Alaska Inc.) reserves its rights accordingly. The important thing is that CPAI agrees to the modifications in the decision and is prepared to move forward consistent with those modifications. “CPAI appreciates you taking time to reconsider your prior decision. In CPAI’s view this outcome will benefit all stakeholders and represents the best opportunity for this area to be timely developed in a safe and environmentally responsible manner. CPAI looks forward to proceeding towards this goal in collaboration with the State of Alaska, Arctic Slope Regional Corp., local communities and other interested stakeholders.” In prior correspondence ConocoPhillips accused Mack of violating the company’s due process and making decisions based on an incomplete record. Mack, in his Aug. 1 decision, roundly dismissed the allegations, calling them “troubling” and “unfounded.” ConocoPhillips spokeswoman Natalie Lowman wrote in an email to the Journal that the company plans to “work with the State, ASRC, Kuukpik Corp. and the community of Nuiqsut to drill an exploration well in 2018.” ASRC is a joint holder in subsurface rights to the leases with the state, while Kuukpik Corp., the Native corporation for the Village of Nuiqsut, holds surface access rights. Nuiqsut is located in the contested area. Mack’s most recent decision came after ConocoPhillips requested he reconsider a February order to require the company drill an exploration well in the area and make a $2.5 million payment before June or relinquish it back to the state; a tight timeline particularly considering any well would have to be drilled on an ice pad. The challenging schedule was the result of the company telling DNR last December it would not be drilling an exploration well in the area because residents of Nuiqsut — less than three miles downwind from the proposed drill site — were concerned exhaust from the diesel-powered drilling rig would make its way into the community during the several weeks of continuous drilling. Last November, Mack overturned a prior 2016 decision by former Division of Oil and Gas Director Corri Feige denying Brooks Range Petroleum Corp.’s attempt to transfer the former Tofkat leases to ConocoPhillips. Feige believed it was in the state’s best interest to put them back up for bid, as Brooks Range’s title to the leases was about to expire. Mack allowed ConocoPhillips to obtain the area after the company told DNR it would drill last winter. ASRC has supported ConocoPhillips gaining control of the area and a spokesman for the North Slope Native regional corporation told the Journal while ConocoPhillips was deliberating that ASRC will be discussing any potential concerns with the residents of the village, who are its shareholders as well. Kuukpik CEO Lanston Chinn said his company, in representing Nuiqsut, continues to seek a balanced approach towards all oil and gas activities. Mack said in an interview that any residual issues between the ConocoPhillips and the Native corporations were matters between private parties that the state would not be involved in. Drilling NEWS Unrelated to the high drama over the Colville River Unit, ConocoPhillips announced Aug. 11 that it had commenced drilling at its 1H NEWS project in the Kuparuk River oil field. The project is a nine-acre addition to the existing Kuparuk 1H drill site and includes four lateral production wells to access previously challenging viscous oil and another 15 injection wells. NEWS is an acronym for Northeast West Sak; the company is drilling into the West Sak oil reservoir in the greater Kuparuk field. According to ConocoPhillips, the $460 million 1H NEWS project should produce up to 8,000 barrels per day at peak and first oil is expected later this year. ConocoPhillips is also progressing its Greater Moose’s Tooth greenfield oil projects in the National Petroleum Reserve-Alaska to the east of Kuparuk. The two GMT projects are expected to each produce up to about 30,000 barrels of oil per day at peak production in the next few years. Elwood Brehmer can be reached at [email protected]

AGDC reports progress in attracting interest to gasline

One piece at a time, the Alaska Gasline Development Corp. is putting its plan to sell the $40 billion Alaska LNG Project into action. The state-owned group currently has a preliminary capacity solicitation for potential customers of the LNG export plan to express their interest in it open through Aug. 31. The “open house” of sorts is geared towards natural gas producers so AGDC can gauge the interest in reserving capacity on the proposed project’s gas pipeline and liquefaction tolling system, corporation officials have said. Accordingly, AGDC has also set up a data room for potential customers to examine the technical design and environmental information on the project the state, BP, ConocoPhillips and ExxonMobil collectively spent about $600 million over three years compiling. The companies transferred that mountain of data to AGDC at the start of the year after depressed oil and LNG markets put in question their ability to continue investing the Alaska LNG and the project’s long-term profit margin. Gov. Bill Walker, the primary proponent of a state-led Alaska LNG Project plan, believes the state can provide benefits to the project the producers can’t that will make it financially viable. A broadly skeptical Legislature has basically given him 2017 to prove it. While the capacity solicitation is meant to mostly gauge upstream interest in the project, AGDC Commercial Vice President Lieza Wilcox said during the corporation’s Aug. 10 board meeting that 17 confidentiality agreements have been signed with companies in six potential LNG markets. The corporation is now meeting with those companies to further inform them about the Alaska LNG Project, she said. After signing the confidentiality agreements the companies “want to walk alongside this train to see if it’s moving,” Wilcox described. She noted a confidentiality agreement is the first step in courting Asian LNG buyers. It is typically followed by a non-binding memorandum of understanding — which AGDC signed with the massive Korea Gas Corp. in late June — or letter of intent and then a heads of agreement, hopefully leading up to a firm contract. AGDC is also reviewing draft letters of intent with 13 parties from multiple countries, according to Wilcox. “I get reminded at almost every meeting what a serious step that (MOU/LOI) is for the companies,” she commented to the board. Tax questions AGDC notched a noteworthy victory in July when it secured an opinion from the Internal Revenue Service that it indeed is a tax-exempt political subdivision of the State of Alaska in the eyes of the federal government. But what exactly does that mean for the Alaska LNG Project? AGDC President Keith Meyer said in response to questions from board Vice Chair Hugh Short that the tax-exempt status is indeed a significant positive for the corporation, but not the missing link that will make the planned megaproject a sure-fire go. Short is a co-founder and CEO of the Anchorage-based and Arctic-focused investment firm Pt Capital. Meyer first clarified that the ruling extends only to AGDC, not to the Alaska LNG Project it is sponsoring. “If we brought a third party into that equity (investment) structure, we can’t extend the (tax) benefits to the third party but we still retain them,” he said. A private equity investor in the Alaska LNG Project would still be subject to federal taxes on any profits that investment would return. However, that may not extend to all Alaska LNG investments as a result of the IRS opinion, depending on how the many billions of dollars worth of financing for the project is ultimately structured. Being a political arm of the state — and holding the IRS ruling confirming as much — also allows AGDC raise debt by selling tax-exempt bonds. As a result, the buyers of any bonds sold by the corporation to fund the project would not have to pay federal taxes on the interest revenue they generate. AGDC estimates the Alaska LNG Project could initially generate $1 billion-plus in annual cash flow growing to more than $2 billion after about 20 years until the debt is paid off. Once debt-free in about 2045, it could produce upwards of $5 billion in cash to investors annually and be sold for up to $50 billion, Meyer said. He has repeatedly pointed to a very high-level, prospective scenario in which construction of the roughly $40 billion project is paid for with a combination of roughly 75 percent debt and 25 percent equity investments. The equity investments would likely garner about an 8 percent return and the debt 5 percent, for a 5.8 percent average cost of capital, according to Meyer. The State of Alaska would not be liable for any debt AGDC takes on to fund the project, Meyer has also stressed, as the bonds or other debt would be backed by the long-term “take or pay” contracts the corporation would secure from Alaska LNG customers. AGDC is encouraging Alaska firms to invest in the project and Senate Bill 138 — the law that established the framework for the state’s participation in Alaska LNG — requires the corporation to allow individual Alaskans to buy into the project as well. Private equity holders would have to manage their Alaska LNG investment into their overall holdings and tax position, but would have a “potential reduced return relative to AGDC for the exact same investment because of the tax impact — to the extent they have a tax impact,” Meyer acknowledged. Short said private equity investors in the project would likely require a higher return threshold to offset the federal taxes they would have to pay on the returns. “I think it’s a little optimistic to think taxable entities are going to invest alongside us and accept a lower rate of return and accept that’s how it’s going to be,” Short said. He suggested offering a different class of stock, blended return rates or simply factoring higher investment returns into a slightly higher tariff to use the pipeline and LNG plant if need be to satisfy potential investors’ requirements. Meyer responded by saying AGDC will offer benefits to different classes of investors with higher returns to some, particularly early investors in the project. He said those late to the game will probably have to accept lower rates because those investments should be subject to less risk as the project progresses, noting AGDC is considering many of these issues in drafting its financing plan. “It’s just a benefit, but when we’re talking about competing against very competitive projects globally, every cent counts,” Short summarized. Elwood Brehmer can be reached at [email protected]

Anchorage, railroad settle federal funding fight

The Municipality of Anchorage and Alaska Railroad Corp. appear to be back on good terms. Railroad CEO Bill O’Leary said in an Aug. 9 interview that the state-owned railroad reached an agreement last week with Anchorage Mayor Ethan Berkowitz’s administration to settle a multi-year dispute over how annual federal transportation grant funds are split between the two and get millions of dollars flowing into Alaska again. The formula funds will be split as they always have been for fiscal years 2016-2018, O’Leary said, which is a positive for the railroad that receives the lion’s share of the funding. The deal also includes an understanding that the railroad will sell the city a parcel of land next to the Port of Anchorage for $1.5 million. Berkowitz said the 20.2-acre property is “a critical piece” of land that will help the city progress its much-needed overhaul and modernization of port infrastructure. The standoff that started in 2016 had left more than $23 million with the feds — roughly $15 million for the railroad and $8 million for Anchorage under the earned split — for last year and the first half of 2017, as the FTA would not release the money without the split letter. As a result, O’Leary said the mayor instead wanted a 50-50 split, which the railroad simply could not agree to. Not getting just more than $11 million in expected 5307 funds in 2016 pushed the railroad into a $4.4 million loss for the year, according to O’Leary; the first annual loss it posted since 1999. Both Berkowitz and O’Leary described the agreement as a “win-win” in separate interviews. “Each one of our organizations had issues we were able to resolve here,” Berkowitz said. “By combining those two (the federal funds and land sale), we were able to do it in a way that solved both problems.” The Municipality of Anchorage is leasing the property in question and buying it outright will save Anchorage taxpayers over the long-term, Berkowitz stressed. He also thanked Gov. Bill Walker for helping resolve the issue. Walker's spokesman Jonathon Taylor said the governor simply brought the two sides together for discussions. Neither the mayor’s office nor the railroad were able to provide the lease rate in time for this article. O’Leary said the land sale “kind of served as the catalyst to move forward” with the overall settlement. In late March Alaska Railroad officials told the Journal Berkowitz was refusing to sign a joint letter with the railroad to be sent to the Federal Transit Administration showing the agency each approved of how the pool of federal cash would be split. Specifically, the “split letter” is for the FTA’s Section 5307 Urbanized Area Funding program meant to support public transit operations across the country. The two entities must settle on how the funds are apportioned because the Municipality of Anchorage, which has bus service, and the state-owned Alaska Railroad, which has year-round scheduled passenger service, are the two public transportation entities in the city. While the whole pot of Section 5307 funds is meant to benefit public transportation in Anchorage in general, its total amount is determined by formulas that tally how much is generated by the municipality’s People Mover bus line and how much the railroad generates. Those formulas are based on route and passenger ridership miles for bus service, and similarly revenue track and route miles for the railroad, as well as population density in the areas served by each. The letter is the Federal Transit Administration’s way of providing local control over how the money is spent. Berkowitz contended the railroad, which had historically generated and received about two-thirds of the Section 5307 formula funds, was getting the money on technicalities. While the Alaska Railroad does indeed offer daily scheduled service in the city — qualifying it for the money — the railroad does not provide the commuter service the city’s bus system does and the funds are intended for, he argued. The Alaska Railroad’s passenger service is primarily tailored to tourists on sightseeing trips and Alaska residents wanting to make longer trips to other cities or to remote cabins or homes along the tracks. The railroad has looked into commuter service in Southcentral, but it has never been deemed financially feasible. When the dispute first surfaced in April when the railroad released its annual results, talks had stopped but the name-calling had started. Berkowitz said in an interview then that railroad leaders were negotiating like “bullies” and with “petulance,” also accusing an unnamed railroad official of calling him “a terrorist” for standing up for his city. Alaska’s congressional delegation quietly sent letters to the FTA during the dispute asking if federal Transportation officials had the authority to settle it. Letters from Sen. Lisa Murkowski and Dan Sullivan did not choose sides, but did highlight how the funds were split previously. Rep. Don Young sided with the railroad in a June 2016 letter to Berkowitz, writing that he only did so because a new split separate from how the funds are generated could kill support in Congress for future FTA funds to Alaska. Alaska’s delegation has long had to fight to keep up federal support for the state-owned railroad because it does not operate as a traditional Lower 48 commuter service provider. The Alaska Railroad is the only full-service passenger and freight train corporation in the country. It does not receive state support for its operations, but various federal grants can account for up to about 30 percent of its operating revenue in any given year. The railroad has fallen on hard times in recent years as its freight business, which was once primarily from coal exports and the now-closed Flint Hills oil refinery in North Pole, has declined precipitously. Low oil prices have also slowed North Slope spending and correspondingly led to fewer equipment and material hauls on the rails for oil and gas projects. Now that a deal has been reached, the remarks from each side are much more measured. “We were able to get this land on terms that are attractive,” Berkowitz said. “The railroad is going through difficult financial times. The split, as configured, was very important to them.” He added that continuing the existing funding apportionment through 2018 allows the city and railroad to “find other ways of supporting each other” in the interim. Berkowitz’s first term as Anchorage mayor runs through June 2018. O’Leary noted that because the railroad is owned by the state, the property sale will have to be approved by the Legislature and railroad officials will be in Juneau next spring to make that happen. “I think this is a good thing for the municipality and the railroad to put behind us,” O’Leary said. Elwood Brehmer can be reached at [email protected]

BLM seeks input on opening entire NPR-A to leasing

The Bureau of Land Management wants to know if any more of the nearly 23 million-acre National Petroleum Reserve-Alaska should be open to development of its namesake resource. The Interior Department agency that oversees the NPR-A on the western North Slope is soliciting interest in the roughly 11 million acres former President Barack Obama’s administration made off limits to oil and gas leasing in 2013, according to an Aug. 7 press release from BLM’s Anchorage office. “Offering all tracts for nomination is in response to (Interior Secretary Ryan Zinke’s) order and will jump-start Alaskan energy production in the National Petroleum Reserve in Alaska,” acting Assistant Interior Secretary for Lands and Mineral Management Katharine MacGregor said in a formal statement. Zinke signed a secretarial order May 31 to initiate possible revisions to the 2013 NPR-A Integrated Activity Plan and update the oil and gas resource estimates for the NPR-A and the Arctic National Wildlife Refuge while at the Alaska Oil and Gas Association’s annual conference in Anchorage. MacGregor further said in her statement that the information gained from the solicitation will aid the department’s review of the current NPR-A land management policies “while protecting surface resources.” “Oil and gas lease sales help strengthen American energy independence, promote domestic energy production and support local job growth,” she said. MacGregor was appointed by Zinke in April to be the deputy assistant secretary for land and mineral management. She is in the acting assistant secretary position as the department awaits Senate confirmation of former Alaska Natural Resources Commissioner Joe Balash, who Zinke appointed to the post in July. BLM regularly asks for nominations on its annual fall NPR-A lease sales and the recent solicitation includes the 900 oil and gas tracts over the 10.3 million acres of the reserve that are open to leasing. Currently, companies hold 189 leases covering 1.37 million acres in the NPR-A, according to BLM. Industry interest in the NPR-A leases has waxed and waned over the years as federal land management policies have shifted and evidence of available oil and gas resources has evolved. The fact that only the far eastern fringe of the NPR-A has any oil and gas infrastructure has also made industry movement into the vast area very incremental. ConocoPhillips, in partnership with ARCO, is the only company to push entitrely into the federal area with its mid-sized Greater Moose’s Tooth oil projects currently under development and projected to total 60,000 barrels per day if both come online. The 2013 NPR-A land management plan prohibits leasing in much of the northeast part of the reserve to protect the Teshekpuk Lake caribou herd and waterfowl that breed in the area. State Department of Natural Resource Commissioner Andy Mack has said the state is also interested in protecting the Teshekpuk caribou — an important subsistence resource for residents of nearby villages — but that can be done while also strategically opening certain areas to leasing that are currently off limits. The December 2016 NPR-A lease sale drew a large amount of interest — again, primarily from ConocoPhillips — garnering $18 million in high bids on 613,000 acres mostly on its eastern edge. ConocoPhillips followed up its bidding activity with the January announcement of its Willow oil discovery in the eastern NPR-A, which the company estimates could hold 300 million barrels of recoverable oil with peak production of up to 100,000 barrels per day possible. Additionally, small independent Caelus Energy’s potentially massive Smith Bay oil find is in near shore state waters adjacent to northeast NPR-A lands currently off limits to leasing. Caelus estimates the prospect contains more than 6 billion barrels of oil in place. Elwood Brehmer can be reached at [email protected]

State gasline corp. gets favorable ruling from IRS

The Alaska Gasline Development Corp. has cleared another of many hurdles in its effort to monetize the state’s North Slope natural gas resources. The state-owned corporation announced Tuesday morning it qualifies as a federally tax-exempt political subdivision of the State of Alaska, according to a ruling it received from the Internal Revenue Service. AGDC President Keith Meyer said in a press release that the ruling will give the organization “significant maneuvering room” in how it can shape the financing structure for the $40 billion LNG export proposal. “This is great news for the corporation and the Alaska LNG Project. Receiving a favorable tax ruling from the IRS was one of the expectations of the transition of the Alaska LNG Project to state leadership,” Meyer said. Being labeled a “political subdivision” of the state means potential profits to the corporation from the project will not be subject to federal income taxes and AGDC can issue tax-exempt debt, according to the Tuesday release. Those prospective benefits were selling points to legislators skeptical of Gov. Bill Walker’s push to continue the project under state leadership. Under the previous project structure, which had BP, ConocoPhillips and ExxonMobil as equity partners with the state equal to their respective natural gas holdings, the companies concluded a flooded global LNG market and correspondingly low prices for the commodity would not allow the project to return profits at levels needed to make their investments worthwhile. As a result, the major North Slope producers suggested either slowing the design phase of the project until market conditions improved or handing it to the state to see if AGDC could make it work with the state’s tools. Meyer has said the Alaska LNG Project — with multibillion-dollar gas treatment and LNG plants on the North Slope and Kenai Peninsula and an 800-mile buried gas pipeline connecting the two — would be primarily debt-financed on the back of customer commitments and would not obligate the State of Alaska to repayments if it went sour. A copy of the five-page letter dated July 18 states AGDC is a political subdivision of the State of Alaska and therefore does not have to file a federal tax return. It does not specify whether or not partnering with private firms on the project, or partial private investment in Alaska LNG, would impact the project’s tax status. In setting the facts the opinion is based on, the letter asserts AGDC stated it may enter into “arm’s-length” natural gas or LNG sale contracts and tolling arrangements with private entities. About a year ago an executive from the global energy industry consulting firm Wood Mackenzie said during legislative hearings that a project not subject to federal taxes under a state-owned gas tolling model as proposed by AGDC could be competitive at current energy market prices; however its ultimate success would be dependent upon a number of other factors as well. Wood Mackenzie’s Dave Barrowman estimated the previous equity-owner model with high returns for the producers would require contracts with Asian buyers for LNG priced to at least $12 per million British thermal unit, or mmBtu. A traditional third-party owned tolling structure with lower investment returns could be profitable at approximately $7 per mmBtu and a state-owned, tax-free project could be economic selling LNG at $6 per mmBtu, according to Barrowman. His assumptions were made on wholesale natural gas being sold into the project at about $2 per mmBtu. The three Slope gas owners have all said they would sell gas into the project on mutually agreeable commercial terms. Tax attorneys testified in the same hearings that while AGDC could be considered a political subdivision of the state, actually capturing tax-exempt status could be more problematic. The corporation could be required to demonstrate other sovereign powers to be recognized by the IRS as above federal taxes beyond just being state-owned, they testified. To that end, AGDC holds the state’s eminent domain powers, according to the IRS opinion. The municipally-controlled Alaska Gasline Port Authority, formerly led by Walker, also received a similar political subdivision determination from the IRS in 1999 but was unable to advance a gasline. ^ Elwood Brehmer can be reached at [email protected]

State gives conditions for ConocoPhillips to explore Tofkat leases

ConocoPhillips is on the clock again for North Slope leases it gave up years ago and has spent the better part of the last two trying to get back. Department of Natural Resources Commissioner Andy Mack issued a decision Aug. 3 giving the oil major another shot at a relatively small piece of sought-after acreage tucked between the company’s large Colville River field and Armstrong Energy’s massive and ever-growing Nanushuk oil discovery. The catch is ConocoPhillips has until Aug. 14 to agree to Mack’s decision, which comes with a long list of contingencies. In February, Mack reversed his previous ruling and denied ConocoPhillips’ application to have 22 leases totaling about 9,100 acres in the now-defunct Tofkat Unit transferred from small independent Brooks Range Petroleum Corp. Mack’s February reversal was due to ConocoPhillips not drilling an exploration well in the acreage this past winter as it had told DNR it would as a condition for approving the transfer. ConocoPhillips Alaska officials appealed the decision, contending they did not drill because residents of the Native Village of Nuiqsut — located inside the area in question — were concerned about diesel exhaust from the drilling rig drifting into the community, which is just a few miles from the chosen exploration site. The rig would have been working continuously for several weeks about three miles in the direction of the prevailing winds from the village. As a result, Nuiqsut residents asked the company to look for a new place to drill. The oil company has a longstanding surface use agreement with Kuukpik Corp. that predates the current iteration of ConocoPhillips — a company that is today the result of multiple mergers of other large oil and gas companies. Kuukpik is the Alaska Native village corporation for Nuiqsut that owns surface rights around the village. Thus, by honoring the residents’ request, ConocoPhillips appeared to be reneging on its commitment to DNR, which is obligated to do its part to ensure the potential oil resource is developed. The company also argued Mack’s decision did not accurately recount discussions between it and DNR and he did not give the company a fair hearing before making the ruling. Mack stated in the document released Aug. 3 that the “due process arguments are unfounded” and bluntly rebutted several other claims by ConocoPhillips raised throughout the lengthy process. “While ConocoPhillips Alaska’s request for reconsideration (to the February decision) largely consists of legal and policy arguments that are mostly unfounded and thus did not factor into the commissioner’s reconsideration, because these arguments were raised and are somewhat troubling, DNR is providing responses to those arguments,” he wrote. DNR is not obligated to provide the company a hearing before issuing such a decision either through the Colville River Unit agreement or department regulations, according to Mack. He wrote further that ConocoPhillips’ claim that he made his February decision based on an incomplete record is erroneous because it is the applicant’s duty to support its request. The company also contradicted itself in documents it submitted to the department; citing meetings between officials in one instance and claiming Mack did not discuss his concerns with its application in another, he continued. “If there were additional or different facts that ConocoPhillips Alaska wanted the commissioner to consider, ConocoPhillips Alaska could have amended its application to provide those facts,” Mack wrote. Brooks Range Petroleum was unable to develop the area because it could not secure a land access agreement with Kuukpik Corp. The state and Arctic Slope Regional Corp. share subsurface rights, but the state holds ultimate decision-making authority if it consults with ASRC, a key part of a 1991 court settlement to resolve a court dispute. To that end, a DNR release that accompanied the decision states that ASRC will also have to agree to the terms of the decision if oil exploration of the area is to progress. “It’s important for the State of Alaska to find common ground with our oil industry partners and local stakeholders as we work to bring much-need oil to the trans-Alaska pipeline,” Gov. Bill Walker said in the DNR release. “To get the full benefit of the decision, at least 80 percent of the hires must be Alaskan. ConocoPhillips has a strong record of training and hiring Alaskans. Because jobs in Alaska should go to Alaskans, my team and I will continue to ensure strong local hire provisions on this and other projects.” Kuukpik CEO Lanston Chinn said the corporation, in representing Nuiqsut, continues “to seek a fair and balanced approach towards any oil and gas activity.” Similarly, ASRC spokesman Ty Hardt wrote in an email that the company will be discussing any potential concerns with the residents of the village, who are its shareholders as well. Mack said in an interview that the state certainly values the concerns of Nuiqsut residents, but it will continue to focus on advancing its interests regarding the former Tofkat area as any potential remaining issues between Kuukpik and ConocoPhillips regarding the location of drilling activity is a matter between two private parties. According to DNR, ASRC must also approve of the decision as a joint resource owner in the area. “We have executive rights under the (1991) decision, but they are certainly a resource owner in every sense and we view them as a really important partner in this process and when we go to make decisions about units which are affected by the settlement decision, ASRC is also an entity that approves those unit decisions,” Mack said. “This is applied across almost every decision we’ve made with the Colville River Unit since its inception.” ASRC objected to DNR’s prior attempts under former Commissioner Marty Rutherford to put the leases in question up for bid in a lease sale, alleging the state had not fulfilled its responsibilities to consult with the Native corporation on the issue. In late June 2016 ASRC subsequently informed the department it would transfer its share in the leases to ConocoPhillips regardless of what the state decided. ConocoPhillips held the acreage in the early 2000s but had to give it back to the state after failing to meet drilling requirements. (At the time, ConocoPhillips referred to the area as Titania, a fairy queen character in William Shakespeare’s play “A Midsummer Night’s Dream.” Subsequently, Tofkat is an acronym for: The Opportunity Formerly Known As Titania.) Mack’s most recent ruling gives ConocoPhillips the opportunity to add the Tofkat area to the Colville River Unit if it drills a well into the Nanushuk formation by May 31, 2018. If the company drills the well and wants to keep pursuing the prospect it will have to make a $3 million bid replacement payment to DNR by Aug. 15, 2018, in-lieu of the money the state would potentially get for putting the leases up for sale. ConocoPhillips would additionally have to commit to drilling a second well by the spring of 2020. If the company decides to further develop the area after 2020 and bring it to production, ConocoPhillips would need to make another $4 million bid replacement or employ at least 15 percent North Slope residents and 80 percent Alaskans on the project. Achieving the Alaska hire requirements would cut the $4 million bid replacement to $3.5 million. The total payment amount of up to $7 million was based on the winning bids for recently leased acreage nearby, which went for between about $1,000 and $3,500 per acre, according to the decision document. Mack wrote that $7 million is appropriate for the size of the area, particularly when a deduction for ConocoPhillips’ ability to hopefully bring it into production quicker than a new lessee is factored in from the state’s perspective. Failing to meet any of the aforementioned requirements, or deciding not to develop the leases, would terminate the Colville River expansion and the company would return the leases to the state, per Mack’s decision. ConocoPhillips spokeswoman Natalie Lowman said the company is reviewing the document and she couldn’t comment further at this time. Mack’s February ruling gave ConocoPhillips the option to make good on its promise and still drill the well last winter, which included putting up a $2.5 million performance bond that DNR would return upon completion, but that was also a tight timeline on which to drill from an ice pad before spring. ConocoPhillips did not agree to those terms and instead filed a request for reconsideration. A prior 2016 ruling from former Oil and Gas Division Director Corri Feige denied the lease transfer on the grounds that it was in the state’s best interest to put the acreage up for bid in a lease sale, start fresh and gain potentially millions of dollars in bid revenue. Mack eventually overruled Feige on the premise ConocoPhillips would be drilling early in 2017. ^ Elwood Brehmer can be reached at [email protected]

Unpaid credits lead to pause in BlueCrest drilling

BlueCrest Energy Inc. is preparing to pause drilling work at its Cook Inlet oil development because the State of Alaska owes the company about $75 million in refundable tax credits, but CEO Benjamin Johnson said he hopes the hiatus will be short-lived. Fort Worth, Texas-based BlueCrest is the sole owner and operator of the Cosmopolitan oil project on the edge of the Inlet near Anchor Point on the Kenai Peninsula. The company is currently drilling a lengthy production well, which is close to done and should be ready to flow oil sometime in September, Johnson said. Once that well is done and mechanical repairs are made to the first well BlueCrest finished drilling early this year, the company will be forced to suspend drilling operations until alternative financing can be secured. That will impact the roughly 300 BlueCrest and contract drilling employees that are currently working at the site, according to Johnson, but he hopes only temporarily. “We were hoping we could squeak by and make it without any additional tax credits; we’re working to try and avert that (drilling stoppage),” he said in an interview. “Hopefully in the best case we’re pausing briefly, only for a month or two, on the drilling. It might be longer; we just don’t know.” The state has paid BlueCrest $27 million in tax credits since the company purchased the project in 2012, but the company now holds about $75 million in refundable credit certificates and expects to earn another $15 million for eligible drilling and development work done at Cosmo before July 1, Johnson added. The Legislature passed House Bill 111 July 15 with a retroactive effective date to end the North Slope and Cook Inlet oil and gas tax credit programs July 1. Gov. Bill Walker signed HB 111 into law July 27. With drilling work and production facilities, Cosmopolitan is about a $525 million project overall, he said further, meaning the company has invested about $400 million of private capital. Walker has taken significant heat from industry representatives and many Republicans in the Legislature for vetoing a total of $630 million of tax credit payments in 2015 and 2016, contending the state could not afford to spend the money and further drain savings dwindling from years of ongoing budget deficits in the $3 billion range. The governor has also said repeatedly he would be willing to start paying off the obligation as soon as the Legislature passes a plan to resolve the deficits and put the state on more solid financial footing. However, it was some of those same Republicans in the Senate that proposed the immediate end to the program. And this year the Legislature appropriated just $77 million — the statutory minimum — to pay down the $700 million-plus obligation. Walker sponsored legislation passed last year to phase out the credits in Cook Inlet over several years, but HB 111 finished off the program sooner. Also because of unpaid tax credits, , BlueCrest also received modifications last December to a $30 million loan it took out with the state-owned Alaska Industrial Development and Export Authority for its powerful drilling rig with a 30,000-foot reach. The AIDEA board of directors unanimously approved the minor loan changes. Johnson said his company will have no problem making the monthly payments on the loan, noting the rig — presumed to be the largest onshore drill in the state — has a value far exceeding the loan amount; AIDEA also has exclusive title to the rig, according to loan documents, which cost about $40 million to build and get to Alaska. BlueCrest and other companies holding oil tax credits could sell their certificates at a reduced rate to the large North Slope producers that could use them against their own production taxes, but the viability of that market is unclear, particularly given low oil prices have dramatically cut down on producers’ state net profits-based production taxes. While his company is trying to move ahead on further drilling with or without the credits, Johnson said they were imperative in drilling the company’s first $45 million offshore well in 2013 that proved up the Cosmo field. The above ground portion of BlueCrest’s Cosmopolitan project is onshore; however the angled oil wells are aimed at an oil pool that is about three miles offshore and 7,000 feet underneath Cook Inlet. BlueCrest is currently producing less than 200 barrels of oil per day from a previous exploration well drilled by ConocoPhillips in 2001. That well has mechanical plugs that have prevented additional oil flow, according to Johnson. The well completed early this year also needs repair after a service company’s part broke, he said, and that work should be done fairly quickly with the rig after the current drilling is finished. When the two new oil wells come online Johnson said they should each exceed the 1,000 barrels per day of production the company originally expected. He is clearly excited about Cosmo’s potential, saying there is enough oil to continuously drill there for at least seven years. “We’ve drilled all the way across the reservoir and we have confirmed that literally every inch of it is productive — is good rock, has oil saturation — so it’s just a matter of getting these wells to flow the oil out,” Johnson said. “There are many hundreds of millions of barrels of oil in the ground, absolutely confirmed. The question is what percentage of that do we get and how fast will it come.” The Cosmopolitan field also contains a large natural gas cap, but limited local demand and shifting state tax policy have delayed BlueCrest’s plans to develop it via an offshore platform, company officials have also said. Elwood Brehmer can be reached at [email protected]

On-time performance dips as Alaska Air integrates Virgin

Alaska Air Group Inc.’s financials are still very strong after turning a $296 million profit in the second quarter, but company executives acknowledge uncharacteristic operational challenges have beset the airline company as it continues to integrate Virgin America into its formerly stellar business. “To be direct, our operational performance has not met our expectation in the first half of the year, but we’re on the road to recovery now,” said Brad Tilden, CEO of the Seattle-based parent company to Alaska Airlines, regional carrier Horizon Air and of-late Virgin America. Tilden made his comments during a July 26 conference call with Alaska Air Group investors about the quarterly earnings report. “Despite starting the year in the back of the entire pack, our team has rallied and we’re now in the No. 2 spot in on-time performance among the six largest airlines in the United States,” he said further. “I’m proud of our team, but we have more work to do.” Alaska Airlines has long overcome operating in one of the harshest weather states to be one of the top performing major domestic carriers and has many industry awards to prove it. In 2016, more than 87 percent of the airline’s flights arrived on time, making it the best large carrier in terms of on-time performance for the seventh consecutive year, an accolade the airline has understandably touted. However, this year things have slipped. Through June, 80.5 percent of Alaska’s flights this year had arrived on time, down from 88.1 percent through the first six months of 2016, comparatively. The decline in the primary operational metric performance has been even more precipitous for Virgin America since officially being taken over by Alaska Air Group last December. Virgin America’s on-time performance is off 12.2 percent for the first half of 2017; just 64 percent of its flights have been on time this year. It should also be noted — as Tilden alluded — that the airlines’ performance is improving. Nearly 83 percent of Alaska’s flights pulled up to a gate when they were supposed to in June and more than 67 percent of Virgin’s flights did the same. The trends are similar for Horizon Air’s flights. Horizon operates flights for Alaska Airlines between Anchorage, Fairbanks and Kodiak. Company executives did not offer many specifics as to why so many more flights have been late, but Tilden attributed part of the problem to increasing nationwide airport congestion, saying it has been particularly bad in Seattle, San Francisco and Los Angeles, which are primary Alaska and Virgin America hubs. “Our team is working on a playbook that will standardize across the various parts of our operation and our customer communications organizations how we handle — or how we’re going to handle — typical ground delay programs and irregular operations. In spite of the on-time struggles, Tilden noted that the company’s in-house customer satisfaction rating for the quarter was very near an all-time high; Alaska Airlines earned its 10th consecutive J.D. Power quarterly customer service award; and Virgin America was again rated as the best domestic airline by Travel+Leisure for the 10th year running. Financials As for the finances, Tilden said about $30 million of the $296 million profit was attributable to Virgin, meaning Alaska’s and Horizon’s business roughly matched the $263 million record profit Air Group turned in the second quarter of 2016 before acquiring Virgin America. The profit, which translated to $2.38 per share of Air Group stock, was on the back of $2.1 billion in revenue. The company paid a dividend of 30 cents per share during the quarter, up from 27.5 cents per share in 2016. Alaska Air Group stock closed trading on the New York Stock Exchange July 28 at $86.32 per share, down slightly from its pre-earnings report price of $87.13 to close July 25. Air Group also blended its 2016 financials with Virgin America’s equivalent pre-merger results in an attempt to provide at least a rough comparison of how the 2017 figures compare year-over-year, understanding the numbers to not account for post-merger operational or managerial changes. Based on those results, the $2.1 billion in quarterly revenue is a 10 percent increase from 2016 and the $3.8 billion in revenue year-to-date reflects 6 percent growth. Without including Virgin America’s 2016 financials in the comparison, Alaska Air Group’s revenue is up about 40 percent year-over-year. Total assets grew to $10.7 billion at the end of the quarter. It started 2017 with $9.9 billion in assets. The company generated $1.1 billion in operating cash flow, $512 million of which was committed to capital projects, leaving $572 million in free cash flow during the quarter. Alaska Air Group held $1.9 billion in cash and marketable investments at the end of June. Fuel, often an airlines largest expense, was up 11.8 percent on a per gallon basis for the quarter to $1.71 per gallon. For the year, Air Group, which hedges on fuel, is paying 24 percent more per gallon at an average of $1.75, compared with $1.41 per gallon in 2016. After adding Virgin America’s fleet of nearly 70 Dutch Airbus aircraft, fuel efficiency has also slipped by 2.3 percent on a capacity-flown versus gallons burned basis in 2017. Fuel efficiency is a metric Air Group has consistently improved in recent years and company leaders have used to support the purchase of many new Boeing 737s — the only aircraft Alaska Airlines flies. Fuel efficiency was down 3.1 percent for the quarter year-over-year. “Generally speaking, I would characterize our cost performance as needs improvement,” Air Group Chief Financial Officer Brandon Pedersen said during the earnings call. “It’s clear that the operational challenges and integration complexities have been driving some cost creep, but we’re also not at peak performance applying the tight cost management practices that we’ve relied on for many years now.” On a positive note, the company’s debt-to-capitalization ratio was down to 55 percent at the end of the quarter after starting the year at 59 percent. Air Group’s debt-to-cap was 25 percent a year ago before closing on Virgin America Pedersen said he expects to get to the 51 percent to 52 percent debt-to-cap range by year’s end. Ultimately, he has said the company hopes to return to the 40 percent debt-to-cap range. Company executives have long stressed a desire to be a strong industrial-style company with an investment-grade balance sheet despite being in a highly volatile industry with a history of airlines that overextend their debt leverage. Looking ahead, Tilden said he expects to enter arbitration with Alaska pilots in August with a decision likely sometime in October. To that, Pedersen said the company’s proposal would increase pilot costs by $140 million per year and equate to a 3 percent increase to consolidated costs outside of fuel. “It will reduce our pretax margin by more than 1.5 points. And it will, by far, be the biggest increase ever for Air Group from a new labor agreement,” Pedersen said. The company agreed to an amended contract with Horizon pilots earlier this year after the pilots’ union alleged Horizon had offered new pilots hiring bonuses outside of its contract terms. On integrating Virgin America into Alaska Airlines, Tilden said he expects to have a single customer loyalty program, one HR and payroll system and a single financial system by the end of the year. A single operating certificate from the FAA is expected by the end of the first quarter next year, he added. Finally, Pedersen said a decision has not been made as to whether Alaska Airlines will continue with its all-Boeing fleet once the airlines are fully blended. “While we recognize there’s a great deal of interest in this question, it’s not urgent that we decide as the Airbus leases don’t even start to expire until 2019,” he said. To that end, Tilden has said Air Group has a very strong relationship with Boeing, a fellow Seattle company, that it wants to retain.

AEDC: Recession extended by inaction

Anchorage Economic Development Corp. CEO Bill Popp believes Alaska’s recession will last another year, due in large part to continued inaction from state lawmakers. Popp spoke July 26 at AEDC’s annual three-year Anchorage economic forecast presentation. He said the absence of state fiscal reforms has led to uncertainty from businesses and consumers who don’t know where and at what level taxes or further spending cuts will be levied has artificially slowed economic activity in Anchorage and statewide. Several years of spending cuts have helped shrink the state’s annual deficits from nearly $4 billion to about $2.5 billion, but a deal to completely eliminate them has not been reached. While AEDC is naturally Anchorage-centric, the city is Alaska’s economic hub and its situation is therefore generally on par with the state as a whole. “Because of the lack of decision-making in Juneau on a long-term policy that says ‘this is the direction the state is going,’ we are now extending our forecast for a third year of recession — 700 jobs lost (in Anchorage) in 2018,” Popp said. “We should not be in this situation.” Through June, the city had lost about 1,600 jobs this year, or about 1 percent of its labor force. Popp said job losses are moderating somewhat, but that’s little consolation to those individuals handed pink slips. The expectation is Anchorage will end the year down 2,100 positions, which is a slight improvement over AEDC’s January forecast of 2,200 lost jobs this year. The city lost about 3,000 jobs last year, according to AEDC. Those losses were led by about 1,400 jobs shed in the professional and business services sector, which includes architectural and engineering firms hit hard by severe contraction in state and oil and gas industry capital spending. The oil and gas sector was also down about 800 jobs last year, but Popp noted about half of those positions were the end result of Shell cutting its Arctic offshore oil exploration program, which was announced in the latter half of 2015. Anchorage retailers contracted by about 300 jobs last year and AEDC expects a similar situation this year as consumer spending slows somewhat. Still, Alaska storeowners are faring better than their Lower 48 counterparts who are falling victim to new consumer trends despite a healthier overall economy. “Alaska retailers are a bright spot on (national retailers’) ledgers and they are squeezing that bright spot to drive a few more dollars into their overall balance sheet to help them out with the debacle that they are dealing with right now, which is known as the Amazon effect,” Popp said. Conversely, he said the health care industry continued to grow and exceed expectations, adding 700 jobs in Anchorage last year; however, policy changes in Washington, D.C., and cuts to federal funding could quickly reverse the long trend of health care job growth if they ever materialize. Leisure and hospitality businesses also added 200 jobs, bolstered by record numbers of tourists traveling to the state due in part to a strong Lower 48 economy. Anchorage’s unemployment rate averaged 5.3 percent last year and is at 5.8 percent so far in 2017. Comparatively, Alaska as a whole had a 6.8 percent unemployment rate in June. The national rate was 4.4 percent and near its lowest levels in more than 15 years. Overall, employment in Anchorage is down about 3 percent from its 2015 peak, according to AEDC’s figures. On a macro level, Alaska’s recession was spurred by inflated oil industry and state spending driven by $100-plus per barrel prices, Popp said, which is generally understood, but he also offered some insight into what that did for Alaska. “Folks, we had an oil price bubble go through the state economy. It started in 2010 and ended in 2014 and in that five years — we’re still trying to figure out what the actual number is, but we think conservatively the additional revenues pumped into the state economy equated to somewhere between $12 (billion) and $14 billion. What could go wrong with that?” Popp said. “It basically repeated what happened to us on a much smaller scale back in the 1980s with the housing price bubble we had.” As a result, the oil industry is resetting to pre-2011 employment levels, he added, and broader figures show Alaska’s economy in general is following its primary driver. In 2016, Alaska averaged 332,400 jobs for the year based on state Labor Department figures. That was the fewest jobs since Alaska had an average labor force of 329,500 workers in 2011. Despite the job losses, other fundamental indicators show the local economy is stumbling, not crumbling. Housing prices in Anchorage — generally viewed as higher than they should be due to a tight market — have stabilized. The average price for a single family home sold in the city was $366,000 last year and AEDC expects it will be flat this year after peaking at $367,000 in 2015. Housing inventory in Anchorage is also down about 20 percent year-over-year, according to AEDC. “We aren’t really concerned with the real estate market at this time,” Popp said. Additionally, Alaska continues to have the lowest foreclosure rate in the country, he noted. And for the time being, money continues to flow into Alaska’s banks and credit unions. Cash on deposit was about $19 billion in the state last year and AEDC expects it will “well exceed $20 billion” when the numbers come out in September, Popp said further. He characterized that as further evidence that while the state’s politicians may not have started the recession, they could do a lot to end it. Other state economists have called it a “government-induced” recession on the premise that the 40 percent-plus decline in annual government spending in recent years pushed Alaska’s economy into the negative, which was not seen during previous oil industry contractions when government spending was mostly steady. “Money is going to safety and sitting on the sidelines because they have no clue — people have no clue whether their businesses or individuals — what their taxes are going to be next year because we have a state fiscal crisis that is putting us in a spot that is giving us a crisis of confidence,” Popp commented. Finally, he said an Anchorage consumer optimism survey AEDC conducted earlier this year shows people are feeling the recession but still fairly comfortable with their personal finances. However, negativity reigns in people’s views about the future of Anchorage’s economy, which is especially troubling given the city has a consumer-based economy, Popp said, noting the survey was taken at the height of the contentious budget debates in Juneau. “We need that solution if we’re going to get out of this recession,” he said. Popp ended his speech by once again pleading for the Legislature and governor to reach a compromise on a long-term fiscal plan for the state and the crowd of Anchorage business types responded with a strong applause. ^ Elwood Brehmer can be reached at [email protected]

Fireworks fizzle after alleged threat over vote

The political fireworks lit by Sen. Lisa Murkowski’s vote against Senate Republicans’ push to quickly repeal the Affordable Care Act so far appear to have been duds, which could be a good thing for many in Alaska’s resource development industries. The seemingly odd mix of health care and resource issues was blended July 26 when Department of the Interior Secretary Ryan Zinke called Murkowski and Sen. Dan Sullivan separately on behalf of President Donald Trump and expressed displeasure with her vote. Later that day Sullivan’s spokesman Mike Anderson wrote in an email to the Journal that the senator — who unlike Murkowski voted to open floor debate on repealing and replacing the heath care law — was “very concerned about Alaska’s economy” as a result of his call with Zinke. As the nation’s chief manager of federal lands the Interior secretary is often rhetorically referred to as Alaska’s “landlord” given the federal government controls more than 60 percent of the acreage in the state. That acreage includes the coastal plain of the Arctic National Wildlife Refuge and the National Petroleum Reserve-Alaska; areas Republicans view as the next frontiers for North Slope oil and natural gas development. Zinke subsequently called reports that he called to threaten the Alaska senators over Murkowski’s health care votes “laughable,” as reported by The Associated Press July 31. He said he regularly talks with the senators and has a good working relationship with them. Zinke made a several-day trip to Alaska in late May, touring North Slope oil infrastructure and participating in Memorial Day ceremonies in the state. He also signed a secretarial order at the Alaska Oil and Gas Association’s annual conference in Anchorage May 31 directing Interior Department agencies to update oil and gas resource assessments for the coastal plain of the Arctic National Wildlife Refuge and the National Petroleum Reserve-Alaska. The resource assessments are seen as precursors to potential action by the Trump administration to allow more oil and gas activity in the North Slope federal holdings. Opening the ANWR coastal plain to exploration drilling would require an act of Congress. Zinke said repeatedly during his trip to the state that Alaska must play a lead role in the administration’s quest for “American energy dominance.” Murkowski spokeswoman Karina Petersen confirmed the senator first took a call from President Donald Trump and then after the July 25 vote to open debate took another call from Zinke, “who passed along to her during that call that the president wasn’t pleased with her vote,” Petersen wrote in an email to the Journal. Murkowski has long been an ardent critic of the Affordable Care Act, stressing the fact that the average health insurance premium for individual Alaskans buying their own policy under the law is more than $900 per month, which is the highest in the country. However, of late she has also been one of numerous Republicans who have also been highly critical of the process their party’s leadership has chosen in drafting replacement legislation — and the legislation itself. The bills have mostly been written in private without the traditional committee process or the public or Democrat input Murkowski contends is necessary to reform a system as important and complex as the nation’s health insurance. In the end, Murkowski said in multiple statements from her office that she chose proper process over her party’s political priorities and hopes a health insurance reform bill can still be drafted and garner her support. That is not to say Murkowski did not engage in what looked like political gamesmanship as well. She chairs the Senate Energy and Natural Resources Committee, which has oversight of the Interior Department, and shortly before news broke of Zinke’s call with Sullivan she postponed a July 27 hearing at which six of the president’s mid-level Energy and Interior department appointees were to be considered. Committee spokeswoman Nicole Daigle said the hearing — announced less than a day before it was suspended — was postponed due to uncertainty about the Senate’s scheduling and a new date is being worked on. As for Sullivan’s concerns about Alaska’s economy, a prominent state business leader said he hasn’t seen evidence of retribution against the state by the Trump administration. Alaska Chamber CEO Curtis Thayer said he also got a call from the nation’s capital July 26, but his call was from a friend there who said if he received a call from an unknown number he should answer it, as it would likely be from Zinke’s office. Thayer then got in touch with Rep. Don Young’s and Sullivan’s offices and asked if there was anything he should be aware of, he said. According to Thayer, he was told Sullivan and Young had both spoken to Zinke about resource development issues in their state and Young had then followed up with a call directly to the White House. Thayer said he believed he was on a list of Alaskans Interior officials were to call because he represents much of the state’s business, and resource development, community. “The call (from Zinke’s office) never came so I can’t really guess what it was about but I assume that there was the linkage between health care and Alaska’s resource development,” he said. To that end, a ConocoPhillips Alaska spokeswoman said the company has not noticed any changes to the permitting efforts for its projects in the NPR-A. Daigle also said there is no indication the Interior Department has changed any of its policies regarding Alaska of late. Sullivan spokesman Anderson said there was nothing to add in response to questions about whether the senator’s concerns had been validated. Thayer said he would be surprised if the administration actually tried to exact revenge in any material form on Alaska as a result of Murkowski’s health insurance votes. “I just don’t see with Secretary Zinke visiting here in May and the comments he made publicly — and the direction of the delegation — I don’t see a harsh penalty,” he said. “I think there could be a reminder that we need to work together; you have things we need and we have things you need, but I just don’t see it being a long-term penalty — penalizing the state.” Elwood Brehmer can be reached at [email protected]

CP earns $199M in Alaska but down $3.4B overall

ConocoPhillips netted $199 million in Alaska in the second quarter, but still lost $3.4 billion overall as the oil major continues to reform its operations to be more competitive at lower market prices. Despite the face value hit to his company’s balance sheet, ConocoPhillips CEO Ryan Lance said in a July 27 statement that substantial progress was made in the second quarter in the ongoing effort to transform the company. “In just six months we’ve exceeded the three-year plan we laid out in late 2016. We’ve reset our portfolio through strategic dispositions that generated substantial proceeds, allowing us to accelerate key financial and operational priorities,” Lance said. “We are on track to far surpass our initial debt reduction and shareholder payout targets, while accelerating strong underlying financial and operational performance. We remain focused on lowering our breakeven price for the business, generating free cash flow and delivering strong per-share growth with improving returns through price cycles.” Companywide, ConocoPhillips retired about $3 billion of debt ahead of schedule and repurchased another $1 billion worth of outstanding shares during the quarter, according to the earnings report. For the year, company leaders expect to buy back about $3 billion in stock, sell off more than $16 billion of assets and end 2017 with less than $20 billion in debt, according to a release accompanying the financial report. The company has had trouble selling its small and aging but historic Kenai LNG plant this year; it announced earlier this month the plant would be put in long-term “mothball” status as world market conditions — that don’t appear to be changing anytime soon — have killed the economics of LNG exports from the Cook Inlet facility. ConocoPhillips started the year with $26.4 billion in debt and $35.6 billion in equity. It held $29.4 billion of debt and $39.4 billion of equity at the start of 2016. As an oil and gas production, or “upstream,” company, ConocoPhillips does not have the downstream refining and retail segments to its business that have helped other petroleum giants better weather several years of lower oil and natural gas prices. Year-to-date the company has lost $2.8 billion after absorbing $3.6 billion of losses in 2016. The $3.4 billion quarterly loss was driven by a $2.5 billion loss in the Lower 48 caused by nearly $3.9 billion impairments, or the reduced value of company assets. Comparatively, the company made more than $1.3 billion in profits from its Canadian operations during the quarter. The negative quarter translates to losses of $2.78 per share. ConocoPhillips stock closed trading July 27 up 2.2 percent for the day at $44.66 per share on the New York Stock Exchange. The company turned a $586 million profit in the first quarter of the year. Despite the challenging bottom line figures, ConocoPhillips generated nearly $8.9 billion in total revenue during the second quarter, up from $7.7 billion in the first quarter and $5.5 billion of revenue in the second quarter of 2016. It realized an average price of $36.08 per barrel of oil equivalent sold during the quarter, up from $27.79 per barrel year-over-year. ConocoPhillips’ worldwide production was down 9.8 percent from the first quarter and down 7.1 percent from the second quarter of 2016 at 1.43 million barrels of oil equivalent per day. For the company’s Alaska business, the second quarter was largely more of the same. Oil production was unsurprisingly down slightly quarter-over-quarter, but up about 4 percent from the second quarter of last year, averaging 169,000 barrels per day. North Slope oil production typically dips in the spring and summer months from the peak winter work season. The company spent $229 million on capital projects in the state during the quarter, on par with the first quarter and up from $183 million in 2016. Alaska has consistently accounted for about 20 percent of the company’s capital budget of late, which was just more than $1 billion for the quarter worldwide. A chunk of that money in Alaska went to progressing two projects. Facilities at the 1H NEWS (Northeast West Sak) drill site in the Kuparuk River Unit are ready for startup, according to the report. The project is expected to produce up to 8,000 barrels of oil per day. And the winter work season at ConocoPhillips’ larger, western Slope $900 million Greater Moose’s Tooth-1 project in the National Petroleum Reserve-Alaska wrapped up during the quarter with two bridges, a 12-acre drilling pad and 14 miles of pipeline tying the project to existing infrastructure completed, according to Alaska spokeswoman Natalie Lowman. GMT-1 is expected to produce its first oil in late 2018 with peak production expected to hit about 30,000 barrels per day. It is the first project on federal leases in the NPR-A, as other projects the company has developed in the reserve were on Alaska Native corporation holdings within the borders of the federal acreage. BP reports 2Q profit BP reported second quarter earnings of $144 million Aug. 1, a vast improvement over the $1.4 billion loss the London-based company absorbed in the second quarter of 2016. The $144 million profit was on on the back of $6.9 billion in operating cash flow for the quarter. BP’s second quarter operating revenue base was $4.9 billion when its ongoing settlement payments from the 2010 Deepwater Horizon oil spill were factored into its balance sheet. “We continue to position BP for the new oil price environment, with a continued tight focus on costs, efficiency and discipline in capital spending,” BP CEO Bob Dudley said in a formal statement. “We delivered strong operational performance in the first half of 2017 and have considerable strategic momentum coming into the rest of the year and 2018, with rising production from our new upstream projects and marketing growth in the downstream.” BP has increased its upstream production by 6 percent in the first half of 2017, despite an 18 percent decrease in per unit production costs. First-half earnings from its retail business were also about 20 percent better than 2016, according to the company. Year-to-date BP has managed nearly $1.6 billion in profits juxtaposed by more than $2 billion in losses through the first six months of 2016. BP, which operates the Prudhoe Bay oil and gas field on the North Slope, also has an agreement with the Alaska Gasline Development Corp. to help the state advance the Alaska LNG Project through the end of the year. Elwood Brehmer can be reached at [email protected]

Zinke call has Sullivan ‘very concerned’ after Tuesday vote

(Editor's note: This story has been updated to include a Thursday morning statement from Sen. Murkowski.) There may be something more in store for Alaska than a critical tweet from President Donald Trump to the state’s senior senator. On Wednesday morning the president scolded Sen. Lisa Murkowski on Twitter for her Tuesday vote against opening debate in the Senate to repeal the Affordable Care Act, writing that she “really let Republicans, and our country, down yesterday. Too bad!” The “Too bad!” portion of the social media post might turn into “too bad for Alaska.” According to Sen. Dan Sullivan’s spokesman Mike Anderson, Sullivan took a phone call from Interior Secretary Ryan Zinke Wednesday. “As a result of that call, he’s very concerned about Alaska’s economy,” Anderson said in a statement to the Journal. Anderson did not elaborate and what exactly worries Sullivan is unclear at this point. A spokeswoman for Murkowski did not immediately respond to requests for comment late Wednesday, but offered a statement from the senator Thursday morning. "I pledged early on that I would work with the president to help advance Alaska's interests. I will continue to do that — to help build and strenghten our economy, keep the promises made to us as a state, and ensure access to health care," Murkowski said in the statement from her office. "While I have disagreed with the Senate process so far, the president and I agree that the status quo with health care in our country is not acceptable and that reforms must be made. I continue working to find the best path forward for what I believe will achieve that — a committee process where we can work issues in the open and ensure Alaskans have the health care choices they want, the affordability they need, and the quality of care they deserve." Zinke made a several-day trip to Alaska in late May, touring North Slope oil infrastructure and participating in Memorial Day ceremonies in the state. He also signed a secretarial order at the Alaska Oil and Gas Association’s annual conference in Anchorage May 31 directing Interior Department agencies to update oil and gas resource assessments for the coastal plain of the Arctic National Wildlife Refuge and the National Petroleum Reserve-Alaska. The resource assessments are seen as precursors to potential action by the Trump administration to allow more oil and gas activity in the North Slope federal holdings. Opening the ANWR coastal plain to exploration drilling would require an act of Congress. Zinke said repeatedly during his trip to the state that Alaska must play a lead role in the administration’s quest for “American energy dominance.” As the lead manager of federal lands across the country, Zinke is ostensibly Alaska's primary landlord. The federal government holds 222 million acres in Alaska; about 60 percent of the state, meaning his decisions could have a major impact on how Alaska's primary resource extraction industries fare. Murkowski told NBC Nightly News Wednesday that she doesn’t think it’s prudent to worry about “a statement or a response that causes you to be fearful of your electoral prospects. We’re here to govern. We’re here to legislate. “We’re here to represent the people who sent us here. So every day shouldn’t be about campaigning. Every day shouldn’t be about winning elections. How about doing a little bit of governing around here? That’s what I’m here for.” On Wednesday, Murkowski, who chairs the Senate Energy and Natural Resources Committee, postponed a Thursday morning committee meeting at which six of the president’s mid-level Energy and Interior department appointees were to be considered. A committee release announcing the change did not offer a reason for the postponement and said a new time for the hearing hadn’t yet been determined. Murkowski and Maine Sen. Susan Collins were the only Republicans to vote against opening debate on the Senate floor to repeal and possible replace the Affordable Care Act with a Republican bill. Their “no” votes left the Senate in a 50-50 tie after Sen. John McCain, R-Ariz., had to fly across the country to vote “yes” following surgery to remove a brain tumor and being diagnosed with cancer 10 days ago. Then Vice President Mike Pence had to vote to break the tie open up to 20 hours of floor debate over the coming days. She explained the rationale behind her vote in a Tuesday afternoon statement from her office, emphasizing again that major policy items like health care reform should be put through the rigors of the standard committee process, “where stakeholders can weigh in and ideas can be vetted in a bipartisan forum,” Murkowski said. “I voted ‘no’ today to give the Senate another chance to take this to the committee process.” Alaska has the highest health care costs in the country and Murkowski has long stood with her fellow Republicans in railing against the Affordable Care Act and voted to repeal “Obamacare” in prior years when a presidential veto was assured. With an unusually small individual insurance market, premiums in Alaska’s individual market have skyrocketed well beyond even what other states have seen. At $927 per month, the average monthly health insurance premium in Alaska’s individual market is also the most expensive in the country. That is despite a $55 million subsidy from the State of Alaska in 2016 to Premera Blue Cross Blue Shield, the lone insurer left in the state’s individual market, to keep premiums from increasing further. The funding through the Alaska Reinsurance Program passed in 2016 held rates down to a 7 percent increase rather than a projected 42 percent. Earlier this month the federal Centers for Medicare and Medicaid Services approved an application by Gov. Bill Walker’s administration to get the feds to cover the lion’s share of the reinsurance program for the next five years using savings from smaller premium subsidies amounting to $332 million. However, Murkowski has also opposed the current versions of Republican health insurance reform — crafted in closed offices — that would cut Medicaid funding and are projected leave more residents in her state uninsured. Also on Wednesday, Murkowski and Sullivan signed onto a letter with 34 other senators in support of the Interior Department’s new Outer Continental Shelf Oil and Gas Leasing Program for 2019-2024, which could open large areas of federal waters off Alaska closed to industry activity under President Barack Obama. Elwood Brehmer can be reached at [email protected]

Delegation, Walker want new route around Cooper Landing

Alaska’s congressional delegation and Gov. Bill Walker have once again joined forces to fight a federal agency decision, this time demanding a new route be chosen for diverting the Sterling Highway around Cooper Landing. Walker, Rep. Don Young and Sens. Lisa Murkowski and Dan Sullivan sent a joint letter July 18 to the secretaries of the Agriculture, Interior and Transportation departments urging them to select an alignment that would take the Sterling Highway farther north of Cooper Landing than the path chosen in December 2015. Then, the Federal Highway Administration, an arm of DOT, selected the “G South” alternative as its preferred option, with input from the state Department of Transportation. The G South option would add about 5.5 miles of new road to the north of the town but avoid the popular Resurrection Pass Trail and Mystery Creek Wilderness area in the Kenai National Wildlife Refuge, which the highway bisects. The G South route is estimated to cost about $250 million. The governor and the delegation — with the support of many, but not all on the Peninsula — want to go with the Juneau Creek alternative, which would add 10 miles of new road but cost less at $205 million, according to the draft supplemental environmental impact statement, or EIS, for the project. They contend the Juneau Creek route provides better protection for the Kenai River and its sought-after trout and salmon because it pulls more of the highway away from the river, thus reducing the likelihood of tanker truck spills or other potential hazards damaging the river. They wrote that the Federal Highway Administration “appears to inexplicably undervalue” the opportunities for protecting fish and wildlife habitat and additional recreational opportunities the Juneau Creek route provides. “Alaskans and many others, representing a diverse array of interests and concerns, agree that the best route for a (Cooper Landing) bypass is the Juneau Creek alternative,” the letter states. “It will run 1.5 miles north of Kenai Lake, so it will not require any construction delays or new bridges crossing the rivers and will protect salmon and other key ecosystem drivers from most sediment and runoff.” The Alaska leaders also noted that a way around the small town has been sought since the late 1970s, and all the information gathered since should have steered the administration to a different conclusion. Their letter was sent to Interior Secretary Ryan Zinke and USDA Secretary Sonny Perdue because the Sterling Highway project would impact the Kenai National Wildlife Refuge and the adjacent Chugach National Forest. The transportation agencies are on the third iteration of an EIS for the project since 1982. Despite requiring less new road, the G South route is more expensive because it would require a new bridge across the Kenai River — for a total of three river crossings in the area — and reconstructing the existing Schooner Bend Bridge at the west end of the project. The Juneau Creek option would not require any additional construction over the Kenai, but would necessitate a bridge over Juneau Creek that would be the longest single-span bridge in the state, according to the Alaska DOT. Each of the alternatives would reconstruct portions of the existing highway on each end of the corridor as well. A Dec. 11, 2015, Alaska DOT press release announcing the G-South route as the preferred alternative cited the fact that it would avoid the Resurrection Pass Trail and Juneau Falls while minimizing impacts to the refuge as reasons for its selection. The senators, Walker and Young considered crossing and rerouting a short section of the Resurrection Pass Trail to be another access point to provide additional recreational opportunities. A ranging contingent of 19 Kenai Peninsula local governments and interest groups signed on to a four-page October 2016 letter from Kenai Peninsula Borough Mayor Mike Navarre submitted as public comments to the draft supplemental EIS supporting the Juneau Creek option. City leaders of Homer, Kenai and Soldotna along with local conservation groups, Alaska Native organizations and chambers of commerce also signed the letter sent from the borough offices. It describes similar concerns to those held by Walker and the congressional delegation about how the project has been evaluated, but argues the G South option is not the safest for drivers and those recreating in the area, either. “In addition to inadequately protecting the Kenai River corridor, (the) G South alternative does not meet the stated purpose and need as well as the Juneau Creek alternatives. While G South does bypass Cooper Landing proper, it fails to bypass Segment 5 (MP 51.3-55.09), the section of the project with the highest crash rate cited in the (draft supplemental EIS),” the Kenai commenters contend. “This area, particularly the segment between the Russian River Ferry entrance and Russian River Campground, is a frequently congested area with multiple parked vehicles and pedestrians along the road during peak summer fishing season.” Improving the existing road to modern design standards along the specified stretch would not alleviate the risk of pedestrian-vehicle collisions, the groups assert. “Many fishermen will continue to travel along and cross this section of the road, and the higher traffic speeds may increase the potential severity of an accident if it does occur,” the letter states further. FHA spokesman Doug Hecox said the agency has made its preferred route known but would consider the additional comments and keep all the options on the table as long as the EIS is open. A record of decision on the project is expected early next year. Alaska DOT spokeswoman Shannon McCarthy said the state provided input on the project but the route decision is ultimately made by its federal counterparts, as a vast majority of the funding for the road work would be federal money. “It doesn’t hurt to take a second look,” McCarthy said of the state’s position. She also noted that while the project evaluation has been drawn out over decades, the EIS “spun off” the several miles of completed upgrades to the Sterling Highway between the intersection with the Seward Highway and Cooper Landing. The Sterling now has wider shoulders and numerous passing lanes and turnoffs along that stretch. Absent from the concerned group of Kenai Peninsula organizations was the Cooper Landing Chamber of Commerce or any other private entity from the community at the center of the debate. While the section of the Sterling Highway through the community would remain open, many Cooper Landing business owners are against the bypass for fear it would pull potential customers away from their traveler-dependent restaurants, lodges and stores. They note the highway is only busy for a couple months during the peak of the Kenai sockeye salmon run and have pushed for improving the existing corridor. State and federal Transportation officials have said the fact that the existing highway is wedged between the river and mountains makes the requisite safety improvements cost prohibitive in some sections and completely unworkable in others. Elwood Brehmer can be reached at [email protected]

Judge denies request for more evidence in $37 million LIO claim

A judge’s decision in the case of a $37 million claim against the Legislature for abandoning its former Downtown Anchorage offices means the final ruling will likely be based on the existing public record. Alaska Superior Court Judge Mark Rindner denied a motion by the owners of the former Anchorage Legislative Information Office building on Fourth Avenue for a hearing de novo, or a hearing to submit supplemental evidence, because there are still unanswered legal questions in the case. However, he declined to detail what outstanding legal matters are still up in the air in his brief, three-page order. Rindner expressed concern during a May 19 court hearing on the matter that subpoenaing legislative records and communications between lawmakers could violate the separation of powers between the branches of government. Attorneys for 716 West Fourth Avenue LLC, the management firm that, for now, owns the six-story building, argued the 14-member Legislative Council then led by Kodiak Republican Sen. Gary Stevens denied the developers a fair hearing on their claim as no public hearings were held on the matter. Further, 716 contends Stevens did not appropriately weigh all of the evidence when he denied the $37 million claim last October. Stevens’ denial led to 716’s appeal to Superior Court. Legislators moved out of the Downtown Anchorage building late last September and into Midtown office space purchased for $11.8 million from Wells Fargo via the state capital budget. In late 2015, public pressure over the unpopular 10-year, $33 million lease pushed the council to start looking for a way out of the building, which was custom-built for the Legislature and completed in 2014. Lacking the Legislature’s monthly lease payments of about $280,000, 716 has since defaulted on its $28.6 million loan on the building with Florida-based EverBank. EverBank is also pushing to foreclose on the property as 716 has not paid on the loan — with $28.8 million in outstanding principal and interest payments — since November. The lender is also seeking a deficiency judgment against 716, which could put the developers on the hook for the difference between the foreclosure sale price and the loan balance, according to documents in a separate state Superior Court proceeding. 716 is seeking just more than $37 million from the Legislature to cover the cost of the loan and the developers’ $9 million in equity in the $44.5 million redevelopment project. Beyond rent payments, the Legislature also put up $7.5 million of state funds for improvements to the building it occupied for less than two years. The Legislative Affairs Agency, which executes business matters for the Legislative Council, told EverBank in a letter that lawmakers would be forced to leave the building because a Superior Court judge in yet a different case invalidated the Legislature’s lease on the property, determining it violated state procurement code. However, the LAA subsequently informed 716 in July 2016 the building would be vacated by invoking the “subject to appropriation” clause common in government contracts that voids the deal if the Legislature decides not to fund it, which is what eventually happened. At one point in April 2016, the state capital budget included $32.5 million to buy the building outright from 716, but Gov. Bill Walker said he’d veto the money if approved by the Legislature. Legislative attorneys have emphasized in court that using the subject to appropriation clause leaves 716 with little recourse and basically ends the case. 716 attorneys argued to Judge Rindner that the differing rationale for leaving the space indicates legislators did not act in good faith regarding the deal, which necessitates adding new evidence to the record to expose the real reason behind their leaving. Rindner said during the May hearing and wrote in his order that if new evidence were brought to light it would likely mean remanding the case back to the Legislative Council for another ruling on the claim. Juneau Democrat Rep. Sam Kito, a regular member of the committee when Stevens led it, now chairs the council. Kito often stood alone against leaving the building in votes on the matter, citing a worry subsequent court cases would put the state on the hook financially for the council’s actions. Elwood Brehmer can be reached at [email protected]

U.S. House approves King Cove road with bipartisan support

The contentious road out of King Cove is, again, halfway to being built. The U.S. House of Representatives passed standalone legislation Thursday approving a state-federal land swap to needed to facilitate construction of the 11-mile, single-lane gravel road to complete a 30-mile connection between the Alaska Peninsula communities of King Cove and Cold Bay. The King Cove Land Exchange Act passed the House by a vote of 248-179 with bipartisan support. It now heads to the Senate. Trump administration officials have supported the land exchange and road project. In late June the Interior Department approved a permit allowing the state Department of Transportation to survey the area to determine the best road corridor. The Alaska DOT estimates the road will cost about $30 million, which will likely be paid for by the state. Alaska’s congressional delegation and several Alaska governors have pushed for the road between the small, isolated communities, as it would link King Cove to the large runway at Cold Bay and provide a safer route to Anchorage for those in urgent need of medical care in a region known for treacherous weather. Gov. Bill Walker commended Rep. Don Young for getting the legislation through the House in a statement from his office. “I thank Congressman Young for accomplishing this important milestone. While the work is not yet finished, the passage of H.R. 218 is a critical step towards actually building this necessary and life-saving road,” Walker said. “State and federal agencies, our congressional and the residents of King Cove are continuing to work well towards this shared goal, and I look forward to seeing additional progress.” Sens. Lisa Murkowski and Dan Sullivan also introduced mirror legislation in the Senate. The Alaska Legislature unanimously approved a resolution supporting the road project this past winter. With a paved runway longer than 10,000 feet, Cold Bay’s airport has one of the longest civilian runways in the state and is the area’s main link to Anchorage. It is left over from a military post built during World War II. King Cove’s airport has a 3,500-foot gravel runway with mountains nearby that prevent its expansion. Over the years 19 people have died in plane crashes or waiting to get medevac service out of King Cove. However, no one has died trying to leave since 1994. “This is an issue that should have been settled a long time ago,” Young said in a press release. “In 2009, this Congress passed a land exchange piece of legislation — very similar to this. We made one mistake; we did put into it the ability for the Fish and Wildlife (Service) to make recommendations. Even then the recommendations were on the positive side. The last administration decided, under the Secretary of the Interior, not to build an 11-mile road to save my constituents — the Aleut people from King Cove — in favor of a goose. And the people of King Cove weren’t really considered.” Young was referencing a December 2013 decision by former Interior Secretary Sally Jewell to deny the land swap of about 43,000 State of Alaska acres for 206 acres of the 315,000-acre Izembek National Wildlife Refuge needed for the road corridor. Since then 63 medevacs have occurred from King Cove, with 17 of those by the U.S. Coast Guard. According to a statement from the House Natural Resources Committee, such Coast Guard medevacs cost up to $30,000 each. Jewell’s decision was lauded by local and national hunting and conservation organizations on the belief the road would damage critical breeding habitat for waterfowl, particularly the Pacific black brant. The refuge is the summer home to 98 percent of the species’ worldwide population, according to the Interior Department. Western Alaska Native groups that subsistence hunt waterfowl elsewhere that migrate through Izembek have also formally opposed the road. Opponents of the land swap also object to building a road through what is currently congressionally designated wilderness and that it would be an unprecedented turnabout in federal land management. They also argue the road, which Murkowski has continuously characterized as “noncommercial” would be used by fish processors to get their products flown out of Cold Bay. Young’s bill contains the same use restrictions for the road as were in the 2009 lands bill signed by President Barack Obama; it allows for people transport, including via taxi or bus service, but prohibits other commercial operations. Finally, some note the feds have already tried to help King Cove residents by appropriating $37.5 million in 1999 for a hovercraft and dock facilities to run over the water body of Cold Bay between the communities. The Aleutians East Borough eventually abandoned. After spending $9 million on a hovercraft in 2004, the Aleutians East Borough took the hovercraft out of service in 2010 saying it was too expensive to operate and couldn’t handle rough water. An amendment to Young’s bill offered by Arizona Democrat Rep. Raul Grijalva would have required the State of Alaska to repay $20 million of the hovercraft money before the land swap could be executed. The amendment, which failed, was criticized by Young who said it would penalize the state for an unreliable hovercraft operation put together by President Bill Clinton’s administration that the people of King Cove never wanted. Elwood Brehmer can be reached at [email protected]

Former DNR commissioner tapped for high Interior post

Another Alaskan has found a spot in President Donald Trump’s administration. The president nominated former Department of Natural Resources Commissioner Joe Balash to serve as assistant Interior Department secretary for land and minerals management on Wednesday. A native of North Pole, Balash is currently chief of staff to Sen. Dan Sullivan, who preceded him as Natural Resources commissioner under former Gov. Sean Parnell. Balash was a deputy DNR commissioner from 2010 to 2013 prior to leading the department until late 2014. “It’s been a long time since the (Interior) Department had an assistant secretary from Alaska, and the president’s nomination of Joe Balash further proves his commitment to Alaska and rural America as a whole,” Interior Secretary Ryan Zinke said in a department release. “Joe is no stranger to the Department of the Interior having worked alongside the department on a number of projects in Alaska. He brings an incredible combination of state and federal experience to the table, and he will be very effective in helping the department work with Congress to do the work of the American people. I look forward to his speedy confirmation in the Senate.” Zinke visited Alaska over Memorial Day weekend this year, repeatedly emphasizing that the state plays a primary role in the nation’s energy production. In June, Alaskan Chris Oliver was appointed to the post of assistant National Oceanic and Atmospheric Administration administrator in charge of fisheries, making him leader of the National Marine Fisheries Service and the country’s top federal fisheries manager. Oliver was the executive director of the North Pacific Fishery Management Council, which oversees federal fisheries off the coast of Alaska, since 2001. He came to Alaska in 1990 to work as the Gulf of Alaska plan manager for the council. As assistant secretary for land and minerals Balash would oversee the bureaus of Land Management, Ocean Energy Management, Safety and Environmental Enforcement and the Office of Surface Mining Reclamation and Enforcement. The position would make him the primary manager of federal lands and waters, as well as the nation’s lead surface coal mining regulator, according to the Interior Department. About two-thirds of the land in Alaska is controlled by the federal government. “As a nation, we are blessed with tremendous public lands and resources that give our people unparalleled opportunities for recreation and job creation for generations to come. I look forward to working with Secretary Zinke and his incredible team to seize on those opportunities and deliver on President Trump’s America First Energy Plan,” Balash said in a formal statement. Sen. Sullivan said he is sad Balash is leaving his staff, but he will be a valuable asset to the administration. “His wealth of knowledge and passion for Alaska — and more broadly federal land issues — cannot be overstated,” Sullivan said of Balash. “His advice and counsel on natural resource matters will be invaluable as Secretary Zinke and the Trump administration chart a new path toward American energy dominance. Alaska can and should be a critical element of this important national objective.” Elwood Brehmer can be reached at [email protected]

Unpacking House Bill 111

Once Gov. Bill Walker signs House Bill 111 into law, cashable tax credits to oil and gas companies working in Alaska will be a thing of the past. But the bill that became contentious in legislative debates — despite House Democrats, Senate Republicans and Walker agreeing on the major aforementioned policy change — has many other subtle but substantive provisions. For starters, it does not end all tax credits, or even all of them related to oil and gas projects. Capital expenditure and exploration credits applicable to work in the “Middle Earth” region of the state, which is pretty much anywhere other than Cook Inlet or the North Slope, continue until they expire on their own. The same can be said of credits for capital projects at the state’s three oil refineries or for entities looking to build natural gas storage, such as the Interior Gas Utility in the Fairbanks area. “We’re not changing the refinery credit; we’re not changing the LNG storage credit. We’re not changing a couple of these credits that people don’t think so much about that have these built in sunsets in 2020 or 2021,” Tax Division Director Ken Alper said in an interview. Companies earning certificates for those credits will just not get cash for them. The Middle Earth capital expenditure credit is applicable to production tax, while the small exploration credit for the region is applicable to corporate income tax, according to Alper. Interior-area Alaska Native regional corporations Doyon Ltd. and Ahtna Inc. have been the primary Middle Earth explorers, drilling for oil and natural gas to serve as a local heating fuel supply. Also, Cook Inlet operators can still earn transferrable production tax-applicable certificates that have not yet phased out after the passage of House Bill 247 last year, which eventually ends the credit program in that basin. The state just won’t refund them for work done after July 1. The Oil and Gas Tax Credit Fund is repealed Jan. 1, 2022, or sooner if the outstanding credit certificates are paid off by the state before then. The Legislature appropriated $57 million to the fund to pay down the state’s outstanding credit liability, which was expected to be nearly $1 billion by the end of the 2018 fiscal year before HB 111 passed. The Department of Revenue estimates repealing the cashable credits will save the state roughly $150 million per year over the long-term. There are also a few fine points surrounding the application of tax deductions and the “ring fencing” provisions that were sticking points in negotiations between House Democrats and Senate Republicans that seemed to confuse even some legislators involved in the HB 111 negotiations. Alper suggested the confusion likely stemmed from the multiple versions of the bill that were drafted during negotiations. The ring fencing provision prevents a company in a loss position from applying its 35 percent annual carry forward loss deduction to its production tax obligation until there is production from the project that caused the loss. Ring fencing was something the Democrat-led House Majority fought hard for to prevent a company from purchasing a non-producing project and using the deductions tied to it against their existing production taxes. It’s a scenario industry representatives dismissed as theoretical. However, ring fencing only applies to companies in a loss position; a producer can deduct 35 percent of its expenses from a development project against its current production tax obligation if it is profitable. The big win for Republicans and the Senate Majority was fending off the production tax increases in the version of HB 111 passed by the House. Additionally, HB 111 limits on the time a company can hold a deduction at full value, which was a win for Democrats and is intended to spur quicker development and ultimately production from a company looking to recover its expenses through tax deductions. A company without North Slope production can hold its deduction at full value for up to 10 years, after which the value of the carry forward deduction is reduced by 10 percent per year. While legislators have implied the annual deduction value reduction is 10 percent of the original amount per year, Alper said he interprets the bill language, which states the value decreases “by one-tenth of the value of the carried-forward annual loss in the preceding year,” to mean the loss deduction would be worth 90 percent of its original value in year 11; 81 percent of its original value in year 12, 73 percent in year 13 and so forth. It’s a point on which he said he would have to confer with Department of Law officials. For producing companies in a loss position, the deductions can only be held at full value for seven years before the “downlift” kicks in. Senate Resources chair Sen. Cathy Giessel, R-Anchorage, said the deduction downlift was one of the last pieces of the bill to be settled. “It’s a tight timeframe to have your full expenses deductible,” Giessel said. Alper said the clock starts the first year a company reports an annual loss, not when a lease is acquired, as some indicated initially. The July 1, 2017, retroactive effective date for the bill passed very late July 15 also caused some heartburn in the state Tax Division, at least when it was initially proposed by Senate leaders in a press conference a couple weeks ago, Alper said. That’s because while the State of Alaska works on a fiscal year starting each July 1, taxes are collected on the calendar year, and the immediate worry among auditors was that ending the cashable credit certificates July 1 would require two six-month tax returns for 2017. After a detailed reading of the bill, it was determined that it directs a company’s reported losses be bifurcated, meaning a company that posts losses to generate a $10 million net operating loss credit in 2017 will receive a $5 million cashable certificate for the first half of the year and a $5 million certificate that could be sold to another production taxpayer or held to offset future taxes but not cashed out, according to Alper. Finally, the credits are settled but oil taxes are not. The bill establishes a legislative oil and gas tax working group that — with the help of the three oil and gas consultants the Legislature now has on retainer — will examine the state’s fiscal regime for the industry and make recommendations in the 2018 regular session. ^ Elwood Brehmer can be reached at [email protected]

Bristol Bay study stands, but EPA moves to halt its finding

Is Environmental Protection Agency Administrator Scott Pruitt just putting the shoe on the other foot? The EPA announced July 11 that it was starting the process to withdraw the proposed determination reached under President Barack Obama’s administration to prohibit large-scale mining in Bristol Bay — a roundabout way of saying the Pebble mine project. A 90-day public comment period on the proposed withdrawal is now open through Oct. 17. Pebble Limited Partnership and its parent company Northern Dynasty Minerals hailed the decision as a major step toward returning to a normal and fair permitting process. “The current administration at EPA is closely focused on enforcing environmental standards and permitting requirements for major development projects like Pebble in a way that is both rigorous and robust, but also consistent in order to provide predictability and an even playing field for all resource developers,” Pebble CEO Tom Collier said in a formal statement. “It’s an approach all Alaskans and all Americans should support because it has the benefit of maintaining the high standards for environmental protection for which the state and country are known, while attracting investment in projects that create high-wage jobs and other much-needed economic benefits in our country.” Pebble has long held that the EPA’s push in 2014 to block mine development through its Clean Water Act Section 404(c) authority was a biased decision. That’s because the junior mining company contends the 1,000-plus page Bristol Bay Watershed Assessment, on which the 404(c) proposal was largely based, is an erroneous document developed over several years to be used as a means to reach a predetermined decision that the mine must be stopped. The Bristol Bay Watershed Assessment ultimately determined that large-scale mining in the region would irreparably harm Bristol Bay’s world-class salmon fisheries that currently support much of the areas economy. Pebble subsequently sued the EPA in 2014, alleging the agency had colluded with anti-mine activists and environmental-leaning scientists in drafting the assessment. Federal District Court of Alaska Judge H. Russel Holland saw enough validity to Pebble’s argument to issue an injunction in November 2014 halting the 404(c) proceedings until the lawsuit was resolved. A January 2016 EPA Inspector General report supported the validity of the assessment, but scolded the agency for months’ worth of missing emails and other procedural missteps related to evaluating the prospective Pebble project. Settlement talks in December 2016 that preceded President Donald Trump’s administration concluded this spring when the sides reached agreement, giving Pebble 30 months to submit its environmental permit applications for the mine at which point the 404(c) process could be resumed. However, the settlement also allows the Bristol Bay Watershed Assessment to stand. Pebble also contends the assessment’s conclusions are highly speculative, given the company has yet to submit a formal mine plan. Yet, despite the assessment being the only valid, on-the-record, scientific document upon which decisions regarding Pebble can be made at this point, Collier is confident the proposed determination to block Pebble will be withdrawn at the end of the comment period. Pebble spokesman Mike Heatwole said in an interview that a fair review of the project in a normal permitting process is all the company has ever wanted. In moving the 404(c) process prior to Pebble even applying for permits, the EPA broke from precedent, but Holland also dismissed another suit in which Pebble claimed the agency had overstepped its authority. Withdrawing the proposed determination “allows us to get an environmental impact statement on the record, which is a far more legitimate, fact-based and thorough document that has to be based upon an actual plan of development with actual science,” Heatwole said. “If you have that level of rigor it would probably make the watershed assessment moot. We have held all along that the process and that document is flawed on its premise.” Alannah Hurley, head of United Tribes of Bristol Bay, the Dillingham-based coalition that has led the fight against Pebble, said if EPA Administrator Pruitt appropriately considers all of the public comments that have been submitted supporting protections for Bristol Bay the withdrawal will be short-lived. “If they listen to the people and actually take the public comment seriously and they look at the immense amount of scientific work that went into that determination it will not be rescinded,” Hurley said in an interview. “If they choose to ignore that and ignore the scientific rigor and the will of the people — if they choose to ignore that and not take it seriously, it will be.” Hurley further argued “99.9 percent of the comments” submitted in 2014 supported the proposed determination. While a large majority of people who testified during August 2014 public meetings supported the EPA’s move, the agency’s Alaska spokeswoman Suzanne Skadowski said Holland’s injunction prevented the results of the 671,517 written comments submitted on the Federal Register from being tabulated. Heatwole contends many of the comments in support of the agency at the time were “postcards” or form letters from individuals without adequate knowledge of, or an appropriate stake in, the issue. A 2014 state ballot measure requiring legislative approval for a large mine in Bristol Bay — which Pebble argues is a blatant violation of the Alaska Constitution — was billed as a way to protect the region’s salmon and passed with 66 percent support among Alaska voters. It was supported by 72 percent of voters in Bristol Bay and greater southwest Alaska, according to Division of Election results. Skadowski called reversing course and moving ahead with the withdrawal despite the assessment being the only available science on Pebble “a policy call” made by Pruitt to see what Pebble’s plans are before making a decision. “We’ll use that existing science and whatever becomes available at that time,” Skadowski said. Heatwole cited a line in the EPA’s Federal Register notice about the withdrawal which states, “A withdrawal of the proposed determination would remove any uncertainty, real or perceived, about (Pebble’s) ability to submit a permit application and have that permit application reviewed.” The notice further reiterates that under the settlement the EPA retains the right to eventually use its 404(c) authority on Pebble if it is deemed necessary. Pebble leaders continue to say they intend to file permit applications this year for a smaller, less impactful mine than had previously been conceptualized. A recent investor presentation on Northern Dynasty’s website states the Pebble copper and gold deposit contains 1.9 percent of all the gold ever mined in recorded history. The company has been roundly criticized, even by some Republican lawmakers who have also criticized the EPA’s actions, for repeatedly stating over more than a decade that a mine plan and permit applications were coming soon, without making good on the promise. Elwood Brehmer can be reached at [email protected]

S&P joins Moody’s in downgrading state

S&P Global Ratings has made good on its warning, joining Moody’s Ratings Service in downgrading the State of Alaska’s credit ratings once again as legislators struggle to mend the state’s increasingly tattered finances. S&P knocked the State of Alaska-backed general obligation rating down one notch to AA from AA+ early July 18, citing a “continued lack of agreement on fiscal reforms to return the state to structural balance,” in a statement accompanying the action. On July 13, Moody’s also downgraded Alaska a notch on its scale, from Aa2 to Aa3 for general obligation debt, which translates to a final AA- rating. S&P also lowered its opinion of state appropriation-backed debt from AA to AA-. Alaska Energy Authority bonds, which are backed by the moral obligation of the state, were also lowered from A+ to A on July 18. The outlook on all the new ratings remains negative, according to the agency. Subsequently, S&P took the state off its negative CreditWatch list, where it had put Alaska June 20. At the time, analysts for the agency said the CreditWatch action was an indicator that S&P would be forced to downgrade the state if a long-term fiscal plan to dissolve the ongoing $2.5 billion-plus annual budget deficits was not approved very soon. “The negative outlook continues to reflect our opinion that if lawmakers fail to enact significant fiscal reforms to reduce the state’s fiscal imbalance during the 2018 legislative session for fiscal 2019 budget, Alaska’s downward rating transition will likely persist, possibly by multiple notches as its structural imbalance becomes more protracted,” S&P ratings analyst Timothy Little said in an agency release. Funding the budget with savings for another year has left Alaska with just about $2 billion in unobligated funds in the Constitutional Budget Reserve, or CBR, the state’s last liquid traditional savings account, an amount insufficient to cover another year of like deficits. The State of Alaska has spent about $14 billion from savings in less than five years. State debt manager Deven Mitchell said via email that the state has just more than $100 million in general obligation bonds left to sell from a $460 million bond package for construction projects that voters approved in 2012. The bond bank manages the state’s debt and has about $1.2 billion in outstanding bonds. Debt service for the fiscal year 2018 budget signed June 30 is $209.4 million. The latest downgrades could raise rates on future bond sales by 0.15 to 0.2 percentage points, according to Mitchell. But he also noted that the “relatively low impact” to state bond rates is due in part to a tight bond market, adding that the latest credit ratings could have up to 0.5 percentage points of impact in times of higher yield markets. It was only about a year-and-a-half ago that Alaska had perfect general obligation ratings from the “big three” raters: S&P, Moody’s and Fitch. When Alaska was going into the market to sell some of those 2012 general obligation bonds, S&P downgraded Alaska sooner than expected from its formerly sterling AAA bond rating in January 2016 and the other ratings agencies quickly followed suit with actions of their own. Gov. Bill Walker, who has spent the last two years pitching his fiscal plan for the state to legislators and Alaskans at large, noted in a July 17 press briefing that the state’s credit rating has quickly gone from as good as it gets to only better than New Jersey and Illinois, whose fiscal problems have persisted for years. “We’re better than that,” the governor said. Walker also said he would not continue to call legislators back into special sessions as a means to force a fiscal reform package unless a deal is imminent, but at the same time reemphasized the need for a fix this year. The Democrat-led House and Republican-led Senate passed similar bills to establish an annual percent of market value, or POMV, draw on the earnings of the $60 billion Permanent Fund during this year’s regular legislative session. Such a draw is the centerpiece to Walker’s fiscal plan, as it could reduce the deficit by nearly $2 billion per year. However, the majorities in the bodies have not been able to reconcile the differing contingencies each has tied to enacting a Permanent Fund POMV draw. The House Majority wanted an accompanying income tax to cover the budget deficit while the Senate was comfortable with a smaller deficit that could be sustained with minimal draws from the CBR. Elwood Brehmer can be reached at [email protected]

Unfinished business remains for Legislature

Gov. Bill Walker thanked legislators for repealing the state’s remaining oil and gas tax credits, discussed the highlights of a recent governors conference and outlined his view for getting the state to a long-term fiscal plan in a ranging press conference Monday. While Walker was in Rhode Island over the weekend attending the National Governors Association summer meeting, he said he stayed awake until about 4:30 a.m. Sunday to watch legislators do the clock limbo to pass House Bill 111 before the special session ended Sunday at midnight. The governor said he is pleased legislators were able to compromise finer points of the tax credit issue to get the big thing on which Republicans, Democrats and he agreed: ending the oil tax credit program. “I didn’t see anybody celebrating necessarily, and I think that was a true sign of what transpired; not everybody got what they wanted,” Walker said to Republican Sen. Cathy Giessel and Democrat Rep. Andy Josephson, who attended the briefing in Anchorage. As leaders of the Resource committees in their respective bodies, the two were at the center of conference committee negotiations on the tax credit bill. Passing a compromise version of HB 111 indicates the Legislature has some momentum and Walker said he’d like to see that translate to other issues like restructuring the Permanent Fund to fix the state’s $2.5 billion budget deficit, Walker said. “As much as I’d like to say ‘it’s over, everything’s fixed (with the state budget),’ we’ve got more work to do,” he said. “I say that with renewed optimism because of what I saw the other night.” Next on the list is for the House and Senate to pass the capital budget, which will allow the state to capture more than $1.2 billion in federal construction funds for a $120 million state matching contribution. However, the governor said he wouldn’t call more special sessions until it appears deals have been struck. “There’s no reason to call 60 people back when a committee is working on something,” he said, noting the expense checks legislators have collected in what has ostensibly been a continuous session since late January. “We’ve gone through a half a million dollars in per diem; we need to be careful about that,” Walker added. In the interim, the governor said he and his administration officials will continue working behind the scenes with legislators to hopefully facilitate agreements on the major outstanding fiscal issues, in particular new sources of state revenue. “It won’t be I’ll put more time on the clock and see what happens,” Walker said of the special session situation going forward. To that end, the Democrat-led House Majority and Republican Senate Majority caucuses both issued press statements emphasizing the need to get the generally nonpartisan capital budget done soon and that legislators might call themselves back to do it. Walker indicated he would like to see that happen by the end of the month. Walker also said he met with Canadian Prime Minister Justin Trudeau while at the governors meeting. Trudeau spoke to the gathering of 33 U.S. governors, but had a 20-minute conversation with Walker, in which the two discussed infrastructure issues and the concerns Alaskans have with prospective mines in British Columbia that could impact salmon in transboundary rivers. Southeast Alaska fishing, Alaska Native and conservation groups have pushed for federal intervention from the State Department on the matter with little success. “We have an opportunity on transboundary now at the prime minister level,” Walker said. Previously, Walker’s administration has met mostly with British Columbia provincial officials on the matter. Elwood Brehmer can be reached at [email protected]

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