Elwood Brehmer

Doyon keeps up Nenana drilling; touts gas alternative to Cook Inlet

Doyon Ltd. is sticking with its oil and gas exploration program near Nenana. Despite past challenges, the Interior Alaska Native regional corporation announced Nov. 28 that it plans to drill another exploration well in the frontier basin west of Fairbanks next summer. The Totchaket-1 well will be drilled based on the results of a 64 square-mile 3D seismic program shot early this year, according to a Doyon release. Company leaders think their years of exploration around Nenana are close to paying off. “We are especially excited about the recent seismic results because for the first time in this basin we see trapped hydrocarbons,” Doyon CEO Aaron Schutt said in a formal statement. “This could be a game-changer.” Doyon has drilled three exploration wells in recent years on the roughly 240,000 acres of state leases it holds in the area and conducted several seismic shoots. The Native corporation also owns land around Nenana. The results of that drilling have mixed. A well drilled in 2016 did not turn out to be successful, but one drilled in 2013 hit several hundred feet of natural gas-saturated sandstone, according to company officials. If not for a faulty geologic trap, Doyon believes it could’ve produced up to 180 billion cubic feet of gas, or bcf, from the formation and potentially supplied the Fairbanks market for decades. Doyon Vice President Jim Mery said the trap was full of water and the gas in place was under pressured as a result of the fault. “We think the building blocks have been there and that’s why we’ve kept at it. We learn from every project and it informs us as to what we should do next,” Mery said. The Totchaket well will be drilled to 12,500 feet and be about 20 miles north of Nenana and on the east side of the Tanana River, according to Doyon. Prior drilling was done closer to Nenana and west of the Tanana. “Although our primary target is oil, our gas prospects are greater, so it is unfortunate timing to see the Interior Gas Utility ready now to commit to a course of action with (the Alaska Industrial Development and Export Authority) which will tie Fairbanks for at least a generation to imported LNG by truck at much less favorable price projections,” Mery said in the release. He added that by committing to the Interior Energy Project plan to expand natural gas distribution in Fairbanks, the borough-owned utility would kill “the option for use of future Nenana gas as well as foreclosing future opportunities to tap into any North Slope gas export line.” AIDEA spokesman Karsten Rodvik said via email that after the three-year gas supply contract the authority reached with Hilcorp for the project earlier this year expires, IGU can purchase gas from any source. That contract, which kicks in Jan. 1, is included in the $331 million package for IGU to purchase Fairbanks Natural Gas and finance gas infrastructure build out in the Fairbanks area with low-interest state loans, bonds and grant money. IGU leaders have expressed concerns with some of the finer points of the financing terms in the tentative deal with AIDEA, but the start-up utility board is expected to make a decision on it soon. Since its inception in 2013, the Interior Energy Project has been intended as an interim solution to Fairbanks’ high energy costs until a gasline from the North Slope is built. While high fuel oil costs subsided along with oil prices in late 2014 — which has also challenged the economics of the IEP by reducing the incentive for residents to switch to gas — getting more natural gas to the city would also help improve its at-times dangerously poor winter air quality. Mery said in an interview that the gas contract is not the issue; rather, it’s the investment in the LNG supply chain — expanding the Mat-Su LNG plant, tankers and LNG storage in Fairbanks — that will tie the utility to Cook Inlet-sourced gas for years. “Once that entity commits to hundreds of million of dollars of debt they’re wedded to that project. How can they abandon that project to buy cheaper gas? Somebody has to pay for those assets that have been acquired,” he said. “We’re just saying there might be another option; there might be a better option in the relative near term. We’re just throwing that out for the public to consider.” IEP leaders have discussed the possibility of using the LNG supply chain to fuel other communities on the road system if another gas supply for the Fairbanks area is found, but their primary focus has been on getting the project up and running first. Mery has said in the past Doyon could start supplying natural gas about three years after a commercially viable discovery is made. On its current schedule, additional gas is expected to start flowing from the IEP in 2020. IGU leaders could not be reached for comment in time for this story. Mery noted Doyon would have to beat fuel oil prices with its natural gas if it is successful, which the company thinks it can do. Elwood Brehmer can be reached at [email protected]

Walker touts trade relations with China after gasline talks

Gov. Bill Walker is hopeful the inroads his administration has made with top-level officials in the Chinese government through cooperation on the Alaska LNG Project can be parlayed into partnerships for other industries. The governor outlined his plans to bolster Alaska-China trade during a Nov. 21 press conference mainly focused on the state’s gasline Nov. 9 agreement with three government-owned Chinese companies. The non-binding joint development agreement sets an outline for Sinopec, the world’s largest integrated oil and gas company, to purchase up to 75 percent of the LNG from the Alaska LNG Project. The Bank of China and the China Investment Corp., the country’s $813 billion sovereign wealth fund, would finance and directly invest in portions of the $40 billion megaproject. Walker described the gasline work, which included Alaska Gasline Development Corp. President Keith Meyer in the country for at least six weeks this year, as “just the beginning” of growing trade with China. “The relationships we have built at the highest level in China can benefit many other areas of business in Alaska,” Walker said. If Alaska is to expand its business dealings with China, it will undoubtedly be helpful that the most-populous country on Earth is already the state’s largest foreign trade partner. Alaska companies exported nearly $4.4 billion worth of goods and raw materials last year, of which almost $1.2 billion worth went to China, according to the state Office of International Trade. A broader trade mission to China coordinated by the International Trade Office is being planned for sometime next year, Walker said, but the details are still being worked out. Japan is the state’s next largest export destination. The country bought $816 million of Alaska products in 2016, followed by South Korea at $730 million. The 2016 export values were all down to varying degrees over prior years; however, because Alaska exports are primarily seafood and other raw materials or commodities with often-volatile market pricing, the year-over-year value of the goods is not always indicative of the amount sold. The state’s total exports have grown substantially in recent years from just more than $3 billion in 2009, according to the International Trade Office. Walker said his team’s discussions with Chinese leaders, including China President Xi Jinping, that led to the Alaska LNG joint development agreement also touched on the state’s additional potential offerings. Xi met with Walker this past April in Anchorage as he passed through on a refueling stop heading home after meeting with Trump in Washington, D.C. “We talked to them about other resource we have and they’re certainly interested in other resources in Alaska. Certainly interested in oil; very interested in mining; but they said ‘let’s get the gas one taken care of first,’ and I couldn’t agree more,” Walker said. Aside from possible direct investment in the Alaska LNG Project by the China Investment Corp., members of the Walker administration have said Chinese companies are also potential upstream investors in North Slope oil projects. At $2.1 billion, seafood was the Alaska’s top export overall in 2016 and similarly was the top single export to China, valued at $626.3 million, or more than half of the state’s total exports to the country. The Alaska Seafood Marketing Institute estimates that 80 percent to 90 percent of the state’s exports to China are reprocessed and sent on to Europe and Japan, which are the top final consumption destinations for Alaska seafood. China also imported $321 million of Alaska minerals last year, a close second to Canada, which bought $323 million of minerals from Alaska. Additionally, China dominated the market for Alaska timber; it bought nearly $75 million worth of forest products from the state in 2016 out of $98.6 million of total timber exports for the year, according to the Trade Office. The vast majority of timber exports currently consist of shipping whole “saw logs” because Alaska’s large lumber and pulp mills used to refine forest products have closed as the state’s timber industry has declined. And beyond traditional table-fare seafood, the Chinese also bought $53.8 million of Alaska fish meal products, which again accounted for roughly half of the total $110 million export market. While Alaska’s business with China has historically been in traditional goods, Walker noted the growth in the country’s middle class could bode well for the state’s tourism industry, one of the few growing sectors of the Alaska economy. “1.4 billion people in China, of which 100 million a year go on holiday. Boy, we sure would like to get a slice of those going on holiday to come to Alaska,” Walker commented. According to the state Commerce Department, approximately 23,000 Asian travelers came to Alaska last year, accounting for only about 1 percent of the roughly 2 million visitors to the state overall. Of those, about 5,000 were from China. Walker said state officials are also working on getting direct scheduled flights between Asia hubs and Alaska to encourage more tourism here. Japan Air Lines has operated charter flights between Tokyo and Fairbanks since 2004, but those flights are in winter and part of group tours planned specifically for aurora viewing. Attracting more international tourists to Alaska could also mean bringing disproportionately more money to the state. The average Alaska visitor spent $1,057 once in the state, while international travelers — Canadians excluded — spent $1,322 per person in Alaska and those coming from Asia spent $1,442 during their stay, according to the Commerce Department figures. Elwood Brehmer can be reached at [email protected]

Murkowski adds Tongass timber, Roadless rule repeal to budget bill

Sen. Lisa Murkowski has made headlines of late for her push to open part of the Arctic National Wildlife Refuge to oil and gas exploration but she’s also using her position in the Senate to angle for more resource activity in Southeast Alaska. Murkowski chairs the Appropriations subcommittee covering the Interior Department, the Environmental Protection Agency and the Forest Service, which released its $32.6 billion discretionary 2018 budget for those agencies Nov. 20. The budget bill also includes provisions that would force the Forest Service to, at least temporarily, stop its transition to young-growth timber harvest in the Tongass National Forest and once-and-for-all exempt Alaska from the Roadless Rule. “This bill will empower Americans to build our economy and create healthy communities for our families,” Murkowski said in a formal statement. “As chairman, I’ve worked hard to address key priorities, from ensuring our parks are adequately staffed, to prioritizing health care through (the Indian Health Service) and focusing on public safety. In this draft bill, we direct federal resources where they are needed by investing in programs aimed to protect people and our lands, enable new infrastructure projects to boost the economy, and help communities provide vital, basic services.” Specifically, the Tongass provisions would require the Forest Service to start the process to amend the 2016 Tongass Land and Resource Management Plan by Jan. 31 of next year. The current Tongass plan — an environmental impact statement — took effect last December and directs forest managers to fully transition to only young-growth timber harvests in the Tongass within 16 years. It was spurred by a 2013 memo from then-Agriculture Secretary Tom Vilsack directing management of the forest to be more ecologically, socially and economically sustainable, while accelerating the transition to predominantly young-growth timber harvest by the region’s remaining timber industry. Managers would revert back to the 2008 Tongass plan while the 500-plus 2016 plan is amended. As part of the management plan changes, the budget bill also directs the Forest Service to conduct “stand-level” inventory of the roughly 360,000 acres of young-growth timber stands in the 17 million-acre Tongass to determine which stands are mature and harvestable and incorporate the results of the survey into the 2016 plan revision. It authorized $1 million to the Forest Service to conduct the fieldwork and another $700,000 to amend the Tongass management plan. Tongass Forest Service spokesman Paul Robbins said via email that the agency couldn’t speculate on the pending legislation, but said the Forest Service spent $5.5 million over multiple years developing the 2016 management plan. Murkowski and Alaska logging industry leaders have consistently said they support moving to strictly young-growth harvests in the Tongass but doing so would require a gradual shift over 30-plus years to allow young-growth stands to mature. Loggers contend the trees in many of the young-growth stands simply aren’t large enough for Southeast’s remaining mills — originally designed for large, old growth logs — to process. Currently, much of the timber harvested from the Tongass and state and private lands in Southeast is exported to Asia as whole, saw logs and is not processed in state. Murkowski has said if the federal government is not going to subsidize the millions of dollars of equipment changes mills would need to make to accommodate smaller logs the young-growth transition needs to be slowed to allow the trees to grow. Accordingly, her bill states that changes in the forest plan must “ensure that any transition to a timber sale program based on young-growth management be accomplished in a timeframe and in a manner that maintains an economically viable timber industry in Southeast Alaska.” According to Alaska Forest Association Executive Director Owen Graham, it takes roughly 90 years for a timber stand in the Tongass to reach harvestable size and the management plan in place now would kill off what’s left of Southeast’s timber industry. At its peak in the 1980s, logging in Southeast supported nearly 4,000 jobs in the region, according to Graham. Today, there are about 300 timber-related jobs in the region. Conservation and commercial fishing groups insist the expedited young-growth transition more aptly matches the reality of Southeast’s current economy. Limiting the new areas available for logging protects salmon habitat and also benefits the region’s visitor industry — one of the few growing sectors of the state’s economy — which markets the pristine environment of the Tongass, the contend. “The (2016) Tongass plan amendment is the product of years of collaboration by Alaskans from across the political spectrum that were able to overcome their differences and form a shared vision for the Tongass based on tourism, fishing and sustainable young-growth forest products,” Trout Unlimited Alaska Legal Director Austin Williams said. “It is disheartening that Sen. Murkowski is turning her back to the thousands of Alaskans that support the Tongass plan amendment and threatening to return the region to the conflict and divisiveness of the past. “The Tongass plan amendment was created by Alaskans that decided to work together and cooperate so that all could benefit and should not be cast aside through a closed-door process in Congress.” In 2016, the commercial fishing and tourism industries collectively supported 21 percent of the jobs in Southeast, according to the Southeast Conference, the region’s lead economic development organization. Roadless Rule rollback With the State of Alaska and timber industry supporters so far unable to reverse the Roadless Rule after years in court, Murkowski’s budget bill would nullify it in Alaska. The Roadless Rule, enacted by the Forest Service in 2001 under President Bill Clinton, prohibits development on roughly 58 million acres of previously undisturbed national forest lands nationwide. In the Tongass, the nation’s largest national forest, the rule set aside about 9.6 million acres, according to the Southeast Conference. While the Roadless Rule does not explicitly prohibit logging in the qualified areas, it limits loggers to using helicopters to remove felled timber, which can be exceedingly expensive and therefore ostensibly prohibits activity in Roadless areas. Much of the focus is on its impacts to the Tongass and Southeast Alaska, but the exemption would also apply to the 5.4 million-acre Chugach National Forest, the second-largest national forest behind the Tongass. Comparatively little logging has occurred in the Chugach, but Roadless opponents note the rule also prevents isolated rural Alaska communities in the forests from developing hydroelectric projects that could supply cleaner, lower cost energy. Alaska’s congressional delegation has long sought an exemption from the rule for the state if it couldn’t be repealed entirely. In 2003, George W. Bush’s administration did exempt Alaska from the Roadless Rule to settle a lawsuit brought by the state. However, in 2011, a U.S. District Court of Alaska ruling overturned the exemption in a lawsuit filed by Alaska Native and conservation groups against the Forest Service. The state intervened and appealed the ruling to the 9th Circuit Court of Appeals and won in a three-judge panel ruling in March 2014 to have the exemption reinstated. But in July 2015, a full, 11-judge 9th Circuit ruling reversed the 2014 decision and again put the Roadless Rule in effect in Alaska. The U.S. Supreme Court declined to hear the state’s appeal in the case last year. Most recently, on Sept. 21 a federal District Court judge for the District of Columbia dismissed with prejudice a separate State of Alaska lawsuit claiming the rule was enacted illegally. The state Department of Law appealed that ruling to the D.C. Circuit Court of Appeals Nov. 6. “This rule has an enormous negative impact on the Tongass National Forest and Southeast’s economy,” Gov. Bill Walker in a statement accompanying the appeal. “It’s important we keep fighting to preserve Alaskans’ livelihoods and options for responsible development.” So to end the legal fights, Murkowski added one sentence to the appropriations bill that starts by identifying the Roadless Rule and ends by stating it “shall not apply the respect to any national forest system land in the State of Alaska.” Elwood Brehmer can be reached at [email protected]

Effort to open ANWR clears one more hurdle

Sen. Lisa Murkowski’s legislation to open the coastal plain of the Arctic National Wildlife Refuge to oil exploration cleared another hurdle as expected Nov. 28, but one more big jump remains. The ANWR provisions passed the Senate Budget Committee as part of the Republicans’ tax overhaul on a 12-11 party-line vote. The next and final stop for the controversial legislation is the Senate floor, where debate is sure to be lengthy and contentious. The House passed its tax and budget plan Nov. 16. With a 52-48 majority in the Senate, Republicans inserted opening the ANWR coastal plain into budget measures that only require a simple majority vote and not the filibuster-proof, 60-vote majority needed for standalone bills. Lease revenue from the two lease sales prescribed in Murkowski’s legislation is expected to generate $1.1 billion, which would go towards offsetting a small part of the $1.4 trillion of tax cuts over 10 years in the Republican tax reform plan. Murkowski chairs the Senate Energy and Natural Resources Committee, which the Budget Committee earlier this year tasked with finding $1 billion in new revenues over 10 years to support the budget-tax plan. The directive was a nod to Murkowski to introduce the ANWR option. Specifically, Murkowski’s plan would direct the Bureau of Land Management to hold at least two oil and gas lease sales for 400,000 acres or more of the 1.5 million-acre ANWR coastal plain— the first within four years and the second no later than seven years after the legislation passes. It sets federal resource royalties at 16.67 percent and would evenly split royalty revenue with the State of Alaska. Finally, as has been the case with all the recent versions of ANWR legislation the delegation has introduced, it would limit permanent development to 2,000 acres in total. Because the ANWR action is being used as a revenue offset to the tax cuts it is linked to the fate of the tax bill, which is far from a sure thing even among Senate Republicans. Wisconsin’s Ron Johnson and Tennessee’s Bob Corker both voted to move the budget reconciliation out of the Budget Committee but have not yet thrown their support behind the tax plan. Johnson has said he has concerns with how corporate tax changes could affect small businesses and Corker has worries over growing the national debt if the economic growth presumed to grow the tax base and mitigate the impact of the tax cuts on the annual deficits doesn’t materialize. While most of the Democratic criticism of the plan in comments after the committee vote focused on proposed corporate tax cuts, Washington Democrat Sen. Patty Murray referred to the larger tax bill as “a backdoor attempt to drill for oil in one of our planet’s most pristine places.” Regardless, if Murkowski can finally be the one to lead ANWR-opening legislation through Congress — and to a president that will sign it — she will likely achieve legend status in Alaska political history for an accomplishment that long eluded her former colleague the late Sen. Ted Stevens. Republicans are trying to replicate what the House did while George W. Bush was president in 2005, when it included opening the ANWR coastal plain to industry activity in the fiscal year 2006 budget; however, much to Stevens’ consternation, it stalled in the Senate due to a filibuster and failed to make the final budget. Rep. Don Young regularly notes that he has led ANWR-opening legislation through the House more than a dozen times during his tenure, but nearly each time it has failed in the Senate. President Bill Clinton vetoed the one ANWR bill to reach a president’s desk in 1996. Elwood Brehmer can be reached at [email protected]

Report shows Medicaid savings largely from travel cost-shifting

Reforms to Alaska’s Medicaid program are producing savings but state budget officials still expect costs to rise up to $75 million next year. Provisions in the state Medicaid reform legislation that passed in 2016 with overwhelming bipartisan support saved the state more than $30 million in fiscal year 2017, according to companion reports issued Nov. 15 by the departments of Health and Social Services and Law. The annual status updates on the effectiveness of the reforms were mandated in the bill itself, Senate Bill 74, in part so legislators could track anticipated cost savings. Various other portions of the omnibus legislation were aimed at studying broader health care systems and models and the long-term potential benefits of applying them in Alaska. Fiscal year 2017, which ended July 1, was the first full year SB 74 was in effect. SB 74 was projected to save the state up to $365 million over six years when Gov. Bill Walker signed it into law in June 2016. Annual cost savings were supposed to increase each year as the numerous changes in the bill are gradually implemented. As expected, the primary savings to the State of Alaska totaling $24.7 million came from shifting costs for Medicaid-covered health care travel to the federal government, according to the DHSS report. Overall Alaska Medicaid travel costs increased by 18 percent in fiscal 2017 to total $100.2 million, the report states. However, the state’s share of those expenses fell by 69 percent from $35.5 million in 2016 to $10.9 million in 2017 despite the larger travel cost growth. That’s because in February 2016 the federal Centers for Medicare and Medicaid Services expanded what the federal government would fully reimburse to include services “received through” Indian Health Service Facilities and tribal health organizations for Alaska Natives, according to the report. Capturing the higher reimbursement rate requires care coordination agreements between Tribal and non-Tribal health organizations. While health costs for Alaska Natives are generally 100 percent covered by Indian Health Services, travel and other arrangements made through non-Tribal care providers had previously been covered half by the state and half by the feds. “The department worked with Tribal health organizations to initiate care coordination agreements with non-Tribal organizations to achieve the enhanced federal match,” the DHSS report states. It also notes the department saved more than $35 million by refinancing claims made between after the February 2016 CMS ruling until March 31, 2017, paid with a 50 percent state match that were found to be eligible for 100 percent federal reimbursement because of preexisting coordination agreements. There are currently 751 such agreements between 18 Tribal health organizations and 64 non-Tribal providers in the state. “In fiscal year 2018, with the additional of one more tribal health organization as a travel services provider, the count will increase to well over 1,000 travels per week financed at 100 percent federal match,” the report notes further. State Medicaid spending, matched by the federal government through a 50-50 split of costs from most recipients, went up by $19.3 million, or about 3 percent, year-over-year in 2017. Yet, the cost increase did not match the corresponding enrollment, which went up by 14 percent to 201,925 Medicaid recipients during the 2017 fiscal year, according to the report. As a result, the state spent 9.9 percent less on each recipient in 2017 than it did in 2016. DHSS officials surmised in the report that the per-capita spending decrease could be attributed to more Tribal care coordination agreements and the resulting growth in federal contributions. According to Office of Management and Budget Director Pat Pitney, the state’s Medicaid costs will increase another $75 million in the upcoming 2019 fiscal year. During a presentation to Commonwealth North, a state policy nonprofit, Pitney said that about half of the cost increase would be due to the gradual ramp-down of federal reimbursement for recipients enrolled under Medicaid expansion, which Walker accepted in 2015 despite challenges by the then-Republican controlled Legislature. The federal government paid for 100 percent of claims in 2016 by expansion-class recipients — low-income adults with no dependents — but the federal funding rate steps down to 90 percent by 2022. Pitney added that the administration attributes about half of the growth in Medicaid enrollment to Alaska’s poor economic situation. “We believe the recession has really created an increase in traditional Medicaid eligibility,” she said. Comparatively, the Legislative Finance Division expects Medicaid costs to grow slower, by $32 million, in 2019, based on flat enrollment expectations, Pitney noted. Fraud control Heightened scrutiny of Medicaid fraud and abuse saved the state another roughly $8 million, according to the joint Law and Health department report. SB 74 added positions to the Medicaid Fraud Control Unit in the state’s Criminal Law Division with the aim of catching additional improper Medicaid claims from patients and providers. Like Medicaid itself, the attorneys and support staff tasked with investigating fraud reports are funded through a state-federal split. In fiscal 2017 the Medicaid Fraud Control Unit reviewed 79 sets of allegations that led to criminal or civil investigations and charged 24 individuals criminally. The division also recorded eight criminal convictions and another civil settlement, which could relate to cases originally filed in prior years, the report acknowledges. When combined with the DHSS Program Integrity system, which among other things audits Medicaid claims, the departments recovered $2.3 million in illegitimate Medicaid expenses and avoided paying out another $5.7 million in potentially troubled claims, according to the report. Elwood Brehmer can be reached at [email protected]

Hilcorp boost Inlet output; Eni preps long well

Most state officials are encouraged about the incremental increase in Alaska’s North Slope oil production because of the impact it could have on state finances, but Hilcorp Energy is drilling to produce more from the state’s original oil basin as well. Hilcorp Alaska Vice President Dave Wilkins said the company drilled nine oil wells into its Cook Inlet fields this year and, as a result, expects to increase its Inlet oil production from about 12,000 barrels per day in January to more than 15,500 barrels per day by year’s end. “2017 was the year of stepping out and drilling wells mainly on the oil side,” Wilkins said Nov. 15 to attendees of the annual Resource Development Council for Alaska conference. “It was a big, bold move in a downturn.” Hilcorp, which is the primary operator in Cook Inlet, drilled three horizontal wells into the upper West Foreland field from its King Salmon and Steelhead platforms across the Inlet from Nikiski, according to Wilkins. Farther to the north along the western shore the company brought another well online in its Granite Point field in early November that has produced 1,100 barrels per day of oil from the Tyonek formation with no residual water. “We think there’s future development in the Granite Point field in the tighter formations to go horizontal in,” Wilkins said, adding the company believes there are still “tens of millions of barrels” of oil recoverable from both the Granite Point and West Foreland fields. Hilcorp is also in the midst of spending $75 million to convert a cross-Inlet natural gas pipeline to an oil carrier, a project it plans to finish in about a year, company officials have said. With other requisite work to adjust gas and oil flow on the west side of the Inlet, the project will allow Hilcorp to close the Drift River oil tank farm, which has been a lingering environmental concern to many because of its location at the base of Mt. Redoubt, an active volcano that most recently erupted in 2009 and caused flooding at the facility. The oil transport line will also reduce oil tanker traffic in the Inlet. On the gas side of Hilcorp’s business, Wilkins said the company drilled eight wells this year simply to replace burned reserves. Inlet gas storage facilities have ample reserves and are at higher pressures this fall than a year ago, he added. “We feel we are ready for this winter. Bring it on, turn up your heat, hope it’s cold,” he quipped. On the Slope, Hilcorp is continuing to build out Milne Point, one of the fields it bought into as part of a $1.25 billion deal with BP in 2014. The company recently drilled 10 wells at Milne Point that are just starting to come online, Wilkins said, and its up to $400 million Moose Pad project at Milne is on schedule. With $80 million of gravel road and pad work finished the company will start drilling between 50 and 70 wells next fall and peak production from the development is expected to hit 16,000 barrels per day in 2020, according to Wilkins. Hilcorp believes the Moose Pad project will produce 30 million to 50 million barrels overall. “Bringing on new oil in Alaska needs to be competitive with other things going on in Hilcorp, so bringing on new oil at $10 or less per barrel cost is very competitive,” Wilkins said. The company will also be running a pilot polymer flood project at Milne Point to improve heavy oil recovery over water floods that have been inefficient at the field, he said. Adding polymers to injected water increases the water’s viscosity and helps it “push” oil out of the reservoir more effectively by preventing the heavier oil pool from dispersing and comingling with the water as easily. Wilkins said the polymer flood should improve heavy oil recover by up to 50 percent over standard water floods. The company is also in the environmental impact statement process for its Liberty development, a plan for a manmade island in federal Arctic waters that has potential to produce 60,000 to 70,000 barrels per day at peak. Eni’s long exploration Italian major Eni, which produces about 20,000 barrels per day from the Nikaitchuq field off of Oliktok Point, will start drilling a diagonal exploration well in the coming weeks that is planned to stretch more than 6.5 miles, Eni Alaska Vice President Whitney Grande told the RDC. The roughly 35,000-foot well will be drilled from its manmade Spy Island drill site in state waters off of Oliktok Point into formations beneath federal waters further offshore. “It’ll be the longest extended reach well in the state,” Grande said at the RDC conference. The company has previously drilled several wells up to 25,000 feet on its state leases, according to Grande. It’s important for the Eni to start drilling by Dec. 31 because its federal leases are set to expire then, he noted. “We’re not foreign to the concept of extended reach (drilling); we have some good best practices around ERD and we’re looking to apply those to Nikaitchuq North,” Grande said. If successful, Eni plans to drill a second, similar exploration well next winter. The company currently believes the offshore reservoir it’s targeting could double the 180 million barrels of reserves the Nikaitchuq field originally held when it started producing in 2011, according to Grande. Upgrades to Doyon Drilling’s Rig 15 — which has done all the drilling at Nikaitchuq — are being finished now so it can start drilling the first long exploration well next month. Elwood Brehmer can be reached at [email protected]

More exploration approved at Icy Cape

Alaska Mental Health Trust Land Office officials are spending the winter reviewing the results of last year’s drilling campaign and preparing for another at their Icy Cape heavy mineral prospect. Those results were promising enough for the Alaska Mental Health Trust Authority Board of Trustees to approve $3 million in October to spend on more exploratory drilling next year, according to Trust Land Office Executive Director Wyn Menefee. The Icy Cape prospect is a long stretch of coastline about 75 miles northwest of Yakutat in Southeast Alaska owned by the trust at the entrance of Icy Bay that appears to hold world-class deposits of several heavy minerals. The entirety of the area is roughly 48,000 acres and stretches for more than 30 miles along the Gulf of Alaska coast. “We have a lot more to do in the sense that we didn’t cover any of the western portion of the property,” Menefee said in an interview. “We also need to do some more on the eastern side of the property. There’s just more to do before you have a better picture of where everything’s located.” Trust Land Office leaders have stressed that they are still in the preliminary exploration phase of evaluating the prospect but early drilling samples from the broad delta at the point of the cape indicate the ore there could be up to 40 percent heavy minerals. Overall, an average of 26 percent of the sands are heavy minerals, according to the Trust Land Office’s 2016 annual report. The minerals of value in the “ore” — which is mostly old beach sands — are roughly equal portions of epidote and garnet in the areas of highest concentration with small amounts of zircon and even gold. Epidote and zircon are semiprecious gemstones. Garnet has also been used as a gemstone for hundreds of years, but more recently the hard mineral has been put to use as an industrial abrasive on sandpapers and in sandblasting applications. It is also used in water filtration; garnet’s small pores allow for the passage of liquid while catching some contaminants. If developed, the Trust property would be the only source for garnets on the West Coast, Land Office officials have said. The Trust Land Office manages roughly 1 million acres of land across Alaska for real estate and resource development purposes, the proceeds of which go to fund the Alaska Mental Health Trust Authority’s work to benefit Alaskans with mental health and addiction challenges. Menefee said there is a misconception about the project that mining Icy Cape heavy minerals would literally mean digging up the beach. Much of the area is forested, he added, and portions of it have been logged. “It’s the course of time that creates these sandy forelands; so even though they are considered beach sands, it’s not the beach,” he said. The sands that comprise the substrate are the result of two sediment patterns coming from opposite directions, those materials that have eroded and washed down from the steep mountain faces above and sediments that tidal and wave action have pushed up to the shoreline. Most of that drilling has been done right from the logging roads that are already there, Menefee said. The area also has an airstrip. The drilling activity — and any future mine — doesn’t and won’t resemble the hard rock mines many people associate with the industry. Most of the drilling is to less than 100 feet down and it’s done with a sonic drill rig that uses vibration, not water, to make its way down. “It just vibrates its way down. We may go 75 to 100 feet, something like that, and then we take out the sand core samples,” Menefee described. “It’s a pretty low-intensity drilling program.” Because it’s a placer deposit, the mine would be “much more akin to gravel operations,” he added. Accordingly, the minerals would be sorted either using water, gravity, vibration, magnets or a combination of the processes, Menefee said, noting there is no need for chemical leaching. Trust Land Office revenues have varied greatly over its 22 years of existence, as money from timber and land sales and other resource projects has come and gone. Since 2011, its annual revenue has been between about $9 million and $16 million. Income from an Icy Cape mine — either as a royalty-collecting passive landowner or an active partner — could multiply the Trust Land Office’s annual revenue several times over and continue for decades, leaders have said. Menefee also emphasized that development is still a long ways off, saying it’s “way too preliminary” to even forecast a development or partnership structure and what role the trust would play in that. “I think that likely we are going to have anything from a few to several more years (of exploration) and a lot depends on the results of our drilling, the distribution of what we find,” he said. “It’s hard to tell right at the moment how long that (drilling) program will last before we would move towards an actual mine.” Between exploration and development the Trust Land Office might also demonstrate the viability of the prospect with prototype sorting equipment, depending on what potential mining company partners want to see, Menefee said as well. The simplicity of the operation and the fact that it’s all on trust, or state, land means federal permits and the often lengthy and costly environmental impact statement review process won’t be needed, according to Menefee. However, he again noted that permitting a full mine operation is a long ways off. “We are attempting to keep the communities and the public informed of where we’re going. We just held public meetings in Cordova and Yakutat and we intend to keep doing that after each field season to let people know where we’re at,” Menefee said. Elwood Brehmer can be reached at [email protected]

Mixed reaction to AK LNG-China letter

Gov. Bill Walker and his gasline team touted an agreement signed Nov. 8 with three Chinese mega-corporations as the largest step the state has ever taken towards finally putting together a North Slope natural gas project. After a few days to digest the situation, legislators’ reaction has been more subdued. Senate Resources Committee Chair Sen. Cathy Giessel, R-Anchorage, said she first sought out LNG industry experts to determine exactly what the arrangement, characterized as a joint development agreement by Walker and Alaska Gasline Development Corp. President Keith Meyer, substantively is. Walker stressed the joint development agreement between the state, AGDC and the integrated Chinese oil and gas giant Sinopec, the Bank of China and the $813 billion sovereign wealth fund China Investment Corp., includes all the pieces needed to make the $40 billion Alaska LNG Project a reality: a gas seller, buyer, and project financiers and investors. Meyer said in a briefing following the signing that the substance of the joint development agreement goes beyond what would be found in a letter of intent from a prospective gas buyer or project investor. AGDC Board of Directors Chair Dave Cruz emphasized during an October project update to legislators that the state-owned corporation was seeking to have a letter of intent by the end of the year. Meyer has repeatedly said letters of intent are paramount for gas sellers because while they fall short of being a full-fledged take-or-pay contract, Asian gas customers do not back out of them. The joint development agreement keeps AGDC on schedule to make a final investment decision on the project at the end of 2018, Meyer said further Nov. 8. On the other hand, Giessel described it as “another in a line of (memorandums of understanding)” with potential Asian LNG customers or investor companies. “I’m not sure it was more significant than other things we have seen in the past,” she added. In June, AGDC announced it had reached a non-binding MOU with Korea Gas Corp., to establish a framework for Kogas, as it is commonly known, for the government-owned utility to participate in developing and possibly investing in the Alaska LNG Project. It was also widely reported at the time that Kogas had entered into similar agreements with competing LNG projects around the world as well. Most recently AGDC announced a similar MOU with PetroVietnam Gas Nov. 12. Meyer said in a press release that the agreement with PetroVietnam complements the Chinese deal because a portion of the Alaska LNG Project’s capacity — designed at up to 20 million tons per year of LNG — remains available. South Korea and Japan have traditionally been the region’s primary LNG importers, with China joining them of late. Other East Asia countries have not participated in the LNG trade on a large scale, but the downturn in global LNG prices that has challenged the Alaska LNG Project has some countries in need of energy looking more at LNG as a viable option. “Vietnam is a new entrant into the LNG industry but has the potential to be a rapidly growing customer of LNG and we look forward to participating in the growth of the Vietnamese economy by providing reliable and stable natural gas supply,” Meyer said. Regardless of party, many legislators have been skeptical of the Alaska LNG Project since it became clear last year that Walker’s administration would take the lead of the megaproject from the state’s former producer partners. Some have questioned the state’s ability to succeed in the cutthroat LNG industry with worries about what it might end up costing. Others have asked why the state would want to move ahead when the presumed expert entities — BP, ConocoPhillips and ExxonMobil — sought to slow down the Alaska LNG until market conditions improve. BP subsequently signed on to assist AGDC behind-the-scenes in developing the project this year. Still others have more quietly commended the governor for trying to make something happen. The announcement from Beijing doesn’t seem to have changed those sentiments much. Giessel noted the state hasn’t fully secured a right-of-way through all of the federal lands the 800-mile pipeline would traverse and hasn’t yet gotten thorough feedback from financial advisors, among other necessary tasks. At this point, she said the potential buyer-investor agreements are to her “incredibly premature.” If Walker and Meyer can get a firm commitment from the Chinese corporations Giessel said she would still be apprehensive about the resulting deal, calling the Chinese firms “experienced and very strategic” negotiators, while describing AGDC officials as “clearly amateurs in comparison.” “The very first goal the Legislature had (for Alaska LNG) is gas for Alaskans,” she said. “That gets lost in a lot of these discussions.” Based on general market projections Meyer has said gas sales from the project would generate about $1 billion annually, of which the state would be privy to about $250 million through royalties and taxes. If Alaska were to raise the cash to be a primary equity investor, the Alaska LNG Project could return $2 billion per year or more to the state during the 20-year debt service period. Once the debt is paid would be the potential to return upwards of $6 billion per year to Alaska LNG investors, according to AGDC’s calculations. The corporation bases the figures on a broad 75 percent-25 percent debt-to-equity financing plan with an 8 percent average equity return through the debt term. Finding investors for the project’s infrastructure willing to accept a smaller return than major oil companies would in exchange for a long-term, stable investment has been Meyer’s primary counter to concerns about the producers wanting to wait on development. Another issue legislators have raised is to what level would AGDC allow gas customers to invest in the project. Large, often government-owned utilities and companies signing up to buy billions of dollars worth of LNG over decades also reliably want a small equity stake in the project so they have access to and can vet all of the other financing and construction contracts. If a gas buyer is allowed too large an investment stake in Alaska LNG it could exert leverage on AGDC and prevent the corporation from negotiating the best deals it could for the state. The Legislature would ultimately have to approve any deal involving state money AGDC would agree to. As of Nov. 14 Giessel had not seen a copy of the joint development agreement, which Meyer said would be made public within about a week after the Nov. 8 signing. One of her counterparts in the House, Resources Committee Co-chair Andy Josephson, D-Anchorage, said he is optimistic about the progress AGDC has made while acknowledging no one has made a firm commitment to Alaska and numerous important terms remain cause for speculation. He said the significance of the agreement being signed in front of President Donald Trump and China President Xi Jinping shouldn’t be forgotten. “One does get the sense that, notwithstanding all the competition in the world, that President Trump and President Xi want something to happen,” Josephson said. The AK LNG agreement was part of a much larger collection of trade deals between U.S. and Chinese firms totaling $250 billion — which Trump promoted as a big step towards balancing trade between the countries. While noting the Chinese government’s human rights violations as a concern for doing business on the government-to-government level along with the U.S. adversaries China does business with, Josephson said country is already Alaska’s largest trade partner (mainly through seafood exports) and the state’s natural gas could play a part in solving the China’s massive coal-driven pollution problem, which the government is finally acknowledging. “I think there’s reason to applaud what happened and I’m glad the House chose not to join the Senate in stripping away $50 million from AGDC’s budget,” he added, in reference to a capital budget amendment and political message to the administration quietly approved by the Senate in May to move about half of the corporation’s available funding to other state functions such as education and public safety. The House reversed the move and it was not part of the budget compromise passed in July. Elwood Brehmer can be reached at [email protected]

ConocoPhillips plans for busy exploration season

It’s going to be a busy winter for ConocoPhillips. The company that has led exploration into the National Petroleum Reserve-Alaska west of the existing North Slope oil fields is heading back into the federal lands to drill four more greenfield wells early in 2018, according to spokeswoman Natalie Lowman. Last January ConocoPhillips announced the Willow discovery in the NPR-A that the company’s Alaska leaders believe contains 300 million barrels of recoverable oil and is capable of producing up to 100,000 barrels per day with the right production and processing facilities. With another exploration well planned for state acreage recently added to the Colville River Unit just east of the NPR-A, the five wells make for the company’s largest North Slope winter exploration program since 2002, Lowman said. “There’s three to help us further appraise Willow and Putu and then this other one that we’re calling Stony Hill,” she said further. The Putu well could be ConocoPhillips’ last chance at developing a prized chunk of state land around the Native village of Nuiqsut just south of the company’s Alpine oil field in the Colville River Unit. It’s on the southern edge of the Pikka Unit, which holds the 1.2 billion barrel-plus Nanushuk oil prospect that operator Armstrong Energy just sold to Australia-based producer Oil Search Ltd. ConocoPhillips took control of the area surrounding Nuiqsut — the now-defunct Tofkat Unit — in 2016 in a transfer from Brooks Range Petroleum Corp. after Brooks Range was unable to work out an access agreement with Kuukpik Corp., the Native village corporation for Nuiqsut that jointly holds surface rights to the area with the state. The lease transfer was originally contingent upon the company drilling Putu last winter, as it’s an area Department of Natural Resources officials also see as highly prospective and want developed. However, ConocoPhillips held off on drilling Putu last winter after Nuiqsut residents raised concerns about the possible impacts of drilling the well roughly three miles from the village. After going back-and-forth with the state in a regulatory fight that lasted several months DNR Commissioner Andy Mack ruled in August that the company could keep the leases for another year as long as it paid the state $7 million in lease bid replacement payments and drilled the well into the Nanushuk geologic formation by May 31, 2018. The Willow prospect is similarly a Brookian Nanushuk oil play, according to ConocoPhillips. It could start producing as early as 2023 if development plans move ahead smoothly, company officials have said. The Stony Hill exploration well will be drilled southwest of Nuiqsut and just inside the eastern NPR-A boundary, Lowman said. To get all the work done the company has contracted for three exploration drilling rigs this winter, she added. ConocoPhillips, along with bidding partner Anadarko Petroleum, was the winning bidder on nearly 600,000 federal acres in the NPR-A during the December 2016 lease sale. The large exploration program, which Lowman noted is still subject to final budget approvals, is planned despite an announcement by ConocoPhillips executives during the company’s late October quarterly earnings report that its capital spend will likely end up being $4.5 billion worldwide in 2017, down about 10 percent from initial expectations. Despite that, company leaders said Nov. 8 that capital expenditures should average $5.5 billion per year for the next three years as long as crude stays above $50 per barrel. Armstrong Energy also plans to drill an appraisal well and sidetrack in the southwest portion of the Pikka Unit this winter before handing the operating reigns to Oil Search in June 2018. The appraisal wells will be in a portion of Pikka that has not been drilled and is nearby the Putu area. Armstrong also has an agreement with ConocoPhillips to receive the drilling results from the Putu well, according to documents the company submitted to the state. Elsewhere in the NPR-A, ConocoPhillips will be continuing work on its Greater Moose’s Tooth-1 and -2 oil developments. The mid-sized oil projects will collectively cost roughly $2 billion to develop and each is expected to produce up to about 30,000 barrels per day. First oil is should flow in late 2018 from GMT-1 and from GMT-2 late in 2021, according to the company. Elwood Brehmer can be reached at [email protected]

Unpaid tax credits, logistical issues slow Inlet producers

A pair of small companies working in Cook Inlet are trying to overcome funding shortfalls stemming from the State of Alaska not yet making good on promised tax credit refunds. Furie Operating Alaska and BlueCrest Energy, both Texas-based independents, had to interrupt their 2017 work plans because expected tax credit repayments from the state did not come through. BlueCrest CEO Benjamin Johnson said in a prior interview with the Journal that the state owes his company roughly $90 million in tax credits for drilling and development work done at its Cosmopolitan oil project before legislation passed to kill the tax credit program July 1. The state has paid BlueCrest $27 million for its refundable tax credits since the company purchased the “Cosmo” project in 2012, according to Johnson. BlueCrest is the sole owner and operator of the Cosmo oil project on the edge of the Inlet near Anchor Point on the Kenai Peninsula. He said in August the company hoped it would have to pause its drilling program only for a month or two after a well was finished in September, if private financing could be secured. Oil industry backers have roundly criticized Gov. Bill Walker for vetoing $630 million worth of appropriations in 2015 and 2016 to pay the industry tax credits. Walker has been steadfast in his assertion that the state cannot afford to make the large credit payments while still in the midst of $2.5 billion-plus annual budget deficits. On the other hand, the governor has also insisted he would like to see the state pay down on the obligation as soon as the Legislature passes fiscal reforms to balance the state budget. Walker’s original fiscal plan proposed in early 2016 included $1 billion to pay off the credits entirely. This year the Legislature passed House Bill 111, which ended the program, but also appropriated just the $77 million minimum for credit payments in the operating budget while still at an impasse over a fiscal solution. State statute outlines an oil price-based formula for the minimum amount the state should pay towards the credits in a given year should lawmakers chose to not pay them off entirely. Office of Management and Budget Director Pat Pitney told the Senate Finance Committee Oct. 31 that the 2019 fiscal year minimum payment would be $118 million. The 2019 fiscal year begins next July 1. The Revenue Department estimates the state will owe $736 million in credits at the end of the current fiscal year and the balance — if continually paid at the minimum — should be paid off in 2024 or 2025. BlueCrest’s 2018 plan of development for the Cosmopolitan Unit submitted to the state Division of Oil and Gas states the company finished drilling the 22,300-foot Hansen 14 well from its onshore drill pad Sept. 25. The company has been producing a little more than 300 barrels of oil per day from Hansen 16, an exploration well drilled by ConocoPhillips prior to BlueCrest’s purchase of the project, according to state production data. Once plugs are removed from the initial well and both are ready for production each should pump more than 1,000 barrels per day, according to Johnson. The above ground portion of the Cosmo 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. In the coming year BlueCrest will be evaluating the drilling results from lateral wells off of the Hansen 14 and prior exploration well, company President John Martinek wrote. Martinek wrote further that “BlueCrest’s plan is to drill at least one well in the 2018 drilling program.” At this point that well is most likely to be another lateral off of Hansen 16 targeting a higher geologic formation, according to the plan document. Johnson has said the Cosmo oil pool is confirmed to hold “many hundreds of million of barrels of oil” and could support seven years of continuous drilling. 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. Kitchen Lights Furie had big plans for the summer of 2017 when Vice President Bruce Webb spoke to the Journal in April, but a combination of unpaid credits and logistical challenges put much of the company’s plans on hold. Furie operates the middle Inlet Kitchen Lights Unit from the Julius R natural gas production platform it installed in 2015. It currently produces about 14 million cubic feet of gas daily to fill the gas contracts it has with to local electric utilities. Another contract to supply Enstar Natural Gas Co. commences next April. Furie leaders had intended to do a workover of the KLU-3 well, finish drilling its A-1 well and then drill another gas well and a deep oil test well, according to Webb. However, the Legislature did not approve the state’s operating budget for fiscal year 2018 — which started July 1 — until June 22. “Although the Randolph Yost jack-up rig was 100 percent staffed to commence drilling operations in April of this year, Furie was forced to delay its 2017 drilling plans — including purchasing tangible items with substantial lead times — until additional funding for the purchase of tax credits was approved by the Legislature and the governor,” Furie’s 2018 Kitchen Lights development plan states. The document was sent to the Division of Oil and Gas Oct. 6. Further, the tugboat needed to handle the large drilling rig’s anchor left the state for dry dock repairs in Singapore in mid-July, according to Furie. Given it was the only vessel in Alaska capable of handling the Randolph Yost anchor system and the lack of funds, the drilling program went awry. Furie did manage to do maintenance work and upgrades to its platform and onshore facilities and had divers install supports to the 15-mile subsea pipeline that connects the two during the summer work season. Going forward, “development will focus on additional wells for increased reserves and deliverability,” the plan states. “However, existing natural gas market constraints through 2019 may have an impact on the necessity of multiple wells.” If the local gas market warrants, Furie will finish the A-1 well in 2018 and drill another gas well similar to the KLU-3. The company may opt to drill another exploration well or re-enter and deepen its KLU-4 exploration well, according to the plan. “Looking beyond 2018, Furie intends to continue diligent exploration, delineation and development activities throughout the Kitchen Lights Unit,” the plan states. Elwood Brehmer can be reached at [email protected]

Brooks Range Petroleum seeks more time as Mustang delayed again

Brooks Range Petroleum Corp. leaders are asking state regulators for another year to bring their small and long-delayed North Slope oil project to fruition. Bart Armfield, CEO of Anchorage-based Brooks Range wrote in the 2018 plan of development document for the company’s Mustang oil project submitted to the Division of Oil and Gas Oct. 23 that first oil is not expected now until early 2019. The 2017 plan, submitted to and approved by the division last fall, pegged first production for this December. According to what Armfield wrote, that isn’t close to happening. He explained in the most recent Mustang development plan that: “In general, the (2017) plan remained in ‘Warm Standby’ during the term of the 4th POD due to continued low oil prices and difficult economic conditions.” Brooks Range had hoped to finish the remaining engineering for production facilities; connect to ConocoPhillips’ Alpine oil transmission pipeline; install the modular facilities and begin producing oil in 2017, based on the planning documents. Full development of the oil field has been estimated to cost $580 million and includes drilling 11 production wells to go along with another 20 gas and water injection wells to reach expected peak production of about 15,000 barrels per day. On the west edge of ConocoPhillips’ large Kuparuk River oil field, Mustang holds about 22 million barrels of proven reserves. Brooks Range did manage to further its evaluation of oil formation data and refine its drilling plans this year and requested and receive proposals to conduct the facility installation work. Additionally, the company has reentered one of its Mustang exploration wells and is currently fracking and testing the well, according to the plan of development. Armfield said via email that the ongoing evaluation should provide information that will be key to determining the future of the project. Brooks Range was unable to commission a drill rig for development wells this year because a processing facility was not available. Further, the company did not tie into the Alpine pipeline, advance facility engineering, solicit proposals for fabricating facility modules and subsequently get the modules fabricated and moved to the Slope all “due to adverse economic conditions,” Armfield wrote. Engineering of the processing facility and associated infrastructure started in January 2015 but was put on hold by the third quarter of the year as low oil prices hampered financing and project economics, according to the Mustang development plan Brooks Range submitted to Oil and Gas last September. The most recent Mustang plan submitted Oct. 23 — which the Division of Oil and Gas has 60 days to review — states that Brooks Range will do basically everything in 2018 that didn’t and won’t happen this year to be ready for first oil in the first quarter of 2019. Getting production from Mustang this year was a particularly key milestone because the Southern Miluveach Unit of state lands that contains the prospect is set to expire Dec. 31. The Southern Miluveach Unit’s original five-year term was set to expire March 31, 2016. However, former Department of Natural Resources Commissioner Marty Rutherford granted a request to extend the unit term to Dec. 31, 2017, on the hopes Brooks Range would have Mustang up and producing before the extension ran out. When acting Oil and Gas Director Jim Beckham approved the 2017 Mustang plan in November 2016, he wrote that completing the scope of work it outlined and getting to production seemed possible, but called the schedule “extremely tight.” At the time, Beckham informed Brooks Range that it would “need to drill and test a well that is capable of producing in paying quantities, apply for and receive certification of that well, and either produce from the unit or be working towards production by Dec. 31, 2017.” He added at the time that the state wants to see the company succeed but the tight schedule, pending unit expiration and financing and other issues caused state officials to question the likelihood of success. The Alaska Industrial Development and Export Authority is also keenly interested in seeing Mustang be a success because it invested $70 million in two installments in December 2012 and April 2014. A $20 million investment in 2012 from the state-owned finance authority supported a five-mile gravel road and 19-acre facility pad. AIDEA is an 80 percent owner in that base infrastructure that was finished in April 2013. Then, Brooks Range leaders said they were shooting to have the field in production by the fall of 2014. In April 2014, AIDEA committed another $50 million equity investment in the $225 million Mustang oil processing facility. Armfield said at the time that the project would start production in late 2015 and likely peak in 2017. With AIDEA’s investment, the Mustang processing facility would be the first such open-access facility on the Slope and have the potential to help in the development of other nearby fields. A spokesman for AIDEA said in a prior interview that the authority’s interests in the road, pad, yet-to-be constructed facilities and North Slope lease holdings give it multiple forms of collateral in Mustang should the project fail. DNR terminated the nearby Tofkat Unit held by Brooks Range in 2016 after the company held the acreage for years without doing much with it. In the case of Tofkat, Brooks Range allegedly was unable to secure an access agreement with Kuukpik Corp., the Alaska Native village corporation that holds surface rights to the state leases. The Tofkat leases have subsequently been transferred to ConocoPhillips in exchange for commitments to drill exploration wells this winter and to make a total of $7 million in bonus bid replacement payments to the state. Elwood Brehmer can be reached at [email protected]

Port gets new name, but problems remain

The Port of Anchorage is no more. No, it did not slough off into Cook Inlet overnight, though parts of it have. Rather, the Anchorage Assembly changed its name to the Port of Alaska on Oct. 24, a gesture intended to emphasize the importance of the ailing infrastructure to all of Alaska, not just its largest city. Regardless of the name, the price tag to keep it in service for the next 75 years remains at upwards of $700 million. Steve Ribuffo Port Director Steve Ribuffo and External Affairs manager Jim Jager said in a joint interview shortly before the name change that while it has been known for close to 20 years the port needs a massive overhaul, the clock is ticking on the status quo. Officials at the city-owned port began casing the most corroded steel piles that support the dock with steel jackets in 2004. The pile-patching program has since ramped up to a $3 million per year operation, according to Jager. To date, about 600 of the piles have been jacketed, which is just less than half of all the piles. Jim Jager The problem is the steel jackets that are helping the port outlive expectations are only useful for about 10 years themselves. “If you do the math, basically 10 years from now we are going to be closing docks because of load-bearing capacity,” Jager said. And that’s if an earthquake doesn’t knock it offline sooner.   Starting in 2004, the most corroded steel piles that support the dock have been encased with steel jackets. The pile-patching program has since ramped up to a $3 million per year operation and to date, about 600 of the piles have been jacketed. That’s just less than half of the piles at the port. (Photos/Courtesy/Port of Alaska) Roughly 2,400 containers cross the Anchorage docks every week, according to Jager, and either finding alternative places to offload them or new ways to get the groceries and other consumer goods they hold to Alaska in a timely fashion is just part of the challenge almost everyone in mainland Alaska would face if the port closes. The Port of Seward has just one large ship berth and employing it for jobs now taken up by Anchorage would also mean relying on the Seward Highway to get freight to Anchorage and north to the Fairbanks area. Whittier’s port is equipped for rail barges and handles industrial materials and equipment destined for the North Slope and other project destinations. There is also only one way in and out of the small town through a 2.5-mile tunnel that doubles as a railroad and roadway. “Ninety percent of freight in the state comes via water and half of that crosses this dock and half of what crosses this dock keeps going outside of Anchorage, so we have got a responsibility of being able to maintain that supply chain,” Ribuffo said from the port’s administrative building, which sits on the dock. Jager described the situation another way. “We have marine connects to road. We have marine connects to rail. We have marine connects to air. We even have marine connects to pipeline because we have pipelines to JBER and to Ted Stevens (International Airport) and down to Nikiski,” Jager said. “The dock rust issue is a mass disruption issue. The disruption that (the port closing) is going to cause is huge. I don’t think we can even begin to describe what it is.” Ribuffo added that the Anchorage port is the state’s critical hub — not only for cargo but also disaster response — because it was the only piece of usable infrastructure like it left standing after the 1964 earthquake. As it stands, load capacities on the port’s Terminal 1 have already been reduced because of weakened piles, Jager said, meaning Matson Inc. could not move its container cranes to Terminal 1 and offload there if need be. Matson and TOTE Maritime each provide twice-weekly service into Anchorage; Matson with containerships and TOTE with roll-on/roll-off trailers made for truck transport. “We can’t even use the big fork lift that they use for setting the gang plank on all of this dock, much less offload containers,” Jager added. Alaska’s military installations add another layer to the port’s importance. It is one of 19 commercial ports across the country classified as a National Strategic Seaport by the Department of Defense. About 20 percent of the cargo, much of it jet fuel, that crosses its docks is Defense related, according to Jager. The Matson containership Kodiak is seen at the Port of Alaska alongside fenders making up the dock facing. Below, one of those fenders is seen being removed from Cook Inlet after the 57,000-pound structure fell off the dock because of corrosion. (Photos/Courtesy/Port of Alaska) In June, a cruise ship was docking at the port when a 57,000-pound fender fell off the dock because the steel supports gave way due to corrosion. Luckily, that was the worst of it. “On the one had it was a nothing event. It was a nothing event that cost us $30,000 but it was a nothing event in terms of nobody got hurt, no trips got missed, nothing was delayed,” Jager said. “On the other hand, guess what, that is one of more than 100 fenders we have and it’s not the only one that has that problem.” In concept, rebuilding the port is a fairly straightforward, albeit very large, construction project: Replace the pilings and the docks they support in phases to allow the freight vessels, fuel tankers and cement ships that commonly call on the port to — with some inconvenient shuffling — continue to provide Alaskans with the things they need. In reality, of course, everything is much easier on paper. While the need to do something soon is clear, Ribuffo, Jager and their colleagues must also convince the skeptics of the new rebuild program that it will not be a repeat of the first Port of Anchorage construction and expansion project, which, depending on who’s talking, failed miserably because of design flaws or construction incompetence. “It’s a dock replacement project; it’s not an expansion project and we can’t stress that enough,” Jager said. The Port of Anchorage Intermodal Expansion Project started in 2003 but came to a halt in 2010 after extensive damage to the Open Cell Sheet Pile being installed to support the new docks was discovered. That work, much of which has been or will be removed as part of the new plan, cost roughly $300 million from a consolidated pool of local, state and federal dollars. The plan for the Port Modernization Program is to stick with a more traditional pile-supported dock. Built to modern standards, it is expected to last at least 75 years. The first of the current docks were commissioned in the early 1960s and the pile jackets have acted as life support to keep the port going well beyond their 35-year design life. “Back then — late ‘50s through the mid-‘70s — the piling were 7/16s of an inch thick, hollow, and some of it was left over pipe from the (Trans-Alaska Pipeline) days even, and that was what was used to finish the place over here,” Ribuffo described. Cook Inlet’s ice sheets and general ice buildup on the supports literally rip cathodic corrosion protection systems off the dock, so the designers of the new dock have decided to quit fighting the corrosion battle, which in salt water is almost always a losing battle anyway. The new piles will be up to one-inch thick steel and 48 inches in diameter as opposed to the hodgepodge of smaller piles put in years ago. More importantly, they will be filled with reinforced concrete that will act as the main load-bearing structure, meaning the dock will not be compromised as the ocean eats away at the outside steel, Ribuffo said. The piles will also be driven deeper — up to 180 feet down — into the compacted layers of glacial sediments that act as bedrock to keep the port intact should a severe earthquake effectively turn the topsoil to mud, according to Jager. Most of the damage caused by the 1964 earthquake in Anchorage was not because of the ground shaking things apart; rather the top layers of soil, comprised mostly of glacial muds, ostensibly liquefied and washed some structures away and left others with no foundational support. Bigger, stronger piles also means fewer of them are needed, which in a worst-case earthquake means soil, and everything it carries with it, will hopefully flow through the dock and down to the ocean without taking the port with it. “For the environment up here it makes sense to go bigger and wider and deeper and fewer and you get the same level of support,” Ribuffo said. Phased construction The first phase (PDF) of the modernization project entails building a new petroleum and cement terminal on the south end of the port to replace the weakened Terminal 1, where tankers and cement ships currently offload. On the north end, a portion of the backlands created during the expansion project and held back by the sheet pile will be removed to open space for TOTE at Terminal 3 and improve current flow past the docks to ease sediment fill issues. Ribuffo said port officials are hopeful phase one can be done with the $127 million left unspent from the first construction project. The Municipality of Anchorage also got $19 million from seven different settlements in the lawsuit it filed in 2013 against contractors and design firms in the first project. That suit closed in January and the settlement money is being put into rebuilding the port. A separate suit against the U.S. Maritime Administration, or MARAD, which managed the failed expansion project, is ongoing in federal court. Municipal attorneys have said they are seeking about $300 million spent on the project under MARAD’s watch. Bringing the Anchorage port up to modern standards does mean widening the docks to about 100 feet and pushing them out 150 feet to reach 45-foot water depths. However, that is all to simply accommodate the larger vessels and dock cranes that are standard equipment in the shipping industry these days. “It’s not more dock, but it’s more capacity,” Jager said. “We’re hurting our competitiveness by forcing them to use smaller equipment.” Subsequent construction phases will rebuild terminals 1 and 2; remove the rest of the northern extension from the prior work; rebuild the second tanker dock and demolish Terminal 3. With a plan in place, the challenge becomes paying for it. “Once you’ve started this you’ve got to finish it. There’s no running out of money halfway through,” Ribuffo said. Preliminary price estimates based on a 15 percent design in late 2014 when the concept was unveiled put the rebuild at nearly $500 million. The price is now up to roughly $700 million at a 30 percent design largely because of issues that have arisen as work has progressed, he said. It also accounts for inflation between now and the end of the work years into the future. For example, port officials have determined they will have to contract for an additional tug to help the vessels longer than 900 feet that call on Anchorage safely maneuver around the work barges that will be in the water during construction. That will cost about $25 million during the seven-year project, according to Ribuffo. His team is also negotiating with the U.S. Army Corps of Engineers for at least partial funding to dredge a channel in front of the new cement dock. The Corps pays all the costs for annual dredging of previously dug areas at the port, but first time dredging is usually the owner’s responsibility, he explained. However, the first design concept had the cement dock farther out in an area that is regularly dredged and for multiple reasons the Corps asked for the dock to be pulled back into shallower water in need of dredging. Whoever ends up paying for it the first round of digging is an unplanned-for $13 million, he added. The port users, Jager noted, could pay for some of the necessary equipment upgrades included in the $700 million and those discussions are ongoing. At the time of this writing the Anchorage Assembly had not taken up the matter of deciding on the construction management firm recommended by port officials, so the company remains confidential. Ribuffo said the Assembly was expected to discuss the issue in November, at which point the firm would become public. The Assembly and both former Mayor Dan Sullivan’s and current Mayor Ethan Berkowitz’s administrations have leaned on the Alaska Legislature to pay for most of the project as most of the state relies on it in some way, but to no avail. In December 2016 the Assembly requested $298 million from the Legislature, but got silence in response. With the State of Alaska still in the throes of $2.5 billion-plus deficits annually and the last savings accounts dwindling, there is little appetite for capital spending, even on a project recognized to be as vital as rebuilding the port. Gov. Bill Walker floated the idea of a $500 million state general obligation bond package in early 2016 to address the state’s most pressing needs, but it didn’t get far. Some legislators have said municipality needs to resolve its litigation with MARAD so it’s known what’s needed before the state contributes. Ribuffo said he is hopeful the suit can be settled soon, but if not it could drag into late next year or beyond. That could challenge the window port officials are up against to get the project done before the port rusts away too far, so other funding avenues are being examined. “Everything is on the table for consideration as par of the solution,” Ribuffo said. “Do we hang a ‘For Sale’ sign on the Port of Anchorage and potentially find a buyer that will come in and take this risk and responsibility off the city’s hands?” Third parties own other major ports around the country, but who would buy something needing $700 million of work is an open question. Ribuffo said municipal leaders are also open to the myriad of public-private partnership options that are available instead of just a straight sale. To this point, years of federal grant applications hasn’t yielded much, he acknowledged, but they keep trying. Day-to-day the port is self-sustaining financially, but it has only $3 million to $4 million at most to chip in per year, Ribuffo said. Looking at the port’s fee structure is one partial option. “We’re not saying by any stretch the state should pay for the whole darn thing. We know there are contributions we can make,” he said. “We still don’t know what any settlement with the federal government would amount to. We do know that in the world of ports we’re a pretty cheap date right now. We’ve got a little bit of room to help ourselves and not scare too many people away. All of that has to be in the package, if you will, that makes this thing happen.” Jager added that paying for the port through a combination of revenue or general obligation bonds or tariff increases roughly equates to a $1,200 to $1,500 “tariff” on each Alaska household over the next 25 years, or the life of a bond. That presumes a tariff hike on the port users would be passed on to consumers through higher freight fees. The alternative is drastically higher costs and longer waits on everything if the port has to be shuttered. Current business Ribuffo expects business to be down about 5 percent in 2017, which is roughly on par with the average decline in Alaska’s major industries as the state works its way through the current recession. Total tonnage across the docks was down about 7 percent in 2016 from a year prior to nearly 3.5 million tons of cargo and petroleum products, according to port records. “This is a meat and potatoes kind of business that we do here and there’s fewer mouths to feed now, so that kind of thing is going to happen,” he said of the decline in activity. However, increased demand for jet fuel from the state’s military bases and strong cargo business at the Anchorage airport have helped keep the losses from being more severe, according to Ribuffo. Those factors, combined with the closing of the Flint Hills North Pole oil refinery, which mainly produced jet fuel used in-state, have nearly tripled the petroleum imports to Anchorage since 2014. Tankers coming into the port now make up nearly half of the port’s business, he said. Elwood Brehmer can be reached at [email protected]

Walker, AGDC sign gasline agreement with 3 China cos.

Gov. Bill Walker’s administration announced a big step forward for the $40 billion Alaska LNG Project late Wednesday in the form of a multi-level agreement with three Chinese mega-corporations to advance the project. President Donald Trump and China President Xi Jinping attended the signing of the joint development agreement in Beijing, according to a press release from the governor’s office. Walker said there is still work to be done before a final investment decision is reached but the agreement has the five key players to make the trans-Alaska gasline project go. The Alaska LNG development partnership includes the state; the state-owned Alaska Gasline Development Corp.; Sinopec, an integrated oil and gas giant with more than $450 billion in annual revenue and potential gas purchaser; the Bank of China; and the China Investment Corp., the country’s $813.5 billion sovereign wealth fund. “The gasline is key to building a stronger Alaska,” Walker said in a formal statement. “I thank President Trump for the full support he and his administration have shown for this project, as it brings the United States one step closer to energy dominance. When President Xi visited Anchorage six months ago, he shared with me his desire for deepening the mutually beneficial ties between China and Alaska. I thank him for expediting that vision to reality.” The governor also thanked the Legislature for not pulling funding from AGDC while the state is in “in difficult and uncertain times” with multibillion-dollar budget deficits. Additionally, he recognized BP, ConocoPhillips and ExxonMobil for helping the state take the lead in the project when LNG markets forced a change in the structure of the project in early 2016. “It’s the beginning of what we hope is a long relationship between Alaska and these companies,” he said in a press briefing from China late Wednesday. Walker has often stressed the need to get Alaska’s natural gas export project out to potential customers. “This is the market responding,” he added. AGDC Keith Meyer called it an “engagement” following the courtship that began in April when after Xi visited with the Walker during a stopover in Alaska on his way from the Lower 48 to China. It keeps AGDC on schedule for a late 2018 final investment decision on the megaproject, according to Meyer. Alaska legislators said through press releases that they are encouraged by the announcement and look forward to hearing more from the Walker administration. Former House Speaker and candidate for governor Rep. Mike Chenault, R-Nikiski, recognized the Trump administration in a statement but did not mention Walker or his leadership team. “This is once again the kind of news we hoped to see under the Trump administration. In less than one year Alaska has seen leaps and bounds towards developing resources beneath our soil and waters. I’m eager for a gas pipeline to become part of Alaska’s legacy. I look forward to seeing all the details in this joint development agreement,” Chenault said. The agreement should be made public in the next week, Meyer said in the briefing.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]  

House sends crime bill back to Senate; budget hearings commence

The House made headway Nov. 7 on both of the agenda items on Gov. Bill Walker’s special session call However, there still does not appear to be any interest from the Republican-led Senate Majority in approving the governor’s proposed employment tax, or any tax for that matter. In the early morning hours of Nov. 7 the House passed Senate Bill 54 by a 32-8 vote with a bipartisan group of Fairbanks and Matanuska-Susitna area representatives voting against it after long days of floor sessions throughout the weekend. The amendment process was rigorous with nearly 50 proposed changes but most of them were voted down. SB 54, which the Senate passed last spring, is a tightening of some of the sentencing guidelines for misdemeanor and low-level felony crimes relaxed the omnibus criminal justice reform legislation passed early in 2016 under Senate Bill 91. The bill will cost the Department of Corrections an additional $3.6 million to account for additional incarceration time, according to the fiscal note. The changes the House made to SB 54 will require a concurrence vote from the Senate. If the Senate doesn’t concur it could add a couple weeks of work closer to the end of the 30-day session. Later Nov. 7 the House Finance Committee heard from Office of Management and Budget Director Pat Pitney on the state’s fund balances and budget reductions in preparation for beginning hearings on the administration’s tax proposal. The 1.5 percent payroll tax would be capped at either a $2,200 payment or twice the previous year’s Permanent Fund Dividend and would raise about $320 million per year once fully implemented in 2020, according to the Revenue Department. Walker has stressed it would leave Alaskans the lowest-taxed people in the country and is necessary to link government’s ability to provide services with economic growth. Walker and Senate President Pete Kelly, R-Fairbanks, exchanged jabs through newspaper editorials in which Kelly questioned if the administration’s low oil production and associated revenue forecasts released this past spring were artificially low to justify the need for a tax. An updated production forecast for the current fiscal year raised the spring estimate from 459,000 barrels per day to a projected third straight year of increases at 531,000 barrels per day. The governor responded that he shares Kelly’s excitement over increased oil production but is “sorely disappointed that he continues to issue statements that rationalize ignoring our fiscal crisis.” As of this writing the Senate Finance Committee had a hearing scheduled for the governor’s tax bill Nov. 9, but that is just as likely a courtesy review of the bill as a signal the Senate Majority will act on it. The Finance committees can also use this time to gather background information ahead of the budget process during the regular session, which figures to be another tough battle and continue to feature the same fiscal issues dealing with multi-billion dollar annual deficits. SB 54 could also end up taking a majority of the remaining time in the special session. The Senate Finance Committee also had a hearing tentatively set on that bill for Nov. 10. The special session ends Nov. 22, the day before Thanksgiving. Elwood Brehmer can be reached at [email protected]

Optimism abounds in advance of annual RDC gathering

There is plenty for the players of Alaska’s extraction industries to be positive about and that should translate into a cheery Resource Development Council for Alaska conference. The annual gathering for some of the state’s largest industries will be held Nov. 15-16 as it usually is at the Dena’ina Civic and Convention Center in Downtown Anchorage. RDC for Alaska Executive Director Marleanna Hall said some of the good vibes are being sent all the way from Washington, D.C. Last year’s conference convened shortly after President Donald Trump was elected and while there was anticipation about what a Trump White House would mean for Alaska businesses, no one knew quite what to expect. “There’s some optimism out there and a lot of it is coming from the changes in the energy outlook for America; it’s coming from opportunities to revise and revamp federal regulatory processes and a lot of it is coming from the top down,” Hall said. “It’s good to see that because instead of spending a lot of our energy pushing back against new bureaucracy we’re making changes to streamline processes that are in place already.” Additionally, the Department of Natural Resources revealed a couple weeks ago that it expects North Slope oil production to continue to rise over the coming year; oil prices have jumped back to more than $60 per barrel of late and Congress, led by the Alaska delegation, appears as close as ever to opening the Arctic National Wildlife Refuge to oil and gas exploration. The RDC conference will open as it often does with a panel report by key players in the fishing, forestry, mining, oil and tourism industries. Popular state economist Neal Fried will follow with the first look at his Alaska economic forecast for 2018. “We thought it would be a good opportunity for (Fried) to hear a little bit about what the panel’s perception is because I think he’ll be able to add some of his own comments during his presentation in response to what these industry representatives say,” Hall added. The rest of day one will be oil heavy, with an emphasis on what it will take to continue growing production from the North Slope. DNR Commissioner Andy Mack will join industry leaders in that discussion. Attendees will also be able to hear from Eni Vice President Whitney Grande. Eni is an Italian-based major oil company that quietly operates the small Nikaitchuq field on the North Slope and has a unique plan to explore its federal offshore leases from the manmade Spy Island in state waters via long reach horizontal drilling. Day two will be highlighted by the lunch speaker, acting federal Assistant Energy Secretary Daniel Simmons. “He, of course, is going to continue the message of (American) energy dominance and Alaska’s role in that,” Hall said. She acknowledged that legislators scheduled to speak during the day — Senate Resources Chair Cathy Giessel and House Resources Co-Chair Geran Tarr — might still be preoccupied with the ongoing special legislative session that could run through Nov. 22. The conference will close with a message from the leaders of Stand for Alaska, the political action group formed to oppose a ballot initiative aimed at strengthening state permitting requirements for salmon habitat they believe could prohibit projects both large and small in the state. The Stand for Alaska panel will include Alaska Gasline Development Corp. President Keith Meyer, who will also give a report fresh off an Alaska LNG Project marketing trip to China with Gov. Bill Walker. “There’s a lot going on right now in China,” Hall said, adding Meyer might just have an agreement or two to announce that could be big news for the future of a gasline. Elwood Brehmer can be reached at [email protected]

Search for new play leads Oil Search to Slope

The search for a new oil play took Keiran Wulff almost as far from his home as it could before he finally found what he was seeking. The president of Sydney-based Oil Search Ltd. — a soon-to-be tenant on the North Slope — and Armstrong Energy CEO Bill Armstrong sat down with the Journal Nov. 6 in Downtown Anchorage to discuss their $850 million deal announced the week before. Oil Search issued a press release Oct. 31 declaring it had reached agreement with Armstrong Energy and Denver-based GMT Exploration Co., a silent partner in the Pikka Unit, to buy a 25.5 percent stake in the Nanushuk oil prospect the unit holds along with a 37.5 percent share of Armstrong’s prospective “Horseshoe” leases to the south for $400 million. Under the deal, Oil Search will become the operator of the Pikka Unit in June 2018 and take charge of developing the 1.2 billion barrel-plus Nanushuk field Armstrong discovered with the help of Spanish major Repsol. It also includes an option for Oil Search to fully buy Armstrong and GMT out of Pikka for another $450 million by July 2019, which Wulff said his company is “highly likely” to exercise. Currently, Repsol holds a 49 percent share of the Pikka Unit, while Armstrong has 38.25 percent and GMT Exploration the remaining 12.75 percent interest, according to the Alaska Division of Oil and Gas. Armstrong took the operator position at Pikka from Repsol in late 2015. The companies first partnered to explore the state lands between ConocoPhillips’ very large Kuparuk and Colville River fields in 2011. They have since drilled 18 primary and sidetrack wells to first discover and then delineate the Nanushuk play. This winter, while Armstrong is still the operator, the company plans to drill an appraisal well and sidetrack in the southwestern portion of the unit, which has not yet been explored. The exploratory Horseshoe well and sidetrack Armstrong drilled last winter about 20 miles south of the Nanushuk project area indicated the reservoir could hold more than 2 billion barrels of recoverable oil, Armstrong said in a prior interview with the Journal. However, the 120,000 barrels per day peak production estimate is based on the 1.2 billion barrels of proven reserves. First oil is expected in the early 2020s and full development of the field will entail 146 wells and cost up to $5 billion to bring online. Now about two years into the roughly three-year environmental impact statement process to develop Nanushuk, Armstrong, a geologist by trade, said he realized early on that the prospect of raising capital, which possibly meant going public, and growing his Anchorage staff of less than 50 by five-fold or more was not something he could, or really wanted to, tackle. The ever-growing obligation was forcing his company to be the one to pump the brakes on the project while Repsol, State of Alaska officials and others were pressing for just the opposite. “We’ve hit the ball so hard here, it’s like, ‘let’s do more; let’s do more,’” Armstrong said. A highly energetic man who even talks at a breakneck pace (particularly for a Texan), slowing down is not in his makeup. “It was rapidly becoming apparent that I was going to have to alter my company substantially if I was going to take this project to full development,” Armstrong said. “(Sometimes) you’ve got to give it up for adoption. I imagine the rest of my company was coming to that realization sooner than I did.” At that point he and his leadership team began a fairly informal search to find a new partner. And as it turned out, Armstrong didn’t so much find Oil Search as the two found each other. An old friend of Armstrong’s happened to be a geologist with Oil Search and the two reconnected via email, talking shop and catching up on other life happenings. Eventually, Armstrong was invited to stop by Oil Search’s offices and meet a few folks the next time he was in Sydney — where his daughter also lives. Some time afterwards Armstrong coincidentally found himself sitting next to Oil Search CEO Peter Botten at a dinner during the annual CERA Week industry mega-conference in Houston. The two quickly hit it off. Armstrong recalled Botten being attracted to his irreverent nature. On the other side of the equation, Repsol leaders mentioned to Wulff, who was on the lookout for a new opportunity for his company, that they had a major prospect in need of another partner. “Timing is everything,” Wulff said. “It’s sometimes better to be lucky than smart and frankly the confluence of circumstances where Bill’s friend works for Oil Search, I had a meeting with Repsol and they introduced me to the Alaska North Slope opportunity, and I thought, ‘gee, that meets a lot of our interests’ and when Bill met with Peter at CERA that really hollered at the fact that there might be something there and then poor old (Armstrong Director Ed Kerr) and I have been jousting for the last six months in terms of this asset.” Search origins Oil Search was formed in 1929 and until about 20 years ago was focused mostly on exploring in Papua New Guinea, where most of its holdings still are. “We faced a very similar situation to what Bill and Ed faced 20 years ago when we had to make the decision: do we remain an exploration company or do we take that next move to a production company?” Wulff said. “We felt because we understood the country we would go to the next phase.” Oil Search eventually bought Chevron’s Papua New Guinea assets in a deal that closed in 2003 and then quickly went from a firm with a couple hundred employees to a workforce of nearly 2,000, he said. “Bill was exactly right; it’s a complete change in the dynamic of a company,” Wulff added. “You go from being a purely entrepreneurial, can-do company to having a lot more obligations and (being) much more process oriented. You can’t really afford to have mistakes.” Today, Oil Search has about 1,300 direct employees, another 800 long-term contractors and is the largest employer in Papua New Guinea, according to Wulff. The company, which had $1.2 billion in revenue last year on $10.1 billion in total assets, also operates much of ExxonMobil’s drilling activity in the country. Oil Search had been looking to grow outside of Papua New Guinea and supplement its primarily gas reserves with an oil play. However, company executives did not want to get into a project outside their familiar territory without an “in-country expert,” Wulff said. “Anyone coming to Papua New Guinea should come to Oil Search, and they do. But in coming to the North Slope we wanted to make sure we were working with someone who had a really great record and frankly was a cultural fit for the organization as well,” Wulff said. Prior to the Nanushuk project Armstrong also discovered the small North Slope Oooguruk field, now owned by Caelus Energy, in the early 2000s and later the nearby Nikaitchuq field developed by Italian major Eni. “It’s a great time in the commodity cycle to (grow),” Wulff said, as oil prices appear to be pulling out of the three-year, sub-$60 per barrel trough they have been in. Oil Search equated the deal to buying into Nanushuk for about $3.10 per barrel. North to Alaska While the contrasts between the tropical South Pacific island nation and Alaska are obvious, Oil Search leaders believe the more subtle similarities and the company’s philosophy will help them make the move smoothly. Wulff said Papua New Guinea’s indigenous cultures play a very large role in working on the island, and generally in everyday life there, as they do in Alaska. Just for example, he said the nation has roughly 800 tribes and a full one-third of the world’s languages. That has led the company to work with a spirit of cooperation, with a goal of benefitting everyone in and around its projects, according to Wulff. “We’re very focused on shareholder return but at the same time we compliment that with a real strong social conscience,” he said. Oil Search is heading north with the intent to form cooperative relationships not only with its fellow Slope operators but also with the communities in the area — which is paramount if the company is going to stay on the Slope as long as its leaders hope. “We have a different style of operating,” Wulff said. “It’s not that we’re soft, we’re actually quite ruthless with respect to our strategy and pursuing our strategy but we see the only way to have that success long-term is that all your stakeholders are engaged.” Oil Search also has a partnership for support on the Slope with Halliburton, the large oil service company that assisted with operations after its deal with Chevron in 2003 and with a long history on the Slope as well. Tapping into Alaska’s homegrown oil workforce that has been hit by industry layoffs of late should also help make for a smooth transition into the state, Wulff said. After a few days of meetings with State of Alaska and other pertinent officials, the Oil Search executive said he has been reassured by the general support for the industry and the widespread goal of more oil production from the North Slope. Those meetings “enhanced” his confidence in Oil Search’s ability to be successful in the state. And while many Alaskans often worry the state’s popular debate over the proper oil tax structure, Wulff added that after working in several Middle East countries in recent years Oil Search is excited to operate in a stable government environment. “There’s always a balance between having the right fiscal terms that encourage exploration and the fiscal terms that ensure the community and the state get the right taxes; that’s a decision for the state,” he said. The bottom line is “Oil Search is a company that’s focused on being here for a long time,” Wulff stressed. Looking ahead Over the next few months Oil Search will take over Armstrong’s Downtown Anchorage offices and likely staff up to 100 people or more in the coming year, according to Wulff, but that doesn’t mean Armstrong Energy is exiting Alaska. Rather, a key part of the deal is that the companies plan to partner on future projects that allow each to maximize its strengths. “I want to keep doing what I do best, which is explore,” Armstrong said. Armstrong Energy now holds about 800,000 acres of leases on the Slope, of which the Pikka Unit is only about 15 percent, according to Kerr. Over the next year to 18 months, the two companies along with Repsol will develop a strategy to evaluate the prospectivity of all those acres. Armstrong said his company will be looking to repeat the Nanushuk play but noted he sees other opportunities as well. “We’ve got a lot to do,” Kerr said. Elwood Brehmer can be reached at [email protected]

Climate change vs. responsible development at Senate ANWR hearing

The U.S. Senate committee hearing held Thursday on the merits of opening part of the Arctic National Wildlife Refuge to the oil industry mostly featured rehashed arguments on both sides of the debate but also highlighted the some of the dichotomies and contradictions underlying the debate. Sen. Lisa Murkowski, who chairs the Energy and Natural Resources Committee and called the meeting in her committee, said to open the hearing that the majority of Alaskans would not support opening the ANWR coastal plain to oil activity if they did not feel it could be done in a responsible manner. “What I know is no one cares more about Alaska than those of us who live and work and raise our families there,” Murkowski said. “We love our state; we respect the land; we would never risk its future for the sake of development.” Sen. Dan Sullivan, who testified as a witness, was more direct in echoing her sentiment. “With all due respect to my colleagues here today there are three people in Congress who care more about Alaska’s environment than anyone else in the entire body: Sen. Murkowski, Congressman (Don) Young and myself,” Sullivan said. Young also testified and did so in his usual attention-grabbing fashion. In attempting to illustrate the size of the ANWR coastal plain, or 1002 area, Young did not put a pen to paper, but rather to the tip of his nose. “I represent Alaska,” he said before putting the ink on his face. “This little dot on my nose — I weigh 225 pounds — this little dot is what we’re talking about, the 1002 area.” The ANWR coastal plain, which got its moniker as the 1002 area via the section it is defined in the 1980 Alaska National Interest Lands Conservation Act that established the refuge, is approximately 1.5 million acres of the 19 million-acre refuge. Alaska is about 375 million acres. Young also said the refuge probably holds 20 billion barrels of oil, a figure he cited in early October when the House passed the fiscal year 2018 budget resolution Republicans are attempting to use as a vehicle in conjunction with President Donald Trump’s tax reform proposal to open the area through reconciliation, which requires only 51 votes to pass. The most recent U.S. Geological Survey assessment of the oil and gas underneath the coastal plain, done in 1998, put the mean oil estimate at 10.3 billion barrels for the 1002 area and very nearby state territory. The USGS additionally estimated there is a 5 percent probability the area holds nearly 16 billion barrels of technically recoverable oil. Young’s spokesman Matt Shuckerow said in a prior interview that the congressman was speaking in general terms and using round numbers when referencing the area’s oil potential. House Republicans inserted a provision into the resolution directing the House Natural Resources Committee to come up with ways to generate at least $5 billion in new revenue over the next 10 years. Similarly, the Senate budget orders the Energy and Natural Resources Committee, chaired by Sen. Lisa Murkowski, to add $1 billion to the Treasury in the coming decade. Revenue from oil and gas lease sales for the ANWR coastal plain is seen as a way to meet those instructions, and using prospective ANWR revenue to in theory help reduce the budget deficit allows the controversial action to be taken with a simple majority vote — all that is needed for budget matters in Congress. The aforementioned members of Alaska’s congressional delegation, along with Gov. Bill Walker and Lt. Gov. Byron Mallott, who also testified, emphasized the need for the economic opportunities and revenues industry activity in the coastal plain could provide their state. Walker said Alaska’s budget deficits that have averaged about $3 billion in recent years due in part to low oil prices and North Slope production that is about one-quarter of its peak have forced him “to do things I hope no future governor ever has to do,” such as cut budgets for public safety. He also stressed the need for Alaska to be able to access and develop the resources inside its borders, the revenue from which was seen as the primary means for the state to pay for itself when Alaska joined the Union. “All I’m asking for is that we get the deal we made in 1959 under the statehood compact. The great compromise that was made under ANILCA was that the 1002 was set aside for further development. That’s what the deal was,” Walker said to the Senate committee. “All we’re asking for is the benefits of the deal that was made long ago.” Alaska’s economic situation is a concern, said Sen. Maria Cantwell, the ranking Democrat on the committee, but the state would be better served focusing on why a gasline project has not been built rather than trying to get ANWR opened. Sullivan contended that opponents to opening the coastal plain who cite the need to protect the fragile Arctic ecosystem need to look at it in a broader context. “When you disallow investment in Alaska, a place with the highest environmental standards in the world, you don’t end up protecting the global environment. What you do is you end up driving capital and investment to jurisdictions with much less environmental standards, or in some cases, no environmental standards,” Sullivan argued. He added that some of those countries are also geopolitical adversaries of the U.S., namely Russia and Venezuela. And while Democrats on the committee, such as Cantwell and Minnesota Sen. Al Franken characterize the ANWR debate as rehashing an old issue, Sullivan said the debate actually hasn’t kept up with technological advancements in the industry. Republicans are asking to permanently develop just a 2,000-acre footprint in the 1.5 million-acre 1002 area in the latest legislation as horizontal drilling and rigs with a longer reach combined with better 3D seismic data allowing for more targeted exploration have drastically shrunk the area needed to extract oil. Cantwell, who has been a cross-aisle ally of Murkowski’s on other energy matters, noted the hearing was about prospective legislation that wasn’t yet before the committee, despite the fact a bill markup hearing is scheduled for next week. “We’re here today because someone has come up with the ludicrous idea that we can pass a tax reform bill that raises the deficit, that increases our taxes and that will take a sliver out of a wildlife refuge to do it,” Cantwell sniped. “I almost want to call this ‘caribou for millionaires’ because it’s the most ridiculous idea I’ve heard as it relates to meeting the tax reform agenda.” Walker and Mallott said the state’s share of ANWR revenue would not only ease general budget burdens but also could be used to help relocate Western Alaska villages and offset other climate change impacts. The Alaska Statehood Act allocates 90 percent of royalty revenue from production to the state government, but that could change in the legislation to open it to drilling, if it is to pass. The state production tax would also apply. “We cannot (fight the affects of climate change) without the financial resources to do it,” Walker said. “I don’t see it coming from Washington (D.C.) to relocate 12 villages. We need to look at how we can bring in the revenue. The only way we can do it is with our resources. Alaska is unique because the beauty above the ground is unparalleled. The beauty below the ground is unparalleled as well. The beauty below the ground is our resources that we need to develop responsibly.” Franken, of Minnesota, questioned Mallott as to whether or not he sees any irony in justifying more oil production to combat the challenges of climate change. The lieutenant governor said he doesn’t see it as ironic because it is simply recognizing Alaska’s current situation. “It will take decades for us to withdraw from reliance on a petroleum-based economy and for us in the meantime to rely on sources other than our own raises national security issues, economic issues; it raises issues that impact us in Alaska very directly,” Mallott responded. Samuel Alexander, a member of the Gwich’in Nation pointed out what he sees as an irony in the broader resource development debate. Gwich’in tribes inhabit the upper Yukon River basin in Northeastern Alaska and the Northern Yukon Territory of Canada. They have largely opposed drilling in the coastal plain because it is the calving grounds for the Porcupine caribou herd that is still one of their primary food sources. Alexander said proponents of drilling in the refuge see it as a way to support economic development, which would allow some to eat better food and lead healthier lives. However, doing so would destroy that very situation for the Gwich’in Tribes that already have food security via the Porcupine caribou, he asserted. “What is all this drilling for? So we can have money to do what?” Alexander questioned. “To live like Gwich’in? We already live like Gwich’in. We’re not trying to change anything in that regard.” He also stressed the Alaska Native corporations in support of opening the coastal plain to industry activity do not speak for the state’s Tribes. “Alaska Native corporations are not Tribes. Their purpose is profit. Our purpose as Gwich’in is to protect our traditional way of life and to live that traditional way of life in an honorable way,” Alexander testified. Aaron Schutt, CEO of Doyon Ltd., the Native regional corporation which covers the upper Yukon area, testified in support of drilling as did, Matthew Rexford, president of Kaktovik Inupiat Corp., the Native village corporation for Kaktovik, the only community in the 1002 area. The only exploration well drilled in ANWR was drilled on KIC in-holdings in the refuge by Chevron and BP during the winter of 1985-86. The findings from that well remain confidential. Rexford said property taxes paid by the oil industry have helped develop the basic public infrastructure in the North Slope Borough that much of the country takes for granted. Drilling in ANWR would continue to support the North Slope communities that have benefited from development on state lands, according to Rexford. Mallott and others said bowing to the unproven fears that oil activity would ruin the refuge ignores what has happened on state lands not far to west for more than 40 years. Former University of Alaska Professor and wildlife biologist Matthew Cronin said caribou continue to use Slope oilfields as habitat and development techniques such as elevating pipelines to allow the animals to pass underneath has limited the industry’s impact on migratory patterns. “I think oil and gas development can be done using proven mitigation measures. I believe it can be done with minimal impacts to caribou as long as mitigation measures are implemented,” Cronin said. “You simply limit activities during the calving period.” Principal Deputy Director of the U.S. Fish and Wildlife Service Greg Sheehan, the agency that manages the refuge, noted that if Congress opens ANWR to industry the country’s environmental review laws would still apply even to establish a leasing plan that would well proceed actual drilling. “We would expect that probably lease sales, perhaps two, would occur, with drilling being as potentially far out as seven to 10 years,” Sheehan estimated. Murkowski said the long lead-time means action should be taken now. “It’s like the old saying, we say it a lot around here: the best time to plant a tree was 20 years ago. The second-best time is now and we need to take that first step today so that we can realize the benefits going forward,” she said. Elwood Brehmer can be reached at [email protected]

Alaska Air nets $266M while muddling through merger

Alaska Air Group Inc. leaders reported a third quarter net income of $266 million and record revenues in the third quarter during an Oct. 25 investor call despite continued operational challenges at their airlines. Seattle-based Alaska Air Group’s airlines, Alaska, Virgin America and regional carrier Horizon Air, generated a record $2.12 billion in operating revenue during the quarter and netted pretax profits of $446 million for a pretax margin of 21 percent. CEO Brad Tilden called the results, which were down year-over-year if Virgin America’s pre-merger results are factored in, “solid” considering the company is still working to combine Alaska and Virgin and fuel prices were up 14 percent over 2016 as well. Alaska Air Group stock closed Oct. 25 down 9.6 percent for the day after the morning earnings call when company executives disclosed some frustrations regarding integrating the two airlines. Its stock started Nov. 1 trading at $65.65 per share. “From an ops standpoint, we’ve come a long way from the beginning of the year, but we still have work to do. We ranked second out of the six largest carriers on on-time performance for the quarter, up from nearly the bottom of the pack during the first quarter,” Tilden said. “While we’re pleased to have closed the gap with our competitors, we remain committed to getting back to the number one position on this metric.” Alaska Airlines has long been the top on-time domestic carrier, but since bringing Virgin America into the fold in the fourth quarter of last year those numbers have fallen. Through September, 82 percent of Alaska Airlines flights arrived on time, which is down 6.5 percent year-over-year. For Virgin America-flagged flights the numbers are worse. Just more than 67 percent of Virgin flights have been on-schedule this year, a decrease of 9.3 percent. Additionally, Horizon Air continues to face the same problems retaining pilots as many regional carriers across the country, an issue that forced the airline to curb its schedule in August and September, Tilden acknowledged. “Pilots have been leaving regional airlines for mainline opportunities at higher rates in the past and at higher rates than we anticipated,” he said. Horizon’s flight schedules have since been adjusted to match pilot availability and cancellations have subsided, according to Tilden. Horizon Air agreed to an amended contract with its pilots earlier this year after the pilots’ union, the Airline Professionals Association Teamsters Local 1224, sued the airline in federal District Court alleging Horizon had offered new pilots hiring bonuses outside of its contract terms to attract new hires. And after a roughly four-year experiment Horizon will stop its service in Alaska on March 10, according to Alaska Airlines Regional Vice President Marilyn Romano. Horizon, with its smaller Q400 Bombardier turboprop aircraft, took over flights between Anchorage, Fairbanks and Kodiak for its larger sister airline in early 2014. Horizon's routes in the state will be picked back up by Alaska Airlines Boeing 737s. While 2017 has not been the smooth sailing of recent years for the company, Alaska Air Group’s record revenue allowed it to generate $1.4 billion in operating cash flow so far this year, $840 million of which has been invested in capital expenses, according to the earnings report. The remaining $520 million in free cash flow is part of $1.7 billion in cash on hand for the company. The company also lowered its debt-to-capitalization ratio to 53 percent at the end of the quarter, down from 59 percent to start the year. Looking ahead, Tilden said the next eight months will be important for Alaska Airlines as Virgin America is further blended into its operations. In January, the airlines should move to single payroll, human resources and accounting systems, according to Tilden. Air Group will also join the airlines’ loyalty programs and expects to have a single operating certificate from the Federal Aviation Administration early next year, he said. Shortly thereafter, the first Virgin America Airbus will be repainted to officially become an Alaska Airlines aircraft, Tilden added. “By the middle of next year, our most critical integration milestones will be behind us, and we’re thrilled about this,” he said. “The fact that we remain on track to complete all of our goals on schedule is a testament to the quality and dedication of our fantastic people.” Tilden continued to note the transition has not been easy, saying the challenges are not different than others the company has overcome. “We’ve also been steadily and consistently building a great company, and that’s what we’re going to keep doing for all of the people who are counting on us to do so. Our customers, our communities, our employees and our shareholders,” Tilden said. Elwood Brehmer can be reached at [email protected]

Armstrong sells major North Slope prospect

Despite holding one of the largest North Slope oil prospects, Armstrong Energy is cashing out some of its stake in Alaska. Oil Search, a publicly traded company with operations in Papua New Guinea, announced Oct. 31 (Nov. 1 local date) that it has reached a $400 million deal with Armstrong Energy and GMT Exploration Co., a silent partner, to buy into the Pikka Unit and other Slope prospects. Under the deal, Oil Search will get a 25.5 percent stake in the Pikka Unit — which is operated by Armstrong and holds the 1.2 billion barrel-plus Nanushuk oil prospect — and a 37.5 percent interest in the “Horseshoe” leases to the south. Armstrong currently operates the Pikka Unit for its partners Denver-based GMT and Spanish major Repsol. Armstrong is also in the midst of the environmental impact statement process to develop the Nanushuk field, which could produce up to 120,000 barrels of oil per day. Oil Search will take over as operator of Pikka from Armstrong on June 1, 2018, according to a company release. The company also has until June 30, 2019, to buy the rest of Armstrong’s and GMT’s interests in the prospects for another $450 million. Currently, Repsol holds a 49 percent share of the Pikka Unit, while Armstong has 38.25 percent and GMT Exploration the remaining 12.75 percent interest, according to the Division of Oil and Gas. Oil Search says it is in the process of setting up a U.S.-based subsidiary to manage its new Alaska holdings. Armstrong has estimated the cost of developing Nanushuk at $5 billion. “The acquisition, exploration, appraisal and development costs will be fully covered by existing cash, cash flows and dedicated additional financing facilities,” according to the Oil Search release. Repsol and Oil Search are partners in oil and gas projects in Papua New Guinea, according to the press release. “Oil Search looks forward to being able to apply its extensive experience of operating safely and cost effectively in challenging environments, as well as leverage its skills working with indigenous people, to these assets,” Managing Director Peter Botten said in the release. Oil Search equated the deal to buying into Nanushuk for about $3.10 per barrel. The company has a deal with Halliburton to utilize the large service company’s operating expertise in Alaska, Oil Search states. The release also stated that Oil Search will “form a long term partnership with Armstrong, leveraging its technical capabilities and experience in the identification of additional potential growth opportunities in Alaska.” It expects first oil to flow from the Pikka Unit in 2023.

AIDEA approves sale of LNG plant to Fairbanks gas utility

A comprehensive plan to get more natural gas to the Interior is halfway home. The Alaska Industrial Development and Export Authority board of directors unanimously approved a $331.2 million financing plan authority leaders hope will enable the Interior Gas Utility to bring the Interior Energy Project to fruition. Included in the deal is the sale of Fairbanks Natural Gas and its Titan LNG plant on Point MacKenzie in Southcentral for $59.5 million, as well as passing of the gas supply contract AIDEA secured in September with Cook Inlet producer Hilcorp Energy. The three-year gas contract, which starts Jan. 1, essentially underpins the whole project. AIDEA officials had been trying to reach a gas supply deal with Cook Inlet producers since early 2016 but the fact that the ultimate demand for gas is still unknown hampered progress. Under the financing plan, Fairbanks Natural Gas, which currently serves a relatively small group of customers in the core of Fairbanks, will be rolled into the Interior Gas Utility to capture the efficiencies of running one entity versus two, as has been the plan since AIDEA bought Fairbanks Natural Gas and its sister companies in 2015. Additionally, Fairbanks Natural Gas leadership is the only group involved in the project with experience operating a gas utility, particularly one with the unique challenge of having to liquefy, truck, and re-gas its fuel supply before delivering it to customers. Most of the $331.2 million will come from the $332.5 million financing package of loans, bonds and grant money approved by the Legislature in 2013 for the Interior Energy Project. To date, AIDEA has spent $14.7 million of the $57.5 million grant. About $52 million in loans were issued to the utilities for distribution build-out. If all goes as planned — construction of LNG storage, LNG plant expansion and numerous other variables — more natural gas should start flowing to the Fairbanks area in 2020. However, what appeared to be a day ripe for the celebration of a long-sought milestone being reached — AIDEA leaders have been consumed with making the challenging project work since being handed it by the Legislature in 2013 — turned somewhat contentious when it became clear IGU leaders are not keen on parts of AIDEA’s final offer. IGU General Manager Jomo Stewart told the board that the deal has troubling loan covenants and other terms that were inserted late without the consent of the start-up utility’s leaders. According to Stewart, it requires the utility to raise rates on customers as the only option to raise revenue or manage expenses should unforeseen circumstances arise, or it could potentially be in default of the state loans and bonds the Legislature authorized AIDEA to manage for the project. That could pose problems if the Regulatory Commission of Alaska doesn’t agree with a rate increase, he said. Stewart also questioned terms that would put IGU in default of the $125 million in low-interest loans the utility would borrow from the state under the deal if the Fairbanks North Star Borough, which formed and thus has ultimate oversight of IGU, were to somehow impair the utility from repaying the money. He asked the board to allow AIDEA Executive Director John Springsteen to negotiate changes to the covenants and default provisions. The Legislature gave AIDEA the authority to manage the Sustainable Energy Transmission and Supply, or SETS, loan funds as part of the $332 million, 2013 Interior Energy Project financing package. The loan is for 50 years with a 0.25 percent interest rate deferred for the first 15 years. Should IGU default on the loan the interest rate increases to 3 percent, according to the loan documents. The favorable financing terms are generally seen as necessary for the project that carries significant public benefits but also has unavoidably challenging economics. Stewart additionally criticized the AIDEA board for lowering the rates charged to Fairbanks Natural Gas customers shortly after it purchased the utility in June 2015. “When you took ownership of Pentex you reduced the rates to the consumer for political and (public relations) purposes, not charging interest or principal,” Stewart commented to the seven-member board. The rate cut of about 13 percent was explained at the time to be justified by operational savings reaped by the utility going from private to public ownership — no longer paying taxes, for instance. According to Stewart, AIDEA is instead trying to recoup the 5 percent return target it has for its revolving loan fund investments by upping the price for IGU to buy Pentex and Fairbanks Natural Gas. Pentex was to cost IGU $58.2 million when the deal was first tentatively reached in late December. The price for Pentex is now listed at $59.5 million in the latest documents. AIDEA bought Pentex for $52.5 million. In a follow-up interview Stewart said he’s concerned the IGU board of directors will reject the deal or be incurring unreasonable risks it has no ability to mitigate if it accepts the deal. IGU’s requests would simply add flexibility to the financing agreement that would allow the utility to better manage operational challenges that are likely to arise, he said. “I want documents that facilitate that (flexibility), not hamper it,” Stewart said. At the same time, though, he stressed that everyone is still working towards the same goal of lower-cost, cleaner energy in the Interior. He also thanked AIDEA and Pentex staff for helping the junior utility get on its feet. “My board as well as the AIDEA board are all fatigued and frustrated that it’s taken as long as it has” to get the deal done, Stewart said. He countered fears that IGU is not ready to take over the project by noting that several members of the utility board of directors have extensive experience in the energy utility realm, mostly with Golden Valley Electric Association. The AIDEA board ultimately approved the financing plan after an executive session and amended the corresponding resolution to allow Springsteen to make technical corrections to the loan and purchase documents. The authority directors strongly urged their IGU counterparts to approve the deal in comments leading up to their vote. AIDEA board member and Deputy Commerce Commissioner Fred Parady noted that the state funding in the deal is far better than any support the Legislature would give the project now. “At some point it’s time to bring (the Interior Energy Project) to the finish line, bring it to a close and that time is now. This is a 50-year loan at 0.25 percent.” Parady said. “We’ve done this work together so we could bring it to reality together. Tick-tock we’re on the clock. The time is now.” AIDEA board Chair Dana Pruhs said the authority is hoping the deal can get expedited consideration from the RCA, but said waiting for better loan terms also means the price of Pentex will go up so AIDEA can meet its internal return targets on the investment. “Six months is a million bucks,” Pruhs said. AIDEA board member Gary Wilken of Fairbanks said he is still concerned that the IGU board is comprised primarily of elected members, which worries him because of fears that elected leaders will choose the popularity of holding customer rates down over making necessary investments in the utility. AIDEA’s lawyer, Assistant Attorney General Jerry Juday also noted the deal can always be amended with mutual agreement at any time for any reason should the unforeseen circumstances worrying IGU officials arise. He added that the loan covenants are not unusual. “AIDEA’s remedies are similar to what a lender would have to protect collateral,” Juday said. Stewart said after the meeting that it would take several days for him to confer with his management team to decide if the deal is workable for IGU. The IGU board is expected to take up the matter at its Nov. 7 meeting. Elwood Brehmer can be reached at [email protected]


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