Elwood Brehmer

Fund value drops 3.19% in first half of FY19

The managers of Alaska’s Permanent Fund did their best to mitigate losses from volatile financial markets in the second half of 2018 as the fund ended the year with a balance of $60.4 billion. Permanent Fund investments lost 3.19 percent of their value in the second half of 2018 — also the first half of the State of Alaska 2019 fiscal year, which began July 1. The Permanent Fund ended the 2018 fiscal year last June 30 with a balance of $64.8 billion, from which the state appropriated roughly $2.7 billion to pay out Permanent Fund dividends and support government services. Alaska Permanent Fund Corp. CEO Angela Rodell emphasized in a formal statement that the fund is invested to meet long-range goals. “Within a long-term investment horizon, it is anticipated that the global markets will go up and down; it is a part of the buying, selling, trading process of the portfolio’s holdings,” Rodell said. “And while we invest with the intent that they will go up more than they go down, there are going to be dips. Our team is poised to take advantage of those dips.” Despite the negative returns, the fund outperformed the corporation’s passive investment index benchmark, which comparably measured losses of 6.54 percent in the first half of fiscal 2019, according to a Feb. 4 APFC release. The Permanent Fund Earnings Reserve Account, which holds income and is the spendable portion of the fund, had a Dec. 31 balance of $16.6 billion, according to an APFC report. The challenging first half to fiscal 2019 is in stark contrast to 2018 when the corporation achieved returns of 10.74 percent. Most recently, APFC reported the fund had rebounded to a balance of more than $63.9 billion as of Jan. 31. However, corporation executives noted the day-to-day value can vary widely and the $63.9 billion includes more than $1 billion in liabilities — most of which is the remaining state appropriation amount that has yet to be transferred to the General Fund. Calculated as 5.25 percent of the fund’s five-year average value, the fiscal 2020 percent of market value, or POMV, appropriation is expected to be roughly $2.9 billion. Gov. Michael J. Dunleavy has demanded the Legislature pay a statutorily calculated dividend, meaning about $1.9 billion from the 2020 POMV draw would go to PFDs. He has also proposed separate legislation to repay forgone PFD amounts over the past three years as former Gov. Bill Walker and the Legislature reduced dividends while debating how to resolve multibillion-dollar annual budget deficits. The PFD repayments would total another nearly $2 billion draw from the Earnings Reserve over three years; the 2020 supplemental PFD draw, which would be made later this year, would be $565 million, according to the Revenue Department. The first half 2019 losses were driven by a decline of 10.9 percent in the fund’s $23.2 billion public equities portfolio made up of stocks. At about 38 percent of the overall asset allocation, public equities make up the largest portion of Permanent Fund investments. For comparison, the Dow Jones Industrial Average lost roughly 4 percent of its value during the period. An APFC release states that public equity managers were “positioned for better than feared economic fundamentals,” and as a result “turned in relatively weak performance versus their benchmarks.” Private investments did much better. The $8.2 billion invested in private equity and special opportunities returned 11.86 percent during the period, while the infrastructure portion of the fund’s $5.2 billion in private income investments returned 9.75 percent. The fund’s $14.7 billion fixed income portfolio lost 0.15 percent in the first half of 2019 as listed infrastructure and real estate investment trusts fell in concurrence with equity markets. Direct real estate investments, totaling $3.9 billion, lost 2.05 percent as a result of recent property valuations, according to APFC. Elwood Brehmer can be reached at [email protected]

BP aims for 40 more at Prudhoe

BP navigated its way through the oil price depression and is now focused on new targets to keep the old Prudhoe Bay field vibrant for another 40 years. BP Alaska President Janet Weiss said the company’s emphasis on “40 more years” at Prudhoe, which began pumping oil in 1977, is more than just a mantra. “It’s about 40 more, it really is. When you think about Alaska in an energy renaissance, it’s really important to have the strength of that foundation. You’ve got to have a strong Prudhoe Bay; you’ve got to have a strong Kuparuk area to really help support the infrastructure it takes for all of the sexy development that’s going on right now,” Weiss said. The “energy renaissance” is a reference to the suite of new, large oil projects on the Slope that are in varying stages of advanced exploration, permitting and development. Weiss and other BP Alaska leaders discussed the company’s plans, challenges and opportunities in the state during an hour-long sit down Jan. 31 with the Journal and Anchorage Daily News. Company officials attacked the idea of producing from Prudhoe for decades more by working it backwards while oil prices were at their lowest, and what it takes is ongoing efficiency improvements, according to Weiss. BP Alaska is continually working to lower its cost base by 5 percent per year, she said. “We took a look at what it would take for us to be at mid-life and we’re on that path and what it basically does take is really minimizing decline in a big way,” Weiss said. The story of North Slope production decline — from more than 2 million barrels per day in 1988 to about 520,000 barrels per day currently — is well told. Oil production at Prudhoe has followed the same trend; it plateaued at about 1.5 million barrels daily through much of the 1980s and has gradually fallen since. BP, the operator of the field on behalf of co-owners ExxonMobil and ConocoPhillips, has largely managed to stabilize production from Prudhoe and smaller satellite fields in the 280,000 barrels per day range since 2016. Initially projected to produce about 9.5 billion barrels, the field has now surpassed 13 billion. “Forty more is really about ushering in modernization, transformation, digitization, agile working,” she said. “Doing things better up there so we can extend the life of that absolutely world-class reservoir.” BP Alaska Vice President of Reservoir Development Fabian Wirnkar said Prudhoe has a bit more than 1 billion barrels left to produce from traditional oil-bearing formations. The company is currently in the midst of the first, full-field 3-D seismic data shoot over the field, which will cover 455 square miles. Started in late January, the shoot should take about 90 days to complete. The resulting data will start to become available over the summer, according to Wirnkar, who Weiss has dubbed “Dr. Grow.” He came to Alaska a little more than a year ago at her request after working around the world for BP. Wirnkar said he believes there are still new reservoirs to be found within Prudhoe and the seismic shoot will help the company identify those otherwise “hard to find fluids.” BP also has two drilling rigs working at Prudhoe this winter. The rigs will combine to drill or work over 35 to 40 wells, according to Weiss. “With our partners we are all in agreement that there are still some significant resources here; some that we don’t even know. I always tell Janet that when I was in the Lower 48 I worked a lot in the Permian and there was a time when they were like ‘there’s nothing left in the Permian,’ and you turn around now and you have some new resources and new rocks that are showing up,” Wirnkar said. Revitalized by the shale revolution, the U.S. Geological Survey now believes the greater Permian Basin in West Texas and New Mexico holds more than 46 billion barrels of recoverable oil. New drilling techniques, particularly horizontal drilling, have helped greatly in improving production while keeping costs down. Wirnkar compared horizontal drilling to doctors who install a stent in a patient’s heart by accessing the bloodstream at the femoral artery in the upper leg and winding their way towards the heart. “Once you start doing some investigating you might be surprised with what you see and so that’s one of the things in BP we’re looking at,” he said. “OK, where can we start looking at some of the bypass rocks that we thought were just seals or that we thought were just source rocks and for some reason now the have become a reservoir? We have reservoir experts who are continually looking and testing the possibilities out there.” One of the long-term possibilities to help keep Prudhoe going is making viscous, or heavy, oil production viable. Industry officials believe there are upwards of 38 billion barrels of viscous oil under the Slope and much of it is quite shallow at depths of less than 5,000 feet. Weiss said BP partnered with ARCO in the early 2000s to spend about $750 million first trying “really simple, straight-hole” wells to produce viscous oil, which doesn’t flow as well as the light crude Slope fields are known for. Subsequent tests of complex multilateral wells proved unsuccessful when the wells started breaking at the junction of the lateral and vertical wellbores, Wirnkar added. More recently, BP has concluded that viscous-focused wells do indeed need to be a bit “simpler” and the company believes it has a better completion technique to keep the junctions intact, according to Weiss. The work has taken the cost to produce viscous oil from roughly $80 per barrel closer to the $50 range, she said, while explaining why viscous oil needs to be blended with current production sooner than later to keep all the oil flowing smoothly. “You want to get after the viscous and heavy (oil) at the time that you’re still sending light down the pipeline. That is the biggest issue that’s out there and why we look at it a lot with TAPS (the Trans-Alaska Pipeline System),” Weiss said. Alyeska Pipeline Service Co. spends significant time and money to find ways to keep the oil in the pipeline warm and moving at low volumes, and heavier oil could add to the challenge. Italian major Eni and Hilcorp, BP’s partner in the North Slope Milne Point field and the Liberty prospect, have led improvements to viscous oil processing facilities, according to Weiss. She noted that one of the major reasons BP agreed in 2014 to partner with Hilcorp at Milne Point was the Hilcorp’s work on developing viscous oil. A final investment decision on Liberty, which has had its federal permit issued last year challenged in court, is expected in early 2020, according to the BP Alaska group. Regarding Prudhoe Bay wells that have had their outer casing “jacked up” due to warming permafrost, Weiss said the issue has arisen on a “handful” of old wells from the 1970s before the field started production. The outer casing on those wells is set in the permafrost. “Because that outer shoe was in the permafrost you saw this kind of ripping apart and this well jacking up,” she said, adding BP has removed the well houses on each well in question and has been working with the Alaska Oil and Gas Conservation Commission, which regulates production in the state. The AOGCC has a hearing set for Feb. 7 on the issue. Finally, a big driver of the recent cost reductions at BP — and in the industry overall — is automation, which likely means somewhat reduced job levels in aspects of the industry’s work. However, automation also makes the work safer, Weiss highlighted. “It’s about changing the nature of the jobs and automating solutions so we’re less transactional,” she said. “The workforce of tomorrow does need to move upstream, solving the new problems and then we automate those solutions. If you don’t do that you lose out.” BP’s current Alaska workforce is about 1,500 and the company contracts for nearly another 4,000 workers, according to the group. Elwood Brehmer can be reached at [email protected]

ConocoPhillips turns first annual profit since 2014

ConocoPhillips continued its turnaround from the oil price collapse by netting the company’s first annual profit in four years with net income of more than $6.2 billion in 2018. In its year-end earnings report issued Jan. 31, the Houston-based oil major additionally posted a fourth quarter profit of $1.8 billion, compared to a fourth quarter 2017 profit of nearly $1.6 billion. ConocoPhillips lost $855 million overall in 2017. The fourth quarter result is also the company’s best quarterly return since the third quarter of 2014 when oil prices averaged $97 per barrel and it earned $2.7 billion, according to report archives. In Alaska, ConocoPhillips turned profits of $445 million for the fourth quarter and $1.8 billion overall for 2018. The companywide earnings came on the back of $10.3 billion in revenue for the quarter and $38.7 billion for the year. ConocoPhillips generated $5.5 billion in free cash flow during the year, according to the earnings report. CEO Ryan Lance said he is proud of the results in a formal statement. “Our accomplishments reflect our clear commitment to a value proposition that is focused on returns and free cash flow generation, and that balances investments with returning cash flow to shareholders through price cycles. This is our formula for offering investors a compelling way to invest in our sector, ” Lance said. “We look forward to delivering another strong year of performance in 2019.” ConocoPhillips announced a first quarter dividend of 30.5 cents per share ahead of the earnings report. The dividend will be paid March 1. ConocoPhillips stock closed trading at $67.69 per share Jan. 31, up from a pre-earnings opening price of $65.76 per share. The company sold its oil for an average price of $68.03 per barrel last year, compared to $51.89 per barrel in 2017. ConocoPhillips Alaska leaders have said the company has set a $40 per barrel oil price breakeven benchmark for all of its future projects. During the year ConocoPhillips paid down $4.7 billion in debt and reached its debt target of $15 billion 18 months ahead of schedule, according to an earnings release. Last July, the company announced a deal with BP to swap a portion of its interests in the offshore Clair Field in Britain’s North Sea for BP’s 38 percent stake in the Kuparuk River oil field on the North Slope, which ConocoPhillips operates. The cash-neutral deal gives ConocoPhillips a 92 percent stake in Kuparuk, according to state Division of Oil and Gas records. The company also commenced production from its $725 million Greater Mooses Tooth-1 oil project in early October. GMT-1 is expected to produce up to 30,000 barrels of oil per day at its peak and marks the first oil production from federal leases within the National Petroleum Reserve-Alaska. Later that month ConocoPhillips approved funding for the nearby and slightly larger $1 billion-plus GMT-2 project, which is forecasted to come online in late 2021. The company also initiated permitting on its large Willow oil prospect, also in the NPR-A, which could cost $4 billion to $6 billion to fully develop over the next six-plus years. ConocoPhillips spent nearly $1.3 billion on capital projects in the state last year out of an overall capital budget of $6.7 billion. BP, ExxonMobil report results BP, which operates the massive North Slope Prudhoe Bay oil field, reported a full-year 2018 profit of $9.4 billion Feb. 5, compared to $3.4 billion in 2017. The London-based major also reported an underlying replacement cost profit of $3.5 billion for the fourth quarter from strong performance in all of its business sectors. The company generated an 11.2 percent return on invested capital during the year, compared to 5.8 percent in 2017, according to the financial report. BP’s 2010 Gulf of Mexico oil spill settlement payments totaled $3.2 billion last year. Its oil and gas production was up more than 8 percent year-over-year, averaging 3.7 million barrels of oil equivalent in 2018. ExxonMobil, operator of the Point Thomson gas field on the North Slope, on Feb. 1 reported full-year earning of $20.8 billion, up from $19.7 billion in 2017 and fourth quarter earnings of $6 billion, down 28 percent year-over-year. However, excluding U.S. corporate tax reforms and impairments, the fourth quarter results were $6.4 billion, compared to $3.7 billion in the last months of 2017, according to a company statement. ^ Elwood Brehmer can be reached at [email protected]

Construction spending forecasted to rise 10%

The coming year should be better than last for Alaska’s construction industry and the state economy as a whole. Construction spending across the state is expected to increase about 10 percent this year over last to a grand total of more than $7.2 billion, according to the Associated General Contractors of Alaska’s annual industry forecast. AGC of Alaska Executive Director Alicia Siira said the trade group is “cautiously optimistic” about 2019 after some very tough times. “Our industry has really taken a beating over the past few years with this recession and we could really use some good news,” Siira said. “We’re hopeful this trend continues and we start to see some dollars moving through the state to help support the economy.” Alaska’s construction workforce averaged a little more than 15,000 workers the past two years and employment levels that low hadn’t been seen since 2001-02, according to state Labor Department data. The industry was doubly hit by Alaska’s three-year oil price-induced recession. Not only did oil companies sharply curtail capital spending, but the state also cut its capital budget allocations from more than $2 billion to less than $200 million in recent years. Restoring some of that state capital spending is a top priority for AGC. State economists expect Alaska to officially climb out of the recession towards the end of the year. The construction industry is correspondingly expected to add roughly 900 jobs in 2019. Most of the spending growth is expected to come via the oil and gas industry and Department of Defense projects at Interior military installations. Both sectors are pegged for 13 percent growth; however, in oil and gas that means an increase to $2.7 billion and roughly $700 million overall for Alaska Defense spending in 2019. On the oil side, many companies have managed to reduce their operating costs to where they can afford to resume investing in larger projects at current prices in the $60-70 range — a price band that is being predicted for several years. The discovery of the now-prolific Nanushuk oil formation on the North Slope has also spurred some oil prospects with development costs pegged at upwards of $5 billion. As a result, oil industry spending is projected to increase for several years, according to the forecast. Military construction in the state continues to center on Eielson Air Force Base near Fairbanks, which is readying for two new squadrons of F-35 fighters that are planned to start arriving in 2020. “Some of the larger elements of the (F-35) ‘bed-down’ are a flight simulator, new maintenance buildings, aircraft weather shelters, new utilidor, as well as renovation of many existing structures,” the forecast states. Additional missile defense projects are ongoing at Fort Greeley near Delta Junction and Clear Air Force Station near Nenana. While not as significant in terms of overall dollars, the mining industry is projected to increase its capital spending by 18 percent this year to $265 million as three of Alaska’s six big large mines — Red Dog in the Northwest and Pogo and Fort Knox in the Interior — have major expansions planned. Siira said she is hopeful political forces will continue to support the resource industries. “For increased spending to continue we feel that we need some stability in our stat and timely review of resource development projects which support the economy and, of course, construction spending,” she said. Overall private industry spending is expected to be about $4.4 billion, a 9 percent year-over-year increase; Alaska public construction expenditures should grow about 7 percent, with about $200 million or more coming as a result of the Nov. 30 earthquake. “Our industry, both vertical and road construction, did see an increase in activity due to the earthquake and although it was unfortunate, it maybe highlighted some of the projects that have been overlooked over the years,” Siira noted. She added that private building damage from the earthquake is more difficult to quantify. State and local government officials have emphasized since the earthquake that additional damage will likely be revealed with the arrival of spring. Longer term, the state still has a $2 billion-plus deferred maintenance list that it must address and new cost estimates to rehabilitate the Anchorage port have shot up dramatically to nearly $2 billion as well.   Elwood Brehmer can be reached at [email protected]

DEC nominee: Experience a plus, not a problem

Jason Brune insists his time working for a former investor in the Pebble mine project and advocating for other resource developments in Alaska is experience that benefits his newest role leading the Department of Environmental Conservation, despite claims by many detractors that it should disqualify him from consideration. Among the first appointments to Gov. Michael J. Dunleavy’s cabinet in November, Brune told Senate Resources Committee members during a Jan. 25 hearing on his confirmation that the questions regarding his professional background are “appropriate and fair,” while also noting that he has no financial interests in the Pebble Limited Partnership and has sold all of his stocks in oil and mining companies that work in the state. He highlighted a belief that Alaska has the most stringent environmental protection standards in the world and as DEC commissioner he demands everyone in the state be held to them. “My personal environmental ethic is ‘think globally, develop locally.’ I believe that provided that the companies that are trying to invest here do uphold the highest environmental standards, we should work with them to try to allow that investment and the development of those resources to occur here,” he said. Brune worked as the U.S. public affairs manager in Anchorage for London-based mining major Anglo American from 2011-14. Anglo American was a 50 percent partner in the Pebble project and invested more than $540 million in exploration and pre-development work at Pebble before announcing it would walk away from the project in September 2013. Before agreeing to lead DEC, Brune most recently worked as the lands and resources director for Cook Inlet Region Inc. He also spent more than a decade with the Resource Development Council for Alaska with about half of that time as executive director. The RDC is an organization that promotes Alaska’s oil and gas, mining, timber, tourism and fishing industries. Public testimony during the Senate hearing was overwhelmingly against Brune’s confirmation as DEC commissioner. Nearly all the individuals that testified in opposition to his confirmation cited his prior work history, contending he could not be objective in reviewing permit applications Pebble would need to submit to DEC before it can develop the large copper and gold mine. DEC is often most visible through its Spill Prevention and Response, or SPAR, Division, but the department also has primacy over several federal Clean Air and Clean Water Act programs as well as overseeing drinking water and food safety in the state. Opposition in written testimony offered to the Resources Committee before the hearing also centered on permitting Pebble. Brune received written support from industry groups such as the Alaska Miners Association, the Council of Alaska Producers and the Alaska Independent Power Producers Association. State commissioner-designees must be confirmed by a majority of legislators in a joint House and Senate vote that is usually held in spring near the end of the legislative session. Brune said in a Jan. 11 interview prior to the hearing that he doesn’t have a position on the highly contentious mine plan. “As a regulator I have the requirement to objectively look at what Pebble has to do to go through the process, so no, I don’t support the Pebble project. I don’t oppose the Pebble project. I think they deserve to have a fair hearing,” he said. The results of an annual poll of Alaskans by the Republican-led Senate majority caucus on current policy issues show that 61 percent of poll respondents oppose development of Pebble even if the company can secure all the requisite environmental permits. An outlier in the debate over Brune’s work history, Icicle Seafoods spokeswoman Julianne Curry, who is also a former executive director of United Fishermen of Alaska, wrote in support of his confirmation. “We have worked with Mr. Brune in the past and have found him to be knowledgeable and interested in finding solutions to problems facing Alaska. His hard-working nature and ability to cut directly into issues will help make him an asset in DEC,” Curry wrote. Brune said his experience in the resource industries can be beneficial to leading DEC and he believes it’s one of the reasons the Dunleavy administration asked him to apply for the job. “I’m not going to rubber stamp any permit for any project — for Pebble, for an oil and gas permit, for a fishing permit. I’m going to look at it and I’m going to make sure that they’re doing what they need to do to protect the environment but that we’re working alongside them to ensure that they’re given a fair process and that we’re partners in bringing responsible resource development jobs to the state,” he said in an interview. Brune’s undergraduate education is in biology and is what originally brought him to Alaska. He spent a summer in the early 1990s as an intern with the U.S. Fish and Wildlife Service cleaning and monitoring sea otters impacted by the Exxon Valdez oil spill in Prince William Sound. He later came close to a master’s degree in environmental science from Alaska Pacific University, but never completed his thesis. “(The otter work) was very impactful on me because I saw, of course, how resource development can be done in the worst way possible. The impacts of the oil spill, we never, as Alaskans, want to see that again. That never should have happened and it’ll never happen again hopefully and we need to put protections in place to make sure it never happens again,” Brune said. On other issues, he said DEC needs to be adequately funded so it can adjudicate permit applications but at the same time he and DEC division directors are working with Dunleavy’s Budget Director Donna Arduin to determine what the department can and can’t afford to do when the state is faced with major deficits and dwindling savings. One of the programs Brune suggested could be on the chopping block is the Ocean Ranger program, which he has heard there isn’t much support for continuing. The program was established in 2006 via a voter initiative and requires certified marine engineers or individuals with expertise in marine safety and environmental protection to monitor marine discharges from large cruise ships operating in the state. DEC also has other regulations and sampling programs to monitor cruise ship discharges, according to the Ocean Ranger web page. “There are things that in these fiscally austere times that we have to ensure are still appropriate,” Brune said. “We have things on the books that are unfunded mandates or that are not necessarily doing anything to protect the environment; they’re just adding regulatory hurdles for companies and we have to evaluate those.” Brune also stressed a belief that “local problems are best met by local solutions,” particularly noting that he hopes DEC can successfully implement recommendations on how to best improve at times dangerously poor winter air quality in the Fairbanks area from a local stakeholder group. He continued to say that he expects the issue of PFAS contamination in drinking water supplies, particularly in rural Alaska, to be a growing issue DEC will have to address during his tenure if he is confirmed. Per- and polyflouroalkyl substances, known as PFAS chemicals, are artificial chemicals used, among other things, as highly effective fire suppressants at airports. Brune said DEC is working with DOT to test wells near airports in several rural Southeast and Western Alaska communities and has found the contaminants in each well that has been tested, in addition to Fairbanks. “I think we need to be a resource for the citizens of Alaska to give them the confidence that the water they’re drinking, that the things they’re doing, are safe,” he said. ^ Elwood Brehmer can be reached at [email protected]

Alaska Air Group reports drop in annual income

A handful of factors that converged on Alaska Air Group Inc. in 2018 resulted in modest net income of $437 million, but company executives said they expect improved financial performance this year during a Jan. 24 earnings call. The Seattle-based parent to Alaska Airlines and regional carrier Horizon Air netted $23 million in the fourth quarter, compared to $315 million in last three months of 2017. The $437 million full-year profit is off 55 percent from 2017 full-year earnings of $960 million. Alaska Air Group CEO Brad Tilden said a year ago the company faced the challenges of increased competition, higher fuel costs, more expensive labor agreements and internal growth. “Today, that picture looks very different. Our growth has slowed. Newer parts of our network are maturing and fuel prices are down; demand overall is solid,” Tilden remarked. “We have good momentum moving into 2019.” Despite earnings down 73 percent year-over-year, he called the $23 million netted in the fourth quarter “solid,” noting per unit revenues rose significantly at 5.2 percent, a trend that is expected to continue. Alaska Air Group’s per gallon fuel cost — the largest expense aside from labor for many airlines — was up 25 percent in 2018 overall and nearly 17 percent for the fourth quarter. Overall, the company generated about $1.2 billion in operational cash flow for the year and spent about $960 million on capital expenses, which resulted in $240 million of free cash flow and more than $1.2 billion in cash on-hand at the end of the year. Chief Financial Officer Brandon Pedersen said capital expenditures should be down to about $750 million in 2019 with less fleet growth and free cash flow should improve as well. Alaska Air Group cut its balance sheet debt by $470 million in 2018 and ended the year with a 47 percent debt-to-capitalization ratio, down from 59 percent after its purchase of former San Francisco-based competitor Virgin America for $4 billion in December 2016. Company leaders expect to hit their debt-to-cap target in the low to mid-40 percent range this year, Pedersen said, noting the company now owns outright 95 aircraft valued at $1.7 billion. “Our long-term owners tell us they value a conservative balance sheet and it’s been a hallmark of our past success,” Pedersen commented during the earnings call. Alaska Airlines and Horizon Air increased their combined passenger capacity 5.3 percent in 2018 but that growth was slowed to 1.1 percent year-over-year in the fourth quarter. The company has also negotiated joint labor agreements with each of its employee groups except for aircraft technicians since buying Virgin America. Tilden said work to integrate Virgin America systems and employees into Alaska Airlines is almost over, which he said was done remarkably quickly as well given its complexity. The refurbishment of Virgin America Airbus aircraft to Alaska livery and interiors should be done early next year, he added. The first fully refurbished Airbus reentered service in early January. “All of this means we’re rapidly becoming a better version of ourselves with greater reach and scale with the same competitive advantage we’ve always had and fantastic opportunities ahead,” Tilden said. He highlighted that the company’s on-time departure rate increased to 86 percent in 2018 and Horizon Air led regional carriers with an on-time arrival rate of 83 percent. Alaska Airlines officially opened its new $50 million, 100,00 square-foot hangar — large enough to accommodate two of the new, larger Boeing 737 Next Generation aircraft it flies — at Ted Stevens Anchorage International Airport in the fourth quarter. The work translated into $147 million in performance bonuses awarded to Air Group employees in 2018; $120 million of which was paid Jan. 25. It was the 10th consecutive year Alaska Air Group issued performance-based incentives totaling more than 5 percent of annual wages, company executives said. “We’re proud of this payout because it’s an example of how we’re trying to run this business in a balanced way that benefits all of our stakeholders. We’re providing good wages and good benefits to our people and sharing $147 million of incentive pay with them for hitting important goals,” Pedersen said. “Our guests are getting low fares and an improving product and our owners are getting a larger dividend.” On Jan. 14 Air Group announced plans to add at least 3,000 jobs across various business segments. In 2018 the company added roughly 1,500 full-time equivalent positions, bringing its total full-time workforce to 21,600. Roughly 75 percent of the new positions will be in Washington, according to a company release. The company also announced that its quarterly shareholder dividend payment would increase 9 percent to 35 cents per share when it is paid March 7. The company paid out $158 million in shareholder dividends in 2018 and repurchased another $50 million worth of common stock. The $23 million quarterly profit and $437 million in full-year earnings translate to earnings per share of 19 cents and $3.52 per share, respectively. Alaska Air Group stock ended Jan. 25 trading at $63.48 per share, down slightly from a Jan. 24 pre-earnings report opening price of $65.72 per share. Alaska Air Group is forecasting 2 percent capacity growth this year and 3-4 percent growth in 2020, according to executives. Tilden said company leaders have also set a multi-year goal to produce profit margins in the 13 percent to 15 percent range by focusing on improving performance in areas the company can control. “We’re on the road to deliver higher margins in 2019 and 2020 as we work with our people to leverage Alaska’s substantial competitive advantage over a route network that now has greater reach and scale,” he commented. Continued per-unit cost containment will be a major part of the improved returns expected in the coming years, according to Pedersen. He said 2018 unit costs were up 3 percent on about 5 percent capacity growth, which was better than early year guidance of 3.5 percent unit cost growth on a 6.5 percent increase in capacity. Unit costs would have been close to flat in 2018 if not for the added expenses of new labor agreements, Pedersen added. This year nonfuel costs are expected to increase 2-2.5 percent on about 2 percent capacity growth, according to Pedersen, who called it “an exceptionally strong cost plan considering the low (capacity) growth and the roughly 120 basis points of headwind we expect from a higher mix of regional flying.” Finding savings through new agreements with contractors is a major element of Air Group’s plan for the coming year as well. “We’re looking for long-term partners who can help us reduce costs today in exchange for future opportunities to grow their business with us,” Pedersen said. Elwood Brehmer can be reached at [email protected]

Cuts to education, VPSO in supplemental budget draw scrutiny

It’s quickly going to become another extremely tense legislative session if the release of Gov. Michael J. Dunleavy’s supplemental budget is any indication. Senate Finance Committee members noted as much Jan. 29 when Office of Management and Budget officials presented their fiscal year 2019 supplemental budget proposals to the committee for the first time. This year’s supplemental requests were made in two bills; one dealing with regular budget adjustments and another $139.3 million “disaster supplemental” to deal with state earthquake repairs and wildfire suppression efforts within the Department of Natural Resources. Specifically, the administration is proposing $29.4 million in state earthquake-disaster funding to match $102 million in expected federal disaster support. Another $7.9 million would address DNR’s wildfire needs. The more standard capital and operating budget proposals total $110 million; however, the vast majority of that — more than $92 million — would come from federal programs. The remaining nearly $18 million would be money from outside sources such as fees or transfers between state agencies. The big sticking points for legislators are a $20 million proposed cut to education funding and a $3 million reduction to the Village Public Safety Officer program. OMB Director Donna Arduin said other than the earthquake spending the administration wanted to present a supplemental that didn’t spend more from the general fund than the original 2019 budget passed last spring. “We worked collaboratively with our agencies to identify areas where there was cash available, where items had not been spend yet during the fiscal year because we felt we needed to prioritize the fiscal situation that we’re facing in Alaska as well as our need for disaster response and recovery,” Arduin told the committee. Senators from both parties took issue with the $20 million education cut, as the money was part of an end-of-session budget compromise last year. Northwest Alaska Democrat Sen. Donny Olson emphasized that it was meant to partially offset the impacts of inflation on school districts after several years of flat formula funding through the state’s Base Student Allocation, or BSA. Sen. Lyman Hoffman, D-Bethel, questioned whether or not the $30 million for 2020 that was also a part of last year’s budget deal would be cut in Dunleavy’s budget plan for next year, which must be released by Feb. 13. The state is facing a roughly $1.6 billion deficit and Dunleavy opposes new taxes so large budget cuts are expected. Arduin said that would be addressed in the upcoming budget. “In my opinion you’re talking to the wrong people first. You should be talking to the school districts first to see where that money is going to be obligated going forward so we don’t have another supplemental,” said Sen. Click Bishop, R-Fairbanks. Arduin generally responded that school districts or other groups expecting state money should budget for it until it has actually been allocated and changed hands, not just approved by the state. Hoffman contended that the education spending bills “are the law of the land,” recalling Dunleavy’s campaign promise to follow state laws, particularly in regards to the Permanent Fund dividend calculation. Arduin noted the spending cuts are simply proposals at this point and the money will be spent if the Legislature rejects them. Hoffman and Olson also pressed administration officials on plans to increase Alaska State Trooper spending by $3.6 million for salary increases meant to improve Trooper recruitment and retention while the VPSO program is cut by $3 million; although Arduin said the $3 million reduction is money approved that the program did not receive requests to spend. Hoffman said the public safety funding changes could appear to prioritize urban Alaska over rural residents. “The salary structure that exists for the VPSOs needs to be addressed as well,” he said. “Taking the money at this time is shortsighted and does not do justice to the services that are required for the people in the far flung corners of Alaska.” Those cuts would offset an additional $15 million for Medicaid claims made in fiscal year 2018 that still need to be paid after the Legislature knowingly short-funded the program in the current year budget. The supplemental also includes a $5 million re-appropriation from the Alaska LNG Project fund back to the General Fund. That money would not come out of the Alaska Gasline Development Corp.’s $10.3 million operating budget for this year, but instead would lessen the corporation’s available funds for future years. As of the end of November AGDC had $39.7 million left from prior legislative appropriations, according to corporate finance reports. AGDC spokesman Tim Fitzpatrick said via email that the corporation worked with the administration to identify where savings could be found and the $5 million in unused funds was the result of that work. “As AGDC works to focus its priorities, and brings stakeholders to the table, we are confident that we will have the resources and funding to operate successfully,” Fitzpatrick said. Elwood Brehmer can be reached at [email protected]

Dunleavy administration pumping brakes on gasline

Gov. Micheal J. Dunleavy’s administration plans to go back to the future for a successful Alaska LNG Project. Revenue Commissioner Bruce Tangeman stressed the administration’s belief that the state-owned Alaska Gasline Development Corp. needs to shift its focus away from intense efforts to get the $43 billion gasline project approved quickly in favor of resurrecting the “stage-gate” approach favored by the state’s former producer partners during a Jan. 18 speech at the Meet Alaska oil and mining contractor trade show in Anchorage. “The (administration) transition is a great opportunity to pause and see exactly where we’re at in the process with the Alaska LNG Project specifically. It’s a good chance to reach out to our partners that we used to be involved with on a different level and see what their views are of the gasline and the LNG market — get their expertise,” Tangeman said. He added that Dunleavy is very familiar with the project from his time in the state Senate. Dunleavy and other legislators were comfortable with the stage-gate megaproject development process employed until the state took over leadership of the project in late 2016, according to Tangeman. The deliberate stage-gate process breaks overall project development into numerous stages and after each is finished a decision is made whether or not to advance to the next stage. For Alaska LNG, the decision points, or gates, were times when BP, ConocoPhillips, ExxonMobil and the State of Alaska could evaluate their desire to continue or allow the other partners go ahead without them. The companies approach former Gov. Sean Parnell about the prospect of the state being a 25 percent partner in Alaska LNG, which was appealing to the state because it was a way to participate without undue risk, said Tangeman, who was a deputy Revenue commissioner when the public-private Alaska LNG Project ownership structure was devised during Parnell’s tenure in the governor’s office. Parnell has since consulted with Dunleavy on the current status of the project since the election. “We had partners who had done this kind of work and we were going to jump on their backs and ride across the finish line to a successful, profitable project,” he recalled. ExxonMobil was leading the project at that time and the company’s Alaska LNG manager Steve Butt emphasized a need to continually focus on lowering the project’s final cost of LNG supply through optimized project design and infrastructure engineering, in turn leading to improved project economics overall. However, when oil markets bottomed out at sub-$30 per barrel prices in early 2016 — and oil-linked global LNG prices followed suit — the companies suggested to then-Gov. Bill Walker that the project could either be slowed or the state, through AGDC, could take it over. Walker, a longtime advocate for a publicly-led gasline project, quickly chose the state-led option. The Alaska LNG team at the time was wrapping up the roughly $600 million preliminary front-end engineering and design, or pre-FEED, stage of the project, which resulted in reams of environmental and engineering data and the current cost estimate of $43 billion, below the conceptual range of $45 billion to $65 billion. Under Walker, AGDC focused on marketing the project to potential customers in the Asia-Pacific region, an aspect of development Walker repeatedly said had been incorrectly ignored under the prior producer-led Alaska LNG structure. AGDC also began the multi-year process of securing federal permits for the project in April 2017 primarily using the information gathered during pre-FEED. Tangeman said interim AGDC President Joe Dubler and new board members appointed by Dunleavy are also taking time to better understand where the quasi-state agency is in negotiations with potential customers as well as the status of permitting with the Federal Energy Regulatory Commission. FERC is scheduled to release a draft environmental impact statement for the project sometime in February. Dubler, a former finance executive with AGDC, officially takes over as president of the corporation Feb. 1. The board hired him Jan. 10 immediately after firing Keith Meyer, who was hired in 2016 under Walker’s guidance for his significant experience in Lower 48 LNG and pipeline companies. AGDC secured 15 letters of interest from potential customers under Meyer’s leadership and was actively negotiating with six of them when he was let go, according to corporate management. The most notable interest has come from a consortium of state-owned Chinese corporations, which signed a joint development agreement, or JDA, with AGDC in November 2017 in front of President Donald Trump and China President Xi Jinping. The JDA outlines the prospect of the Bank of China and oil giant Sinopec Corp. becoming anchor customers and financiers of the project, with the bank debt funding up to 75 percent of the $43 billion project cost in exchange for Sinopec purchasing 75 percent of its LNG production capacity. Final JDA negotiations have been extended for six months after a Dec. 31 deadline was not met. While the administration is championing a slower approach, board chair Doug Smith also said he doesn’t want to slow any of the progress the corporation has made. Tangeman made it clear that AGDC would not be making a final investment decision on Alaska LNG in 2020 as Meyer had been pushing for, but getting a record of decision from FERC would be valuable and it’s unclear exactly how much that will cost. The state will not be leading a project into construction with as much risk as it carries now, he said. AGDC was also preparing for what executives called an “equity road show” to market the project to investors this year. They often noted the producers would be welcome investors to the project. Tangeman said Dunleavy doesn’t expect to return to the prior structure, but he would be happy with it. “We understand what took place with the price of oil, the price of gas over the last several years but we’ll be talking with (the producers) to see what the climate is now, where we are with oil at $60; what is the gas market; is there an appetite to reengage and see if we can move forward as a partnership again?” he said. “We look forward to having those discussions again. And ultimately a stage gate approach will be put in place so we know and Alaskans know exactly how we’re going to build this project.” The Legislature will also have its say, Tangeman noted. AGDC had previously stressed the need to move quickly on the project to meet a mid-2020s market demand window. BP Alaska President Janet Weiss said in an interview that a state-led project has tax advantages the IRS has recognized that could lower the cost of supply and government-to-government relationships with customers are valuable as well. The state is wrestling with the challenge of assuring it can find a competent builder for the project, something BP, which has assisted AGDC since the state took over, would need to be comfortable with before it would invest. The London oil major also agreed to key terms, including pricing, in May with AGDC to sell its share of North Slope gas into the project. Weiss said BP, which has championed the state’s project “is all about educating and figuring out how to go forward” in discussions with the administration and Legislature. Tangeman said in an interview that the potential customers AGDC is negotiating with understand some change is going to happen in the project with a change of governors but that it will survive if it is economic. He said they also understand there is still a lot of work to do. AGDC veered from the formal stage gates between pre-FEED and FEED, which the companies estimated to be up to a $2 billion undertaking of much more detailed work. “All that hard work has gotten us to a 10-yard line but I think we still have a long way to go to get to the 10-yard line,” Tangeman said, referencing Walker’s campaign metaphor for how close he believes the state is to finally building a gasline. “And I think it’s going to be important that Alaskans understand that.” Tangeman later added in an interview that, “Gov. Dunleavy doesn’t want to go that 90 yards with 100 percent of the risk on our back.” ^ Elwood Brehmer can be reached at [email protected]

Economists: Three-year recession to end ‘with a whimper’

There is a general belief among Alaska economists that the longest recession in the state’s history will come to an end later this year, but the economy isn’t likely to look much different then than it does now. Longtime Alaska Labor Department Economist Neal Fried expects employers will add roughly 1,400 jobs in 2019, which, while a definite positive, would only be about 0.4 percent growth in the job market. Overall, the state has lost about 12,000 jobs since late 2015, when depressed oil prices and ballooning state budget deficits led to contraction in some of the state’s largest industries — oil, construction and government. While the final numbers for 2018 are still being tallied, Fried and University of Alaska Anchorage economic professor emeritus Scott Goldsmith believe final numbers will show the state lost about 2,300 jobs last year, a 0.7 percent contraction of the workforce after consecutive years of losses in excess of 4,600 jobs in 2016 and 2017. Statewide employment was down 0.3 percent in December, according to a Jan. 18 Labor Department release. Goldsmith said the state is headed towards what he described as a “post-recession” period and not a true recovery, which would technically mean a return to pre-recession job levels. Current employment levels mirror 2011, according to Fried. Relatively stabilized oil prices in the $60 to $70 per barrel range, a suite of new North Slope oil prospects and — tentatively — stabilized state government spending are what Fried and Goldsmith are basing their 2019 projections on. “The declines are declining,” Goldsmith said at a Jan. 16 luncheon, noting that Alaska was adding jobs at a rate of just about 0.4 percent per year in the three-year period leading up to the recession. “If you recall those were years when oil prices were over $100 per barrel so one would’ve expected that the economy would’ve been chugging along at a pretty brisk rate, but it really wasn’t so I think that’s worth thinking about as we move forward,” he added. They’re forecasting the oil and gas industry, which has shed about 5,000 jobs — more than one-third of its total Alaska workforce — since 2015, will add about 300 jobs this year. Oil and gas companies added 100 jobs in December year-over-year, according to the Labor Department. The closely linked construction industry added another 200 jobs in December and Fried is predicting Alaska builders will hire 900 more employees over the coming year. “A recession usually ends with a whimper. What generally happens is the positives get big enough to overwhelm the negatives,” he said, which is what he is predicting for 2019. Additional employment gains of about 500 jobs are expected in the health care and hospitality industries, sectors that mostly continued to grow during the recession. Those additions will offset small losses in government and retail, according to Fried. UAA Institute of Social and Economic Research professor Mouhcine Guettabi noted that the improved economic outlook is predicated on the Legislature and Gov. Michael J. Dunleavy not resolving the state’s current $1.6 billion budget deficit with spending cuts alone. “If that ($1.6 billion) were to get removed from the economy, obviously all of this gets tossed aside,” he said. ISER has concluded that state government spending cuts are the most economically damaging way lawmakers can close the state’s budget gap. That’s because Alaska uniquely relies on oil tax and royalty revenue and as of this year investment earnings from the Permanent Fund to pay for government services — money that is additive to the overall state economy — instead of recycled broad-based tax revenue. ISER estimates $100 million in state operating budget cuts roughly equates to 1,000 or more full-time jobs lost depending on how the cuts are implemented. ^ Elwood Brehmer can be reached at [email protected]

Major producers building carbon pricing into future plans

The list of oil and gas companies with global influence that support some form of carbon pricing continues to grow. Alaska’s “big three” producers — BP, ConocoPhillips and ExxonMobil — are all now a part of that group. ExxonMobil announced in October that it would be donating $1 million to Americans for Carbon Dividends, a campaign led by former U.S. Sens. John Breaux, a Democrat, and Trent Lott, a Republican. ConocoPhillips doubled down on that donation in December with a $2 million pledge to Americans for Carbon Dividends over the next two years. BP executives have been trumpeting the expression “dual challenge” for several years, referencing the company’s belief that worldwide energy production will need to continually increase at the same time global carbon emissions must be drastically reduced. “In decades to come there needs to be 2.5 billion people lifted out of poverty and there’s going to be another 2 billion added to our planet, so there is a deep need for energy, and we need to do it better with less emissions,” BP Alaska President Janet Weiss said during a Jan. 18 speech at the Meet Alaska contractor trade show in Anchorage. “At BP we strongly support the transition to a lower carbon economy and we have it tied to our larger business strategy,” Weiss added later. BP estimates roughly 20 percent of the world’s greenhouse gas emissions are subject to some form of carbon pricing mechanism and expects two-thirds of its emissions will be in countries with some sort of emissions or carbon policy by next year. As a result, the London-based oil major has instituted an internal carbon price of $40 per metric tonne of carbon dioxide on its operations in industrialized nations in order to “help anticipate greater regulatory requirements” on its greenhouse gas output, an official statement on the company’s carbon price says. BP also supports the global carbon emissions reduction goals set out in the 2015 Paris Agreement. ConocoPhillips now either incorporates a carbon price into the economic analyses it runs on all of its proposed projects or runs a sensitivity tests of its projects against likely future carbon pricing scenarios. Those evaluations are conducted based on existing regulations for projects in countries with carbon pricing already in place and similarly to BP are based on a cost of $40 per tonne for large projects in countries without a carbon tax, according to its climate change strategy. Energy policy experts of all stripes acknowledge support for carbon pricing, or tax, mechanisms is gaining steam domestically and abroad, but where does that leave Alaska, with its oil-dependent economy and small population that burns a large amount of fossil fuels per capita compared to most other states primarily because of its cold climate? According to the U.S. Energy Information Administration, in 2015 Alaska had the fourth highest level of energy-related carbon dioxide emissions per capita in the country behind Wyoming, North Dakota and West Virginia, states with high levels of coal consumption, cold winters, or both, an EIA report notes. Speaking on background, leading officials with Alaska’s major producers said the companies’ support for carbon pricing initiatives comes from the belief that working towards a cleaner environment is a sound tenant of doing business, and something shareholders increasingly demand. For simplicity’s sake, oil companies in support of carbon pricing almost unanimously favor a national policy in the U.S. over state-by-state systems and a global policy would be most ideal for the same reason. Americans for Carbon Dividends is backing the Baker-Shultz plan spawned in part by former secretaries of State James Baker and George Shultz, who advocate for a slowly rising but revenue-neutral carbon tax that would be paid back to all citizens through a dividend. The Baker-Shultz concept also includes removing other carbon regulations subsequently deemed unnecessary and “border adjustments,” or fees levied on goods imported from countries without carbon pricing policies. Alaska’s three oil majors are also members of the Climate Leadership Council, a group comprised of some of the world’s largest companies and environmental nonprofits that also backs the Baker-Shultz plan. The Climate Leadership Council touts the national carbon dividend concept as “pro-environment, pro-growth, pro-jobs, pro-competitiveness, pro-business and pro-national security” and something that can be morphed to match the needs of other countries that have not already put a cost on carbon emissions. The council contends its dividend plan is the most equitable carbon tax concept being debated because it would tax consumers based on their purchases — the more wealthy of which generally buy more goods and fuel and therefore contribute more to greenhouse gas emissions — but distribute the carbon tax-generated dividends equally. Consequently, the dividends would most greatly benefit lower income individuals who are more likely to turn around and spend the money in the national economy, according to the council. However, many Republicans argue the carbon dividend idea is not as “pro-everything” as the Climate Leadership Council claims. David Banks, an executive with the American Council for Capital formation and former energy and environment policy advisor to President Donald Trump, said during the Jan. 18 conference that a carbon tax is not the answer and would simply lead to “carbon leakage,” where higher emitting business sectors move to jurisdictions without a carbon price. Banks also questions the motives of oil companies backing such policies. “You have activist shareholders who have hijacked the shareholder resolution process to achieve what they can’t get through legislation or regulation on climate,” he said. “They’re essentially working a backdoor process to force public companies to accept climate-related goals that may not be in the best interest of the average shareholder who simply wants the company to pursue measures that increase the value of the stock.” Officials with the big companies working in Alaska dispute that accusation. Robert Dillon, a conservative strategist and former Republican communications director for the Senate Energy and Natural Resources Committee, said in an interview that upstream energy companies can support a carbon tax because they can pass it through to end users. Dillon also insists the cost of administering such a program would degrade its benefit. He and Banks both believe the money for dividends would ultimately be diverted to other needs, particularly in the era of no congressional earmarks. “If oil and gas support for a carbon tax gains a critical mass of support in Congress it’s highly likely that it will be hijacked and used as a revenue stream to save something like Social Security,” Banks said. He supports a blending of climate and international trade policies to favor lower carbon products, which would give advanced economies like the U.S. a competitive advantage because manufacturing and energy production practices here usually result in less carbon emissions than in developing nations. The U.S. currently imports more “embodied carbon,” or carbon emitted from producing a given product, than it exports and that increases total U.S. carbon emissions by about 10 percent, according to Banks. “There’s no question that U.S. (natural) gas would be more competitive than Russian gas in Europe if life-cycle emissions were taken into consideration,” Banks argues. He and Dillon stressed that legitimate climate change solutions will be market-driven — such as lower cost natural gas displacing coal for electricity production — and government’s role is to invest in research and development of cleaner energy technologies while removing barriers to innovation. Alaska actions On the state level, Gov. Michael J. Dunleavy scrapped former Gov. Bill Walker’s Climate Action Leadership Team shortly after taking office and has repeatedly said the state overall is not a major carbon emitter on the national or global levels. Therefore, the State of Alaska needs to focus on oil production and otherwise generating a strong economy that can allow it to invest in ways to adapt to a changing climate, such as relocating coastal communities threatened by erosion, according to Dunleavy. The University of Alaska Anchorage Institute of Social and Economic Research recently published a report that estimates the consequences of a warmer climate will require the state to spend $340 million to $700 million per year in additional public infrastructure repairs and upgrades over the coming decades. Renewable Energy Alaska Project Executive Director Chris Rose said in an interview that it’s understandable that the oil companies want a carbon tax implemented as broadly as possible and advocating for one now is a hedge against uncertainty, as he believes carbon pricing will eventually be commonplace. However, that conflicts with the fact that new policies are almost always generated in states that act as policy laboratories, “incubators, if you will,” Rose said. “If the oil companies want to wait for a national or international (carbon) policy I think they’ll be waiting for a long time,” he said, noting the oil industry lobbied against a carbon tax referendum in Washington state that was soundly defeated on the November ballot. The root issue with carbon pollution, according to Rose, is it isn’t nearly as tangible as roadside garbage and therefore it’s harder to generate support for policies to curb it. “The problem with carbon dioxide is it’s invisible and if people could see they’re polluting they’d look at id differently,” he said. “All of those costs of carbon are being externalized.” Rose suggests a state carbon tax — as unlikely as it is in the near-term — could easily be implemented at the gas pump, for example, but the revenue could then be invested in economic activity inducing energy efficiency programs. A carbon tax could support a state “green bank” that would act similarly to the Alaska Industrial Development and Export Authority, the state’s development bank, with a focus on renewable energy and efficiency investments. “Energy efficiency is always the cheapest” way to reduce carbon emissions, Rose said, as evidenced by the Alaska Housing Finance Corp. home weatherization programs that have reduced participants home energy use by roughly 30 percent. An Alaska green bank could use the tax revenue to leverage private investment in a revolving loan fund that wouldn’t rely on grant funding as state energy programs have in the past, Rose said. The green bank would not only reduce energy costs — freeing individual and business capital for other uses — but it would also spur construction activity and help private banks become comfortable in lending for renewable energy or efficiency projects, according to Rose. For its part, BP has started bringing carbon-pricing mechanisms to Alaska indirectly. Last March, BP and Southeast Alaska Native regional corporation Sealaska Corp. announced that they had reached agreement on a carbon offset project in which Sealaska set aside 165,000 acres of carbon-absorbing forestland for at least 110 years to mitigate for BP’s carbon emissions in California, which has a carbon cap-and-trade program. The finances of the deal remain confidential, but the Sealaska Native Alaska Forestry Project was issued 11 million carbon credit offsets by the California Air Resources Board for agreeing to not harvest the timber or otherwise develop the acreage, according to the company. Sealaska then sold those credits at a lesser price than it would cost BP to reduce its California carbon emissions below the state’s emissions cap. A single credit equals one ton of carbon dioxide, according to Weiss. It allows Sealaska to derive revenue from the land while preserving it for salmon and wildlife habitat and other traditional uses, according to the company. Weiss said BP reached a similar deal with Ahtna Inc. last October that is the largest carbon forestry project in the country. “These projects support sustainable future management and multi-use access to the forestland and create economic opportunities for the region,” she said. “They also incentivize verifiable and permanent emissions reductions in sectors of the economy that would otherwise not be incentivized to pursue such reductions.” Ahtna declined to comment on its deal with BP, but Rose said the State of Alaska — with its roughly 100 million, mostly undeveloped acres — could play the role of a carbon banker by agreeing to set aside some of its forests or even coal prospects. ^ Elwood Brehmer can be reached at [email protected]

Dunleavy adminstration pumping brakes on gasline direction

Gov. Micheal J. Dunleavy’s administration plans to go back to the future for a successful Alaska LNG Project. Revenue Commissioner Bruce Tangeman stressed the administration’s belief that the state-owned Alaska Gasline Development Corp. needs to shift its focus away from intense efforts to get the $43 billion gasline project approved quickly in favor of resurrecting the “stage-gate” approach favored by the state’s former producer partners during a Jan. 18 speech at the Meet Alaska oil and mining contractor trade show in Anchorage. “The (administration) transition is a great opportunity to pause and see exactly where we’re at in the process with the Alaska LNG Project specifically. It’s a good chance to reach out to our partners that we used to be involved with on a different level and see what their views are of the gasline and the LNG market — get their expertise,” Tangeman said. He added that Dunleavy is very familiar with the project from his time in the state Senate. Dunleavy and other legislators were comfortable with the stage-gate megaproject development process employed until the state took over leadership of the project in late 2016, according to Tangeman. The deliberate stage-gate process breaks overall project development into numerous stages and after each is finished a decision is made whether or not to advance to the next stage. For Alaska LNG, the decision points, or gates, were times when BP, ConocoPhillips, ExxonMobil and the State of Alaska could evaluate their desire to continue or allow the other partners go ahead without them. The companies approach former Gov. Sean Parnell about the prospect of the state being a 25 percent partner in Alaska LNG, which was appealing to the state because it was a way to participate without undue risk, said Tangeman, who was a deputy Revenue commissioner when the public-private Alaska LNG Project ownership structure was devised during Parnell’s tenure in the governor’s office. Parnell has since consulted with Dunleavy on the current status of the project since the election. “We had partners who had done this kind of work and we were going to jump on their backs and ride across the finish line to a successful, profitable project,” he recalled. ExxonMobil was leading the project at that time and the company’s Alaska LNG manager Steve Butt emphasized a need to continually focus on lowering the project’s final cost of LNG supply through optimized project design and infrastructure engineering, in turn leading to improved project economics overall. However, when oil markets bottomed out at sub-$30 per barrel prices in early 2016 — and oil-linked global LNG prices followed suit — the companies suggested to then-Gov. Bill Walker that the project could either be slowed or the state, through AGDC, could take it over. Walker, a longtime advocate for a publicly-led gasline project, quickly chose the state-led option. The Alaska LNG team at the time was wrapping up the roughly $600 million preliminary front-end engineering and design, or pre-FEED, stage of the project, which resulted in reams of environmental and engineering data and the current cost estimate of $43 billion, below the conceptual range of $45 billion to $65 billion. Under Walker, AGDC focused on marketing the project to potential customers in the Asia-Pacific region, an aspect of development Walker repeatedly said had been incorrectly ignored under the prior producer-led Alaska LNG structure. AGDC also began the multi-year process of securing federal permits for the project in April 2017 primarily using the information gathered during pre-FEED. Tangeman said interim AGDC President Joe Dubler and new board members appointed by Dunleavy are also taking time to better understand where the quasi-state agency is in negotiations with potential customers as well as the status of permitting with the Federal Energy Regulatory Commission. FERC is scheduled to release a draft environmental impact statement for the project sometime in February. Dubler, a former finance executive with AGDC, officially takes over as president of the corporation Feb. 1. The board hired him Jan. 10 immediately after firing Keith Meyer, who was hired in 2016 under Walker’s guidance for his significant experience in Lower 48 LNG and pipeline companies. AGDC secured 15 letters of interest from potential customers under Meyer’s leadership and was actively negotiating with six of them when he was let go, according to corporate management. The most notable interest has come from a consortium of state-owned Chinese corporations, which signed a joint development agreement, or JDA, with AGDC in November 2017 in front of President Donald Trump and China President Xi Jinping. The JDA outlines the prospect of the Bank of China and oil giant Sinopec Corp. becoming anchor customers and financiers of the project, with the bank debt funding up to 75 percent of the $43 billion project cost in exchange for Sinopec purchasing 75 percent of its LNG production capacity. Final JDA negotiations have been extended for six months after a Dec. 31 deadline was not met. While the administration is championing a slower approach, board chair Doug Smith also said he doesn’t want to slow any of the progress the corporation has made. Tangeman made it clear that AGDC would not be making a final investment decision on Alaska LNG in 2020 as Meyer had been pushing for, but getting a record of decision from FERC would be valuable and it’s unclear exactly how much that will cost. The state will not be leading a project into construction with as much risk as it carries now, he said. AGDC was also preparing for what executives called an “equity road show” to market the project to investors this year. They often noted the producers would be welcome investors to the project. Tangeman said Dunleavy doesn’t expect to return to the prior structure, but he would be happy with it. “We understand what took place with the price of oil, the price of gas over the last several years but we’ll be talking with (the producers) to see what the climate is now, where we are with oil at $60; what is the gas market; is there an appetite to reengage and see if we can move forward as a partnership again?” he said. “We look forward to having those discussions again. And ultimately a stage gate approach will be put in place so we know and Alaskans know exactly how we’re going to build this project.” The Legislature will also have its say, Tangeman noted. AGDC had previously stressed the need to move quickly on the project to meet a mid-2020s market demand window. BP Alaska President Janet Weiss said in an interview that a state-led project has tax advantages the IRS has recognized that could lower the cost of supply and government-to-government relationships with customers are valuable as well. The state is wrestling with the challenge of assuring it can find a competent builder for the project, something BP, which has assisted AGDC since the state took over, would need to be comfortable with before it would invest. The London oil major also agreed to key terms, including pricing, in May with AGDC to sell its share of North Slope gas into the project. Weiss said BP, which has championed the state’s project “is all about educating and figuring out how to go forward” in discussions with the administration and Legislature. Tangeman said in an interview that the potential customers AGDC is negotiating with understand some change is going to happen in the project with a change of governors but that it will survive if it is economic. He said they also understand there is still a lot of work to do. AGDC veered from the formal stage gates between pre-FEED and FEED, which the companies estimated to be up to a $2 billion undertaking of much more detailed work. “All that hard work has gotten us to a 10-yard line but I think we still have a long way to go to get to the 10-yard line,” Tangeman said, referencing Walker’s campaign metaphor for how close he believes the state is to finally building a gasline. “And I think it’s going to be important that Alaskans understand that.” Tangeman later added in an interview that, “Gov. Dunleavy doesn’t want to go that 90 yards with 100 percent of the risk on our back.” ^ Elwood Brehmer can be reached at [email protected]

Microcom founder launches new satellite broadband project

If everything goes according to Chuck Schumann’s plans it will soon be easier to do everything from providing health care to running an oil field to streaming a favorite movie in rural Alaska. Schumann founded the Anchorage-based satellite telecom provider Microcom in 1984. Now he’s parlaying that success — Microcom has expanded to Hawaii and Lower 48 markets — into a project to provide up to 40 gigabytes of broadband Internet capacity across Alaska. “We’re working hard to solve the problem of access to broadband in rural Alaska. In following the industry we were always hearing people talk about solving the problem in Africa or South America or the Middle East and countries around the world and they weren’t focused on solving the problem in Alaska,” Schumann said in an interview. Schumann’s plans started with founding Microcom subsidiary Pacific Dataport Inc., or PDI, in 2017. Pacific Dataport has since partnered with San Francisco-based satellite developer Astranis Space Technologies Corp. to build and launch one, and eventually several, “microsatellites” to support The Aurora System broadband network. "We really couldn't have asked for a better first customer and a better partner," Astranis CEO John Gedmark said in a Pacific Dataport announcement about the project. "Not just because of PDI's vision and dedicaiton to bridging Alaska's digital divide, but also becasue this is a perfect opportunity to showcase our phased approach to bringing online the more than 4 billion people in the world without reliable internet access." Phase one of the Aurora project is set to launch in 2020 and offer up to 7.5 gigabytes of broadband capacity across Alaska, according to Schumann. If successful, subsequent expansions to The Aurora System and a second satellite launch in 2021 will grow that capacity up to 40 gigabytes, he said. His companies have heard from large resource developers in rural parts of the state that broadband service now is too expensive and unreliable, which just adds another layer of challenges to an already technically challenging industry. Rural Alaska health care providers have also expressed a widespread need for better Internet access to aid in providing telehealth other information sharing needs. Currently, Alaska has about 2.5 gigabytes per second of satellite bandwidth across multiple broadband providers, according to PDI. The broadband tracking website BroadbandNow lists Alaska as being 80 percent covered by some sort of broadband service at an average speed of 25.8 megabytes per second. Alaska is the 44th most connected state when it comes to broadband availability, according to the site. “A couple of years ago we were just fed up with being left out of everything because satellite platforms covering Alaska just are too low on the horizon; we were just left out of things,” Schumann said in describing a common challenge with Alaska satellite connections. “They don’t cover Alaska. (We’re) always at the mercy of taking the scraps that someone would give us.” That is, satellite-based systems used in extreme latitudes are often obstructed by objects on the ground, or even the curvature of the earth, because they must be pointed at low-earth orbit, or LEO, satellites circling the earth at the equator. The Aurora System will overcome that issue by utilizing geosynchronous equatorial orbit, or GEO, satellites that are launched into an orbit thousands of miles above Earth and mirror the planet’s rotation. Schumann said the Aurora satellites will be positioned roughly over Hawaii “to give the best possible look angle” to Alaska. They will be able to provide broadband service up to 500 miles north of the North Slope, he said. “We’ll be able to serve cruise ships transiting the Arctic Ocean with a large amount of capacity that’s being demanded by the cruise ships of the future,” he added. The Aurora System will be run by Pacific Dataport. Microcom will offer small business and residential retail broadband from the system and Pacific Dataport will handle business-to-business and wholesale broadband contracts, according to Schumann. While the project is still in its early stages, a Pacific Dataport release states Aurora System service should initially be available for about one-third the average cost of current broadband rates for residential and wholesale customers in the state with three times the current satellite capacity. Schumann said the first phase, which will be “in the tens of millions of dollars” of investment, is as much of a sure thing as it can be because it is already fully funded. “We’re already building; we’re already ordering. We’ve been in progress now for well over a month in getting the project underway so the decision was made to let the word out that we’re underway,” Schumann said, adding “that we needed to give rural Alaskans hope that we were underway.”   Elwood Brehmer can be reached at [email protected]  

AGDC audit recommends minor changes, additional report forthcoming

Alaska Gasline Development Corp. officials by and large have spent $433.3 million in line with the requirements tied to that money but missed the mark on other, smaller legislative mandates and in-house rules, according to a special Legislative Audit Division review of the state-owned corporation. Released Jan. 14, the audit determined that AGDC had spent all but $150,000 of the $433.3 million in accordance with legislative intent for the appropriations. The misstep occurred when seven invoices from the Bureau of Land Management were charged to the corporation’s Alaska LNG Project fund instead of its Alaska Standalone Pipeline, or ASAP, project fund as they should have been. The charges were made after a new working agreement was signed with BLM and “were coded incorrectly to the AK LNG fund,” according to the audit report. AGDC staff subsequently corrected the errors when they were flagged by the auditor, the report states. Accounting for a $157 million re-appropriation of gasline funds to an education account in 2015, AGDC has received $479.8 million from the Legislature since 2010; $225 million of which was meant for the smaller, in-state ASAP project and another $254.8 million to further the $43 billion Alaska LNG Project. AGDC has exhausted its ASAP money and had $39.7 million left in Alaska LNG funds remaining at the end of November, according to figures presented at the corporation’s Jan. 10 board of directors meeting. A joint permitting record of decision for the ASAP project is expected from the U.S. Army Corps of Engineers and BLM as soon as the federal government shutdown is over. ASAP is a gasline project for in-state use estimated to cost approximately $10 billion. The finance review covered the period from July 1, 2014, to March 31, 2018. AGDC’s administrative support was handled by the Alaska Housing Finance Corp. prior to July 2014. AGDC started as an arm of AHFC and the Legislature separated the two in 2013. Some legislators have questioned whether AGDC had kept its project spending segregated during a time of severe overall state budget challenges given development of the long-sought Alaska LNG Project could benefit from additional money. The audit additionally concluded that AGDC had not complied with statutory language requiring its hiring procedures to include an Alaska veterans’ preference and recent corporate budgets and large contracts had not been approved by the board of directors as called for in the corporation’s bylaws. AGDC’s annual operating budget has been static at $10.3 million for several years. Then-AGDC board chair Dave Cruz wrote in a Jan. 2 formal response to the audit that the board approved a veterans’ preference policy in August and that staff would notify the board of future contracts of more than $1 million and seek board approval for contracts in excess of $5 million. Management will also seek full board approval for future operating budgets, according to Cruz. “AGDC is a dynamic organization that has successfully navigated through considerable organizational change,” he wrote. “AGDC is committed to continuously monitoring operations to ensure current processes are in alignment with established policy and good corporate governance. AGDC is committed to continuous improvement.” AK LNG report, financing Legislative Budget and Audit Committee chair Sen. Bert Stedman announced during a Jan. 14 meeting that the committee is working on a report with consultants hired to evaluate the overall potential fiscal impacts of Alaska LNG development on the state’s finances. Stedman said he originally wanted the Alaska LNG fiscal report — spanning everything from broad construction costs to the implications of specific lease expenditures by the North Slope producers — to be available by the Jan. 14 meeting as to apprise the incoming committee chair from the House of the work the committee has been doing to evaluate the gasline project. As of this writing a majority caucus had not been formed in the House and it was unclear who would chair the LBA Committee. However, the committee was told in mid-December that the flow information from AGDC and other relevant state agencies had been “highly restricted,” which delayed completion of the document, according to Stedman. He noted the Legislature didn’t approve AGDC’s request last year for unlimited authority to accept outside funding in large part because legislators weren’t comfortable with the amount of information the corporation was providing them. “We’re hopeful that we’ll have a smooth transition (to House leadership) and this document will help sitting members in the Legislature and staff and the public better understand the scope and realm (of fiscal issues) that we’re dealing with,” he said. Randy Ruaro, a member of Stedman’s staff said the report could be done in late January. Outgoing Rep. Paul Seaton of Homer also voiced concerns he has regarding the financing structure for Alaska LNG that AGDC is contemplating during the meeting. According to Seaton, AGDC Commercial Vice President Lieza Wilcox said negotiations with the Bank of China and Sinopec — two of the three state-owned Chinese companies AGDC has been negotiating with as a possible anchor customer and financier for the project — include the possibility of Sinopec receiving cheaper gas than other customers for 1 percent to 2 percent debt financing in return. Wilcox was part of mid-December meetings in Houston with LBA consultants, committee members and administration officials. Seaton participated via teleconference. The November 2017 joint development agreement AGDC signed with the Bank of China, Sinopec and China Investment Corp. contemplates Sinopec buying up to 75 percent of the project’s LNG capacity in exchange for the Bank of China funding up to 75 percent of the estimated $43 billion Alaska LNG Project. The remaining project funding would be raised through equity investments, according to AGDC officials. “What disturbed me was they said the Chinese are interested in this project because they could get cheap gas. They mentioned $5 (per million British thermal units) if things worked out,” Seaton said in an interview. “When you have a national bank and a national oil company working together on a project — heck, they could have 0 (percent) or 1 percent money and they’re going to make those payments and all of a sudden that’s where it could be really cheap.” Those comments caught his attention because corporation leaders have previously estimated building and operating Alaska LNG infrastructure would cost more than $6 per mmBtu, which does not account for feedstock gas and shipping costs, Seaton said further. He’s worried it could leave the state with LNG priced on equity financing with 8 percent to 9 percent returns that would be too costly to sell on world markets. “The whole plan has been 75 percent Chinese but this financing model means that it’s no longer one project; it’s two separate projects because the financing for the projects are totally separate and therefore one can be economic and one can be noneconomic,” Seaton described. AGDC officials disputed the $5 gas price reference but noted volume discounts are common in markets for many products. AGDC communications Vice President Tim Fitzpatrick said “pricing for gas from the project is still in the negotiation process” and also pointed out that in-state gas from the project would not have liquefaction and shipping costs added to it. Elwood Brehmer can be reached at [email protected]

USPS cancels Bypass Mail pilot project at last moment

A pilot program aimed at finding cheaper ways to deliver goods and mail to North Slope communities has been scrapped just before it was set to launch. The U.S. Postal Service had partnered with Lynden Transport Inc. and planned to use multiple modes of transportation to make Bypass Mail and non-priority mail deliveries around the North Slope hubs of Deadhorse and Utqia’vik, formerly Barrow. The pilot program was set to start Jan. 15 and run for one year. USPS officials went as far as to inform other mail carriers that could see their business impacted by the plan. Jodi McDermott, a commercial air network manager with the Postal Service, wrote in a Dec. 7 letter to Anchorage-based Northern Air Cargo leadership that Lynden Transport would deliver the same mail at the same frequency as before, but would use tractor-trailers traversing the tundra during winter, marine landing craft in summer and aircraft only during the spring and fall shoulder seasons. The belief, according to McDermott, was that Lynden would be able to achieve as good or better on-time service compared to the air service primarily used today. A major freight carrier in Alaska with corporate offices in Anchorage and Seattle, Lynden Transport is the parent company to 16 air, marine, ground and logistics subsidiaries. “The Postal Service expects substantial savings during the one-year pilot test. If the pilot test is successful, the annual savings are expected to increase due to continual Department of Transportation airline rate cost increases. These transportation savings come at a critical time for the Postal Service, as we continue to experience financial losses every year,” McDermott wrote. Established in 1972 as a way to ease demand on postal facilities that were running over capacity, the Bypass Mail program supplies a large portion of the consumer goods used in rural Alaska. The program uses a complex system of rate and aircraft classifications depending on the route served to determine freight fees. Those rates are established by the Department of Transportation and imposed on the Postal Service. Air carriers transport the freight orders that could be anything from food to power tools to household items, directly to their destination without going through a postal facility. The carriers are paid by the Postal Service. The Alaska Congressional Delegation successfully fought off changes to the Bypass Mail rate structure proposed by Rep. Darrell Issa, R-Calif., in 2014. At the time, officials with the Postal Service inspector general’s office said during a House committee meeting regarding Issa’s legislation that the Alaska-specific program lost $76 million in 2013, or 70 cents for every dollar of the $108 million the post office invested. Issa’s bill would have required the Postal Service to recover up to half of its Bypass Mail costs by 2020 through incremental rate increases. It’s unclear exactly why the Postal Service suddenly changed course and canceled the multi-modal test. USPS Alaska spokesman Brian Sperry said Jan. 14 via email that the program had been withdrawn and was no longer being pursued and he could not elaborate further on the reasons why. A spokesman for Lynden Transport also did not respond to questions about the program and why it was nixed. Alaska Air Carriers Association leaders sent a letter to McDermott Dec. 13 requesting the Postal Service pause the program until the potential impacts to contracted mail carriers could be identified. The letter also suggests that if the pilot program meets the requirements of federal Bypass Mail statutes and regulations the Postal Service should issue a request for proposals “to all eligible air carriers for the services requested.” AACA Executive Director Jane Dale said in a brief interview that it was subsequently determined the Postal Service has the legal authority to launch the pilot without going through a standard RFP process. She stressed the association does not want to meddle in any one company’s business, but seeks transparency and open competition for opportunities available to its members. Dale could only speculate as to why the program was canceled. ^ Elwood Brehmer can be reached at [email protected]

Meyer out as president of Alaska Gasline Development Corp.

Keith Meyer is out as the president of the Alaska Gasline Development Corp. Meyer was dismissed from his position on Thursday and replaced on an interim basis by Joe Dubler, who is currently the executive vice president of finance and administration for the Cook Inlet Housing Authority. Dubler worked for AGDC as vice president of commercial operations under former President Dan Fauske, who resigned from the position at former Gov. Bill Walker’s request in November 2015 after the Legislature approved a buy out of TransCanada Corp.’s interest in the $43 billion Alaska LNG Project. Continuing the shakeup, Doug Smith, who was appointed to the board by Gov. Michael J. Dunleavy on Monday, was voted the new chair of the board of directors and Dan Coffey, also appointed Monday, was named vice chair. Smith replaces Dave Cruz as chair. Cruz has served on the board of AGDC for the past three administrations after first being appointed by former Gov. Sean Parnell. Meyer has led AGDC since June 15, 2016. The Alaska LNG Project is nearing a milestone with the scheduled release of a draft environmental impact statement scheduled to be released next month. A joint development agreement with three large nationalized Chinese companies to invest in up to 75 percent of the project was signed in November 2017 but a recent Dec. 31 deadline to formalize commercial agreements was extended for six months. Laborers’ Local 341 union leader Joey Merrick, one of the board members replaced Monday, thanked AGDC staff for their hard work during the public comment portion of Thursday’s board of directors meeting and encouraged the new members to continue the work that has been done. “We’re close to having some customers, which is the key to this project,” Merrick said. Smith thanked Cruz for staying with AGDC, calling him “an integral part of this board,” during the meeting. He also said in a talk with reporters following the meeting that the leadership changes do not signal a change in course for the state-owned corporation. “We’re not looking to derail any progress,” Smith said, emphasizing that he wants that message relayed to those interested in participating in the project with the state. He declined to elaborate on why Meyer was let go, calling it a “personnel matter.” AGDC officials said during an update on the Alaska LNG Project that they are in active negotiations with six potential LNG buyers. Meyer had previously stressed 2019 would be the year AGDC would begin courting potential Alaska LNG investors with an “equity road show” in addition to continuing regulatory work and securing customers. Dunleavy was regularly critical of the state-led Alaska LNG Project structure during his time in the state Senate and while campaigning for governor, stressing that the private sector needs to play a larger role in the project, as was first envisioned. The state took over the lead role on the project in 2016 after the major producers partnered on the project wanted to slow the pace down as LNG prices collapsed along with oil. Officials in the governor’s office avoided answering questions as to why Meyer was terminated.  AGDC External Affairs Vice President Tim Fitzpatrick said Dubler would not be available for comment Thursday. Meyer joined AGDC from LNG America, a Houston-based energy logistics firm he founded in 2008 that focuses on increasing the use of LNG as a fuel for the maritime and transportation industries, according to an AGDC release. He was paid a base salary of $550,000 per year, making him the highest-paid state employee, and the board of directors voted last month to award him two years of performance bonuses totaling $296,000. Dubler will officially start at AGDC Feb. 1 with a base salary of $350,000 and will not be offered pay bonuses, according to state officials. Walker also shook up the board of directors at AGDC soon after taking office, firing two board members a month after taking office in January 2015, and replacing Fauske later that year.   Editor's note: This story has been updated from the original with additional reporting. Look for updates to this story in an upcoming issue of the Journal.  

Senate set to work as House in disarray

Another challenging session is fast approaching, but Alaska’s Legislature remains half-baked. That’s because at the time of this writing the House is still without a majority caucus despite the Supreme Court’s Jan. 4 decision to uphold a single-vote victory for Fairbanks Republican Rep.-elect Bart LeBon in District 1. In the Senate, leaders of the Republican majority are again preparing to tackle major issues on which they have made progress in recent years but significant work remains. Incoming Senate President Cathy Giessel, R-Anchorage, told a gathering of the Resource Development Council for Alaska at the group’s annual legislative preview meeting Jan. 3 that addressing crime problems in the state will be the top priority for her caucus in 2019, a position in line with Gov. Michael J. Dunleavy’s primary goal for his first session in office. Dunleavy and many legislators — some of whom first supported it — have pushed for a wholesale repeal the now-beleaguered criminal justice reform package in Senate Bill 91 passed in 2016. Giessel said in a brief interview that there are “significant flaws” in SB 91 and on the whole the public wants it repealed but continuing changes can be made that could be beneficial without sacrificing some of the more popular aspects of the law, such as tougher penalties for various felony convictions. She said prosecutors across the state have helped legislators identify some of the gaps in SB 91 that can be closed without a straight repeal. Finance Committee co-chair and operating budget leader Sen. Bert Stedman, R-Sitka, said he expects the omnipresent issue of closing the state’s large budget gap will keep legislators working well into overtime for a fifth consecutive year. The 2020 fiscal year deficit is currently pegged at about $1.6 billion, but Dunleavy’s final budget proposal should cut spending to the point of being balanced, according to Budget Director Donna Arduin. At that point it will be up to the Legislature to determine how many of the administration’s cuts it wants to implement. It’s those major policy calls — and the fact that there are little state savings to fall back on — that lead Stedman to believe legislators will work up to and possibly over their constitutionally allotted 121 days. With $1.7 billion left in the Constitutional Budget Reserve Fund it would be possible for legislators to turn to it one more time to fill the deficit but there is general agreement that the state needs to keep at least $1 billion, and ideally $2 billion, in reserve to respond to emergencies and for cash flow management purposes. That means legislative action will be needed to make the structural budget cuts required to resolve a deficit of that size, according to Stedman. “I’ve expressed concern and a desire to the administration to have legislation prepared and ready for legislative action. In my opinion, (big changes) should be led by the administration; the agencies are the ones with the expertise, with the more intimate knowledge of their operations,” he said. “The Legislature, the body of the people, doesn’t have the background.” Senate Republicans are looking to major changes to the state’s Medicaid program, for one. Democrats argue Medicaid expansion, accepted by former Gov. Bill Walker in 2015, is a win for the state because it has afforded upwards of 40,000 low-income Alaskans access to health insurance that is 90 percent funded by the federal government, a funding level legislators are happy to match for other federal programs such as highway funding. However, Giessel contends the expanded class of Medicaid recipients, which includes working-age men, takes money away from the individuals the safety net was originally intended for. “Working age men — we need to get them to work,” she said. On the other hand, Stedman said he wants to make sure the state is collecting all of the Medicaid funding that’s available. “I’m interested in seeing how much money we’re leaving on the table and I think it’s significant — in the tens of millions — and I think we need to clean up that area and try to get as much match as absolutely possible,” Stedman said in an interview. The Senate’s final Permanent Fund dividend amount will be a collective decision, he noted, but Stedman is of the opinion the PFD appropriation should be half of whatever the state’s percent of market value, or POMV, draw on the fund is in any given year. He believes splitting the draw 50-50 for dividends and government support would help alleviate the politicization of the issue. Stedman is more concerned about the size of the POMV draw; he said the current 5.25 percent draw is too large and it needs to be reduced to the 4.5 percent range to be sustainable over the long-term. At 5.25 percent, the Revenue Department estimates the 2020 fiscal year POMV draw will be roughly $2.9 billion. “We shouldn’t be looking at the Permanent Fund as a milk cow to milk it as much as we can and hope the historical (average returns) average out and we don’t have any abnormal hiccups in the financial markets,” Stedman stressed, recognizing a smaller draw means less revenue, putting more pressure on the state budget. “The Permanent Fund should be siloed and run as a portfolio regardless of our financial needs.” His biggest worry, though, is that legislators will use take “the easiest course of action” in the upcoming session and fill the deficit via an ad hoc draw from the roughly $16 billion available through a simple majority vote in the Earnings Reserve Account of the Permanent Fund, he said. “That issue of protecting the Earnings Reserve and protecting the Permanent Fund from appropriations is a very serious matter,” Stedman continued. “You can’t point at one party — the no-good SOBs down the hall, they want to take big chunks of money — it’s all the SOBs in the building. We have good intentions but collectively we’re very dangerous and hard on the savings of the state because it’s easier to make a 21 and 11 vote than it is to restructure our operations.” He emphasized that he is looking forward to a robust debate on how to best avoid overusing the fund. House disarray Because no one wants to show their hand, no one among House legislators is talking. There is very little legislators in the House can do until they settle on a majority caucus, according to Lt. Gov. Kevin Meyer’s Chief of Staff Josh Applebee. The lieutenant governor presides over the initial floor sessions of the House and Senate each year, swearing in new members and taking nominations for House speaker and Senate president pro-tems. “That’s all his duties are. It’s incredibly limited what the lieutenant governor can do,” Applebee explained. “The lieutenant governor as presiding officer is only empowered to do those things — maintain decorum, call them to order, swear them in.” Without a majority to nominate a speaker the House will not even be able to accept messages from the Senate or the governor, according to the Legislature’s uniform rules. Applebee noted that means “the body can’t conduct any business other than electing a speaker pro-tem and that includes being able to approve the governor’s appointment of Sharon Jackson” to the House District 13 seat vacated by now-Corrections Commissioner Nancy Dahlstrom. Applebee investigated what happened the last time — in 1963 — the House started a session without a majority, through reading the Legislative Journal from the time. “They really tried to explore other powers the (lieutenant governor) had and they came to the conclusion that there are none,” he said of the 20-20 caucus split in 1963. “There’s no committees to be appointed, communications from the governor and the Senate can be received but not acted upon; they basically sit on the clerk’s desk.” He added that it could go so far as to challenge votes to adjourn a floor session. “Back in ’63 they couldn’t agree on how long to take a recess,” Applebee recounted. How it eventually shakes out should add up to an interesting lesson on the inner workings of Alaska politics. ^ Elwood Brehmer can be reached at [email protected]

Dunleavy replaces two AGDC members amid project review

Gov. Michael J. Dunleavy has begun to put his stamp on the $43 billion Alaska LNG Project. The governor’s office announced Jan. 7 that Hugh Short and Joey Merrick were removed from the Alaska Gasline Development Corp. Board of Directors in favor of Doug Smith, a longtime Alaska oil and construction industry player and former Anchorage assemblyman and mayoral candidate Dan Coffey. AGDC is in charge of the ambitious state-led gas pipeline and LNG export plan. Dunleavy additionally appointed Department of Labor and Workforce Development Commissioner Tamika Ledbetter and Environmental Conservation Commissioner Jason Brune to the AGDC board. Ledbetter and Brune fill the two cabinet-level appointments to the seven-member board required by statute. Those seats were previously held by former Transportation Commissioner Marc Luiken and Labor Commissioner Heidi Drygas. The new appointments are subject to confirmation by the Legislature, which typically occurs near the end of the legislative session each spring. Public members of the AGDC board serve five-year terms. The governor said in a formal statement that the AGDC leadership changes continue to advance the ultimate goal of broadly lowering energy costs in the state and monetizing North Slope gas resources while also allowing his administration to conduct a “diligent review of the project.” “AGDC is tasked with a very complex mission — and I look forward to seeing how the state can assist in moving a (gasline) project forward. Each one of our appointees bring a wealth of knowledge and experience to the table, including in areas of resource development, labor and workforce, regulatory issues and oversight, and I look forward to working with them closely in the future,” Dunleavy said. More specifically, Smith was previously the CEO of the comprehensive oilfield service provider ASRC Energy Services, a subsidiary of Arctic Slope Regional Corp. and has served on the boards of the Resource Development Council and Alaska Support Industry Alliance, according to the governor’s office. Coffey is a longtime Anchorage attorney, small business owner in addition to posts on other state and local boards and commissions. Most recently Coffey served on AGDC’s Community Advisory Council. He ran an unsuccessful campaign for Anchorage mayor in 2015. Short is a finance expert, former mayor of Bethel and leads the Arctic-focused investment firm Pt Capital. Merrick is a union leader with the construction trade Laborers’ Local 341 and has been involved with various Alaska resource development organizations. Former Gov. Bill Walker appointed both to the AGDC board of directors and had appointment terms through at least September 2020. Chairman Dave Cruz — first appointed to the AGDC board in 2013 by former Gov. Sean Parnell — former Alyeska Pipeline Service Co. CEO David Wight and Warren Christian, president of the Alaska pipeline construction firm Doyon Associated remain on the AGDC board. Dunleavy was sharply critical while in the state Senate and during his gubernatorial campaign of Walker’s push for AGDC to lead the Alaska LNG Project in 2016 after former equity partners BP, ConocoPhillips and ExxonMobil decided to back out or slow-walk the project amid globally depressed energy markets. He has said the private sector should have a much larger role in the $43 billion project. Officials in the governor’s office said Coffey’s significant experience leading complex organizations would be beneficial for oversight of the quasi state agency’s operations, specifically noting concerns Dunleavy has regarding the board’s December approval of $296,000 in performance bonuses for AGDC President Keith Meyer while the state continues to face large budget deficits. Cruz told the Anchorage Daily News Meyer had earned the bonus pay. AGDC spokesman Tim Fitzpatrick told the Associated Press that Meyer offered to take his bonuses as stock in a corporation subsidiary at a future date when the subsidiary would issue stock. But Fitzpatrick said the board opted to award the cash bonuses. Industry insiders have noted that aside from the bonus, Meyer’s $550,000 base salary is commensurate with industry norms for those leading endeavors as large and complex as Alaska LNG. Under Meyer’s leadership since mid-2016, AGDC has secured formal expressions of interest from 15 potential Alaska LNG customers in the Asia-Pacific region. Most notable among those is the joint development agreement, or JDA, signed in November 2017 with three nationalized Chinese companies to potentially provide an anchor customer and the bulk of the financing needed for the project. However, AGDC and the Chinese JDA parties the Bank of China, China Investment Corp. and oil and gas giant Sinopec Corp. missed a soft Dec. 31 deadline to finalize the specific terms of the agreement, which Walker said in November would be likely given the change in administrations. The JDA negotiations are ongoing, according to AGDC officials. A draft environmental impact statement is scheduled to be released by the Federal Energy Regulatory Commission in February. Elwood Brehmer can be reached at [email protected]

Italian major secures full ownership of North Slope field

Italian oil major Eni has reached a deal with Caelus Energy to buy the small independent out of the Oooguruk North Slope field. Eni announced Jan. 3 that it will acquire Caelus’ 70 percent in Oooguruk and take over as operator of the near shore oil development. The deal, for undisclosed terms, will make Eni the sole owner of Oooguruk as the company already holds a 30 percent stake in the field, according to a Jan. 3 release. Oooguruk sits in state waters about 2 miles off the North Slope. Oil production started in 2008 from a manmade island and the small field currently produces about 10,000 barrels per day from 25 production wells, according to Eni. The field also contains 15 gas-water injection wells. A statement from Eni says the company — which also owns 100 percent of the Nikaitchuq field, another small, near shore oil development — will work to synergize operations at the fields. Nikaitchuq’s Spy Island drill site is about eight miles northeast of Oooguruk. Eni plans to drill additional wells at each field to increase oil production by several thousand barrels per day. In late 2017 the company began drilling ultra-long reach angled exploration wells roughly 35,000 feet long from Spy Island to reach targets in its federal leases further offshore. Last August Eni also bought the rights to 124 onshore state leases from Caelus covering about 350,000 acres of exploration acreage on the eastern North Slope. Caelus Energy bought Oooguruk and other Alaska assets for $550 million in cash from Pioneer Natural Resources in a deal announced in late 2013. At the time, Caelus CEO Jim Mussleman said he planned to invest about $1.5 billion in Alaska over the next five to six years. Mussleman and other Caelus officials have said the company came to Alaska in large measure due to the state’s revised oil production tax structure known as SB 21 and the generous but now defunct refundable oil and gas tax credit incentives the state offered to small explorers and producers for working in Alaska. Caelus made national headlines in October 2016 when company leaders announced they had discovered upwards of 6 billion barrels of oil at the remote Smith Bay prospect in shallow, state-owned waters about 125 miles northwest of other Slope oil developments on the edge of the National Petroleum Reserve-Alaska. However, the company has not done any significant work at Smith Bay since. Caelus has also postponed further development of its onshore Nuna oil project near Oooguruk estimated at $1.2 billion, which currently consists of a 22-acre gravel pad. Company leaders have blamed more than $100 million in unpaid state tax credits for hampering Caelus’ ability to further development of its Slope prospects. The company was granted reduced state oil royalty payments at Nuna in January 2015 in exchange for prompt development of the project but the Division of Oil and Gas denied an extension of those terms in April 2016. Caelus Alaska Vice President Pat Foley said in a brief interview that the company has been actively marketing Nuna to potential investors or buyers for a couple years. “We think those (marketing activities) are going to be coming to an end fairly soon,” Foley said. He also said at this point there are no plans for more work to appraise the Smith Bay prospect. “We continue to try to secure funding,” Foley said of Smith Bay. “We’re hopeful that we can conduct more activities but nothing is yet firm.” ^ Elwood Brehmer can be reached at [email protected]

Judge rules on constitutionality of tax credit bonds

(Editor's note: This story has been updated to include additional information from the plaintiff's attorney regarding an appeal of the judge's order.) The small oil companies and banks holding more than $800 million in refundable tax credits scored a victory Wednesday when an Alaska Superior Court judge threw out a lawsuit challenging the state’s plan to sell bonds to pay off those credits. Judge Jude Pate granted the State of Alaska’s motion to dismiss the suit filed by former University of Alaska regent Eric Forrer arguing against the constitutionality of the bond scheme contained in House Bill 331 that the Legislature approved last spring. In making the ruling, Pate concluded that Forrer and his attorney, Juneau lawyer Joe Geldhof, failed to state a claim upon which the court could grant relief on the grounds that HB 331 “passes constitutional muster.” Forrer filed the suit in May, contending the plan to sell the “tax credit bonds” falls outside the tight sideboards the Alaska Constitution puts on the state’s ability to incur debt. He also said in interviews and through court filings that the plan amounts to a de-facto dedication of general fund money to pay the bond debt because not making the payments would have grave consequences on the state’s credit rating and future finances. Attorneys with the Legislative Legal Services office also questioned the legality of the tax credit bonds while HB 331 was being debated. A competing legal opinion by former Attorney General Jahna Lindemuth declared the bill was constitutional. Geldhof said Friday morning that Forrer will appeal Pate's ruling to the Alaska Supreme Court. The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold. State corporations can also sell revenue bonds, but those are usually linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole. HB 331 allows the Revenue Department to set up the Alaska Tax Credit Certificate Bond Corp. specifically for the purpose of issuing the 10-year bonds. State attorneys contended the plan is legal because the bonds would be “subject to appropriation” by the Legislature, which the bond buyers would be aware of, and therefore would not legally bind the state to make the annual debt payments. New Attorney General Kevin Clarkson and Revenue Commissioner Bruce Tangeman praised Pate’s order in a formal statement from the Department of Law. “With this tax credit bond program, we are following through in paying down the tax credits, so industry and the financial markets know we are open for business. This will bring more stability to state finances and help the business community to get the economy back on track,” Tangeman said. Tangeman also said in a brief interview earlier Thursday that the state would be working to release $100 million originally approved in the current fiscal year budget for companies that chose not to participate in the bond plan. “It’s a high priority to cut that $100 million loose,” he said, noting even if HB 331 is upheld at the Supreme Court it will take several months to execute a large bond sale. State officials initially planned to hold the sale last August, but it was put off given the looming lawsuit would almost certainly require high interest rates on the bonds, if they could be sold at all. That situation could remain if Forrer appeals Pate’s ruling as expected. Pate, in a narrow but lengthy ruling, wrote that while the policy implications of selling the bonds can be debated, those issues are not the courts’ to decide, noting that HB 331 has provisions that allow credit holders to sue the Tax Credit Certificate Corp., but not the State of Alaska, if the bonds aren’t paid through appropriations by the Legislature. “An examination of the bond transaction in HB 331 demonstrates the presence of both an effective non-appropriations clause and the shield of an independent state corporation,” he wrote. “These two features sufficiently ensure that HB 331 does not create any debt that is legally enforceable against the State.” Hatched by former Gov. Bill Walker’s administration as a way to pay off the large tax credit obligation — expected to be upwards of $1 billion when the final tax credit certificates are applied for — HB 331 would allow the companies and banks holding credits to get their money relatively quickly instead of possibly waiting for the state to pay them off over years of appropriations according to current statute. Until Walker vetoed $200 million worth of the credits in the 2016 budget while facing a deficit of more than $3 billion, the Legislature had always paid off the full credit balance each year. To get paid sooner the credit holders would have to accept a discount of up to 10 percent less than the face value of the certificates. The state Department of Revenue would then use the difference between the credit values and the discounted amount actually paid to cover the borrowing costs. Forrer, Geldhof and others skeptical of the plan have also questioned the economics of it. Supporters of the tax credit bonds insist it is a way to restart investment by small producers and explorers in Alaska’s oil and gas fields that has been slowed by three years of credit payment amounts at levels below what was applied for as the Legislature and the administration debated how to resolve the state’s large budget deficits. The credits were largely issued to small exploration companies that did qualifying work, but they were then often used as collateral for loans issued by investment banks to support additional exploration work. A commonly used credit for explorers with no production and no tax liability had the state paying 35 percent of the cost of qualifying work in cash. When the earned credits weren’t paid off in full in the fiscal years 2016-18 state budgets, as had previously been done, the banks holding them mostly stopped lending into the Alaska oil sector. In one unique instance, the Department of Revenue in October 2015 issued a $22.5 million tax credit-backed loan to a holding company set up by the state-owned Alaska Industrial Development and Export Authority. The loan was made because the authority had not received payment on its investment in a small North Slope oil development spearheaded by Brooks Range Petroleum Corp. — payment that was supposed to come from tax credits paid by Revenue for work Brooks Range had performed. Forrer and Geldhof rebut that the new corporation would not have any revenue of its own — which Pate acknowledged in his order — but would rely on legislative appropriations from the general fund. According to Geldhof, Pate incorrectly applied a prior Alaska Supreme Court decision involving a lease-purchase agreement that does not apply to this case. “Everybody’s admitting that, well, if a future Legislature doesn’t use general funds to give this phony shell corporation the money to pay back the bond holders there’ll be enormous consequences through Moody’s and the other ratings agencies and Alaska’s credit rating will take a hit and there is recourse,” he said. Permitting the state to invoke the subject to appropriation language and set up pass-through corporations for the use of selling bonds sets a dangerous precedent, Geldhof argued further. “It’s going to be all bets are off and the State of Alaska will start incurring fantastic debt,” he said, later adding, “It’s a recipe for running this place like Illinois or Venezuela.” Pate acknowledged this argument, but wrote that, “the court should not engage in second guessing the wisdom of the legislature’s fiscal policy decisions, even when those decisions may have a negative impact on the State’s credit rating.” The judge also pointed to prior court rulings that “concerns regarding the state’s credit rating do not create legally binding debt.” While he disagrees with Pate’s ruling on multiple fronts, Geldhof said he appreciates the effort that went into it. During oral arguments in October Pate said he would issue a decision in early November, but the 44-page order wasn’t published until Jan. 2. “As an attorney I at least want to know the judge heard my argument. He clearly did because he labored on it,” Geldof commented. Elwood Brehmer can be reached at [email protected]

ISER study: Warmer temps will cost hundreds of millions per year

University of Alaska economists believe the impacts of climate change could cost the state hundreds of millions of dollars per year in the coming decades. The consequences of a warmer climate — from failing infrastructure to community relocation, increased wildfire frequency and shorter ice road seasons — are likely to be a net loss of $340 million to $700 million per year, according to a University of Alaska Anchorage Institute of Social and Economic Research report published this past November. That report, Economic Effects of Climate Change in Alaska, focuses on the net costs of five widely reported effects over the next 30 to 50 years, a timeframe used for long range economic and infrastructure plans. Those costs would equal 0.6 to 1.3 percent of the state’s $51 billion GDP, but they would not be distributed evenly, “as rural communities face large projected costs while more southerly urban residents experience net gain,” the report states. The projections are based Alaska’s annual average temperatures rising 1 to 2 degrees Celsius by 2050, as the U.S. National Climate Assessment published last year by the U.S. Global Research Program forecasts, with warming by up to 3 degrees Celsius statewide by the end of the century. The authors, ISER professors Matthew Berman and Jennifer Schmidt, note annual average temperatures across the state have risen by 1.5 degrees Celsius since the 1950s. Infrastructure damage from thawing permafrost and coastal erosion are a major portion of the overall impact cost, at $250 million to $420 million per year between 2015 and 2060. The Fourth National Climate Assessment estimates an additional $110 million to $270 million will be needed annually to maintain select portions of Alaska’s infrastructure. Those costs were limited to impacts to public transportation and pipeline infrastructure without accounting for private industry buildings, the report notes, and are expected to arise from projects with shorter useful lives and the subsequent for early reconstruction. Current erosion issues, particularly along the state’s western coast, are also likely to get worse, the assessment adds. “Longer sea ice-free seasons, higher ground temperatures, and relative sea level rise are expected to exacerbate flooding and accelerate erosion in many regions, leading to the loss of terrestrial habitat in the future and in some cases requiring entire communities or portions of communities to relocate to safer terrain,” it states. The ISER study estimates the annual total for bracing against coastal erosion and flooding and eventually relocating communities from it at $50 to $100 million. It notes the State of Alaska has requested $162 million from the federal government for three communities — such as Newtok on the Yukon-Kuskowkim Delta — that the U.S. Army Corps of Engineers expects will need to be relocated within 15 years. Other, more northerly Western Alaska villages such as Kivalina and Shishmaref have also been the subjects of relocation studies. A higher number of wildfires would likely have a host of effects on Alaska, from fewer tourists to public health issues as well as the more easily quantifiable impacts of firefighting and property damage costs. The report estimates the combined increased annual cost of fire protection and property damage claims is likely to be $25 million to $40 million based on the growing frequency of years with over 1 million acres burned in the state. Shorter ice-road seasons — requiring more expensive permanent gravel or limiting travel options — are another challenge. Building all-season roads across the North Slope would cost another $10 million to $20 million per year, according to the study, to maintain travel to remote communities as the climate warms. Former Gov. Bill Walker’s administration began conceptual work on a network of primitive all-season roads across the western Slope with the Arctic Strategic Transportation and Resources, or ASTAR, project in 2017. A major positive of a warmer climate — particularly in rural Alaska where energy prices can be extremely high — is reduced heating costs. By correlating current average statewide energy cost and consumption data with long-term climate forecasts, Berman and Schmidt conclude Alaskans could save $100 million to $150 million per year on space heating costs over the next 30 to 50 years. The number of annual heating degree days, a calculation of the amount of energy needed to heat a space in a given climate over a year, has already decreased by 8.4 percent in Anchorage, 5.6 percent in Fairbanks and 7.5 percent in Utqiagvik over the past 50 years, according to the report. Additional changes could need to be made in areas such as hydropower production with higher winter water levels. The final effects on Alaska’s fisheries of ocean acidification stemming from higher levels of carbon dioxide in the water remain to be seen but are a significant worry for many, Berman and Schmidt note as well. Elwood Brehmer can be reached at [email protected]

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