Elwood Brehmer

Utilities purchase share of Beluga gas field from ConocoPhillips

Anchorage’s electric utilities have partnered to purchase part of a Cook Inlet natural gas field, a move that secures a long-term fuel supply and could save ratepayers up to $9 million per year, utility leaders said Monday. City-owned Anchorage Municipal Light and Power and Chugach Electric Association agreed to purchase ConocoPhillips one-third interest in the Beluga River Unit gas field for a total of $152 million. Under the agreement ML&P will own 70 percent of the unit share and Chugach will take the remaining 30 percent. ML&P purchased a one-third share of the Beluga field in 1996, which has already saved its ratepayers more than $239 million when the utility’s cost to produce the gas is stacked against historical market prices, according to ML&P General Manager Mark Johnston. Hilcorp Energy owns the remaining third of the West Cook Inlet field and is the expected operator on behalf of the utilities, Johnston said in a press briefing. “Because we have the city’s business core and commercial and industrial core (in ML&P’s service area) we think it’s very important that we have a stable fuel supply that helps us to have stable fuel prices for the business community that they can rely on,” Johnston said. The latest deal should supply ML&P with all of its natural gas needs and Chugach with about 10 percent to 15 percent of its gas demand for about the next seven years before production begins to significantly taper. Beluga is expected to produce for the utilities through 2033. Johnston said two reservoir analyses concluded there is between 70 billion and 80 billion cubic feet of gas remaining in the Beluga River Unit. Chugach CEO Brad Evans said his ratepayers would likely see overall savings up to 15 percent on the fuel portion of their electric bills, equating to an overall yearly savings of between $2 million and $3 million per year. Johnston said ML&P’s larger share in the field should translate into savings in the $4 million to $6 million per year. “My wife and I did a back of the envelope calculation and we figure it could be worth a couple hundred bucks a year,” in savings to ML&P ratepayers, Anchorage Mayor Ethan Berkowitz said. ML&P’s gas production cost this year is $4.35 per thousand cubic feet, or mcf, from its original share in Beluga, according to the utility; compared to the regulated wholesale market price of $7.42 per mcf for Cook Inlet natural gas. While still a savings, the production cost has nearly doubled since 2013, a consequence of drilling new wells and doing well workovers to maximize production, Johnston said. The cost of production has fluctuated over the 20 years ML&P has held an interest in Beluga, he said in an interview, and the utility could invest about $30 million to $40 million more in the field over the next five years. ML&P expects to be able to pay for its portion of the acquisition with about $80 million from its Deferred Regulatory Liability from Gas Sales Fund along with a $13.5 million underlift and nearly $25 million in available cash. If the Regulatory Commission of Alaska limits the fund draw Johnston said the utility would turn to revenue bonds tied to production from the field. Evans said Chugach will likely use its low-interest commercial paper program for short-term financing with longer-term debt covering any remaining balance. The utilities first partnered to build the $369 million Southcentral Power Project, a 183-megawatt natural gas-fired plant completed in early 2013. Ownership shares in the power plant are reversed from Beluga deal, with Chugach owning 70 percent and ML&P holding 30 percent. ML&P is also finishing work on the new wholly owned 120-megawatt George M. Sullivan Power Plant 2 natural gas-fired plant in Northeast Anchorage. Combining the new, more efficient generation with owned gas reserves enables the utility to provide power at the lowest possible cost, Johnston and Berkowitz said.   Elwood Brehmer can be reached at [email protected]

Anchorage LIO proposal offers savings, settlement to lawsuit; LAA disputes figures

Editor's note: This story has been updated with the state's analysis of the LIO owners' offer and subsequent comments. A proposal by the building owners to keep the Legislature in the Anchorage Legislative Information Office building could save the state millions of dollars and get the legislators out of a political bind. However, Pam Varni, executive director of the Legislative Affairs Agency, which handles business for the Legislative Council, disputed the figures in a Feb. 5 memo to Council Chair Sen. Gary Stevens. The proposal, submitted Jan. 29 to Stevens, suggests the State of Alaska purchase the building for $37.9 million to accrue maximum savings that would outpace projected savings of moving legislators into the nearby Atwood Building, primarily occupied by executive branch agencies. A meeting of the Legislative Council is Feb. 11 is scheduled for 5 p.m. to discuss the proposal. Tax-exempt financing would be “considerably less” than the current lease payments of $281,000 per month the Legislature currently pays, and the equity in the building would serve as an accrued savings account for the state, according to 716 West Fourth Avenue LLC, the building owner group. The leaseholder company name is the Downtown Anchorage address of the LIO and the offer is signed by longtime Anchorage developer Mark Pfeffer, the firm’s managing member. Varni wrote to Stevens that the proposal overstates the costs of moving to the Atwood Building by $11 million over 10 years and by $16.3 million over 30 years by including costs for debt service that is currently set to expire in March 2017. She concludes that purchasing outright or financing a purchase of the building would cost the state from $22.5 million to $94.4 million over 30 years compared to moving to the Atwood Building. The 716 proposal creates a "statistical misperception," according to Varni. "The purpose of statistics is to make something easier to understand; however, when used in a misleading fashion, may trick the casual observer into believing something other than what the actual data show," she wrote. "In this instance, 715 West Fourth Ave LLC, asserts it is less expensive to stay at 716 W. 4th Avenue than the Atwood Building, based on unrealistic and erroneous debt service data." The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. Pfeffer has indicated an intention to sue if the Legislature walks away from its obligation. The proposal also states that 716 has secured a settlement to dismiss a lawsuit brought by Jim Gottstein, owner of the adjacent Alaska Building, against the LIO owner group and the Legislative Affairs Agency. Gottstein’s complaint alleges the LIO lease is illegal because it is neither an extension of an existing lease, nor 10 percent below market value, as statute requires for a long-term extension. To fully settle the suit the Legislative Affairs Agency must agree to waive potential claims to recoup legal fees, according to the proposal document. Last month, the judge in the suit denied Gottstein’s petition to receive a “whistleblower” award of 10 percent of any money saved if the lease is ruled illegal. Trial in the case is currently scheduled for March. A Department of Revenue analysis of the Legislature’s options based on figures provided by 716 West Fourth Avenue — buying the building outright, having another state agency purchase it, break the 10-year lease and move to the Atwood or keep the status quo — found a potential savings of more than 55 percent over the existing lease another state entity finances the purchase for the Legislature. Another stopgap solution offered to lower the existing rent by 5 percent, or $169,000 per year, beginning July 1 until a purchase could be executed. A rent reduction would require lender approval. The lease is paid through May 31, 2016. The owner group also notes it has approval to waive earthquake insurance on the building, which could save another $59,600 per year from the Legislature’s $3.3 million annual bill. Amy Slinker, a spokeswoman for 716, said in a statement that Varni's memo lacks third party analysis. "The Department of Revenue's professional review shows the ability for clear savings," Slinker said. Revenue’s examination of the options put the upfront cost to move out of the LIO and remodel 30,000 square feet of the Atwood at $3.5 million to $5.5 million, with an annual building operating cost of $664,000. Purchasing the LIO in some fashion would require the initial payment and then operating payments of $269,000 per year for 45,000 square feet of usable space. Legislative Affairs concludes the Atwood's annual operating cost to be $613,000, based on Varni's memo. State ownership would also save $231,000 per year in municipal property taxes; however, taking the building off the city’s tax roll has been a reason cited by legislators for why the council did not purchase it initially. Anchorage Democrats, the public and legislators from elsewhere in the state have disparaged the LIO lease terms as far too expensive at a time when the state is facing annual budget deficits approaching $4 billion. On Dec. 19, the Legislative Council unanimously recommended the full Legislature vote not to fund the lease at a meeting in the Anchorage LIO unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days — by Feb. 5. In a statement released prior to the proposal being made public — multiple news outlets were denied a copy when requests were made to Stevens’ office — Slinker wrote the group trusts the council will consider the proposal that meets the council’s terms. “Our discussions with Sen. Stevens over the past 45 days have pushed us to dig deep for short-term, interim savings,” Slinker wrote. “That then set the stage for a long-term solution to save millions of dollars and help avoid any negative financial implications for the state.” The building houses off-season offices for 25 Anchorage legislators and is the de-facto home to much of the general Legislature’s out-of-session activity. The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said. Appraisals of the six-story building plus its underground parking facility have been as high as $48 million, but numerous estimates put its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer. His group first drafted and submitted terms for the state to purchase the building for $37 million plus closing costs Oct. 9; a proposal requested by the Legislative Affairs Agency, which manages business for the council. The original terms agreed to by Legislative Affairs attorneys set a Jan. 31 deadline to act on the sale terms, according to correspondence between attorneys for both sides. 716 waived the deadline in a Jan. 29 letter on conditions that the council votes to buy the LIO by Feb. 5 or appropriate funds for fiscal year 2017 rent in the state budget.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

AG, Sullivan seek permission to investigate sex allegations against Bill Allen

Alaska Attorney General Craig Richards and Sen. Dan Sullivan joined forces in Anchorage Friday morning to announce the state’s intent to pursue longstanding allegations of sexual abuse and trafficking of a minor against former Alaska business leader Bill Allen. Richards sent a letter to U.S. Attorney General Loretta Lynch Friday requesting she cross-designate the State of Alaska with authority to investigate and potentially prosecute Allen in federal court for violating the Mann Act. A federal law passed in 1910, the Mann Act prohibits transport of individuals across state lines with the intent of engaging in sexual acts with them. The Anchorage Police Department and the Federal Bureau of Investigation first looked into the allegations in 2004 that Allen had paid for Paula Roberds, originally from the Western Alaska village of Goodnews Bay, to fly between Anchorage and Seattle multiple times for sex when Roberds was 16, according to news reports. The U.S. Department of Justice announced in 2010 that it would not prosecute Allen for those allegations. Prior requests for cross-designation by former attorneys general Michael Geraghty and Sullivan himself were denied by the Justice Department with little explanation. In rather unique coalescence, Sullivan, as senator, sponsored an amendment to the Mann Act requiring the U.S. attorney general to approve the cross-designation or provide the state attorney general with “a detailed reason for the denial no later than 60 days after the date on which a request is received,” the law states. President Barack Obama signed the anti-trafficking bill that included Sullivan’s Mann Act amendment into law last year. Alaska Criminal Division Director John Skidmore said documents subpoenaed to a federal grand jury cannot be revealed to parties not authorized to pursue charges on a federal level, thus requiring the cross-designation authority from Lynch. Speculation has persisted — and continued at the press conference in Anchorage —that Allen was not prosecuted due to a deal he may have reached with the feds in exchange for testifying against the late Sen. Ted Stevens in a 2008 political corruption case. Stevens was found guilty just days before the 2008 election and lost to Mark Begich by a narrow margin. The conviction against Stevens was eventually tossed and the Justice Department attorneys were sanctioned for misconduct for withholding exculpatory evidence from the defense. “The guardians of justice for the country may have said, ‘alright, to go after Ted Stevens we are going to throw (out), ignore and not go after the heinous crimes where victims are young girls.’ The Department of Justice should not be doing that if that did indeed happen,” Sullivan said. Richards and Sullivan both emphasized that their criticism of the Justice Department’s silence regarding its denials of previous cross-designation requests is not aimed at Lynch, given she was not the U.S. attorney general when those requests were made. “This is really, I think, the opportunity for the Justice Department to right a wrong and make clear and provide clarity around what really happened,” Richards said. “And if there was a deal cut and the deal was that (seeking) to prosecute Ted Sevens would result that Bill Allen not be prosecuted for sexual crimes against children, then we should know it and if that wasn’t the deal then Alaskans should know that too.” Allen, the former head of the oilfield services firm VECO Corp., pled guilty in 2007 to bribing a handful of Alaska legislators for support of an industry-friendly state tax policy. He was sentenced to three years in prison and fined $750,000. Skidmore said the state has not yet confirmed Allen’s whereabouts and would do so if it chooses — and is allowed — to pursue charges against him.   Elwood Brehmer can be reached at [email protected]

ConocoPhillips absorbs $4.4B loss in 2015

ConocoPhillips’ fiscal situation looks a lot like the State of Alaska’s after the company posted a 2015 net loss of $4.4 billion in its year-end financial results released Feb. 4. While Alaska leaders are contemplating cutting the Permanent Fund Dividend to help fill a $3.8 billion budget gap, ConocoPhillips announced it was slashing its dividend from 74 cents to 25 cents per share. Combined with reductions in capital expenditures to $6.4 billion from the $7.7 billion plan announced in December, the two moves will save the company $4.4 billion in 2016. The company’s share price dropped 8.1 percent to $35.50 following the announcement. In Alaska, ConocoPhillips reported earnings of $4 million for the year, compared with more than $2 billion in earnings for 2014. The company posted positive Alaska earnings in the first three quarters, but absorbed a $389 million loss in the fourth quarter as its average realized price per barrel was $40.29 compared to $71.34 in the fourth quarter of 2014. In January, Alaska North Slope crude prices dipped to less than $30 per barrel for the first time in more than a decade. Including special items, ConocoPhillips reported an overall pre-tax net loss of $650 million for Alaska in the fourth quarter. Company spokeswoman Natalie Lowman said ConocoPhillips is estimating its tax and royalty obligation for the year at $665 million, which, when combined with capital expenses, resulted in a negative cash flow exceeding $100 million in Alaska. A $467 million fourth quarter after tax item loss for Alaska is primarily attributable to the company’s federal Chukchi Sea lease holdings, according to Lowman. Following Shell’s lead, the company announced it would suspend development of the Chukchi leases it paid $500 million for in 2008. The company recorded a $412 million impairment as part of its total $467 million in special item expenses in Alaska. New oil from the CD-5 development in the National Petroleum Reserve-Alaska and Drill Site 2S online late in the year helped boost fourth quarter production, Lowman said. ConocoPhillips average daily Alaska production increased 5,000 barrels per day in the third and fourth quarters compared with 2014. Its average daily in-state production for the year was down 4,000 barrels to 158,000 per day, or about 2.4 percent. The harsh financials likely mean a slight decrease to the previously announced $1.3 billion Alaska capital budget in 2016, Lowman said, but she also noted the state continues to have one of the highest capital spend levels of any sector of the company’s worldwide portfolio. “For this year we expect our (Alaska) capital budget will be higher than in 2012,” Lowman said. In November, ConocoPhillips announced the sanctioning of its Greater Moose’s Tooth-1 exploration in the NPR-A, with a projected development cost of $900 million. Elwood Brehmer can be reached at [email protected]

Construction forecast down 18% to 2013 levels

Alaska’s contractors will begin to feel the effects of the new oil reality in 2016 as statewide capital spending declines about 18 percent from last year, according to a construction industry forecast. The University of Alaska Anchorage Institute for Social and Economic Research projects just more than $7.3 billion will be spent on capital projects in 2016. About $8.9 billion was spent on construction projects in Alaska last year. “Our short-term outlook is challenging,” Associated General Contractors of Alaska Executive Director John MacKinnon said during a Jan. 28 presentation in Anchorage. ISER compiles the industry data for AGC of Alaska’s annual spending forecast. MacKinnon noted that the contraction in outlays is neither positive, nor a catastrophe; it takes the industry back to 2013 spending levels. Statewide construction employment in 2013 peaked at 20,700 jobs in late summer and averaged 16,600 workers throughout the year, according to the state Labor Department. Preliminary Labor numbers show the industry averaged 18,100 workers in 2015. Not surprisingly, the spending decline will be led by the oil and gas sector, which is expected to be down 25 percent at $3.1 billion from an all-time capital spending high of $4.2 billion last year, according to ISER Professor Emeritus Scott Goldsmith. The annual wellhead value of North Slope crude has fallen from about $20 billion several years ago to $10 billion in 2015 and is projected to be roughly $5 billion this year, Goldsmith said. Less revenue translates directly, he said, into less spending on exploration and maintenance of existing fields. However, spending on oil and gas development projects is often separate from immediate price fluctuations, as evidenced by the record 2015 industry capital spend in Alaska while oil prices fell throughout much of the year. Several major projects, including Shell’s offshore Arctic exploration, the Point Thomson gas project led by ExxonMobil, and ConocoPhillips’ CD-5 oil development, mostly wrapped up last year, leading to an organic spending vacuum. A bright spot for this year is ConocoPhillips’ $900 million Greater Moose’s Tooth No. 1 oil project in the National Petroleum Reserve-Alaska, which was sanctioned late last year. The age of the North Slope fields — Prudhoe Bay is closing in on 40 years of production — also helps spur workforce demand that is disparate from oil prices, Goldsmith said. “One of the things that is a positive is that jobs in oil and gas related industries — construction related oil and gas — continue to grow as production declines,” he said. “Aging fields require more maintenance and smaller fields require more workers for a given barrel of oil.” Projections were mixed for other industries outside of the dominant oil and gas sector, which supports about 40 percent of the total capital spend in the state. Transportation spending, pegged at just more than $1 billion, will be down slightly due to less work on the state’s ports and harbors. The Matanuska-Susitna Borough’s Port MacKenzie rail extension, which has relied on state capital appropriations, is also stalled this year for lack of money. Large state capital appropriations in the 2012 and 2013 fiscal years have supported many projects across Alaska; however, expenditures from public-supported capital projects will fade in the coming years if the state continues with sparse capital budgets. According to ISER, money from public projects “hits the street” over six years after the initial approval, with peak monies available two years following the appropriation. Gov. Bill Walker’s administration has proposed a $500 million general obligation bond package to fund capital projects in the 2017 budget being debated in Juneau now. Utility spending is expected to be down by a third to $459 million in 2016 mainly because, similar to oil and gas, several large projects wrapped up in 2015. Matanuska Electric Association and Golden Valley Electric Association both commissioned new power plants in 2015 and Anchorage’s Municipal Light and Power is nearly done with its replacement plant started in 2014. Most of the utility spending will be from nearly 50 small projects going on across the state, according to ISER. Long-term, Alaska’s Railbelt electric utilities are currently debating whether major upgrades, estimated at upwards of $900 million, are needed for the region’s transmission system. Defense spending is projected to reverse a several year trend and increase by more than 25 percent to $552 million this year. Work scheduled at Eielson Air Force Base in Fairbanks includes a new flight simulator in preparation for new squadrons of F-35 fighters and upgrades to the base’s heat and power plant. Upwards of $1 billion will be invested in missile defense systems over the coming years at Clear Air Force Station near Nenana and Delta Junction’s Fort Greely. “Anytime that kid in North Korea starts playing with fireworks it bodes well for Defense spending in Alaska,” MacKinnon quipped. Construction spending by Alaska’s large mines will remain flat at about $180 million in 2016, despite depressed metal prices, Goldsmith said. He noted lower oil prices can help the bottom lines of the state’s mines, many of which are remote and rely heavily on diesel fuel for not only equipment but for electrical generation as well. “I was surprised to find that all of the existing world-scale mines in Alaska are spending at higher rates than they have in years past and that’s to upgrade their facilities, to expand their facilities to be able to take advantage of new discoveries that will extend the lives of their mines,” Goldsmith said. Health care’s capital spend will be down about 20 percent at $195 million, ISER projects, again, as new construction in Anchorage, Kenai and Ketchikan is completed. Alaska’s health care industry has grown steadily both on the capital and employment sides for more than a decade. One major hospital project expected to start this year is the Yukon-Kuskokwim Health Corp.’s new $287 million clinic and hospital in Bethel. YKHC received a $165 million U.S. Department of Agriculture loan for the project, the largest single loan the USDA has ever approved, according to corporation leaders. Elwood Brehmer can be reached at [email protected]

Negotiations among producers challenging AK LNG timeline

Progress has slowed in fiscal negotiations among the state’s partners in the Alaska LNG Project, raising concerns that agreements might not be in place to meet critical deadlines. At the top of the list of eight agreements still needing to be resolved is the Gas Balancing Agreement, the foundation necessary for the other issues to fall into place, project leaders told the Senate Resources Committee Jan. 27. Representatives from BP and ExxonMobil stuck mostly to vague boilerplate statements, saying the negotiations are hitting “speed bumps,” that should in a way be an encouraging as a sign the tough issues are being addressed. Bill McMahon, a senior commercial advisor for ExxonMobil, said the project must have “agreeable, competitive and durable” fiscal terms for each party — the State of Alaska, BP, ConocoPhillips and ExxonMobil. “The key is making sure we have a clear understanding of positions and making sure we find ways to bridge those gaps,” McMahon said to the committee. ConocoPhillips Vice President of Commercial Assets Leo Ehrhard offered more telling testimony, saying the project faces “significant economic headwinds” as oil and natural gas prices have fallen. LNG prices in Asian markets have slid by up to 60 percent since early 2014, the beginning of major work on the project, he noted. As it stands, the $45 billion-plus Alaska LNG Project has made it farther than any of the other previous attempts to monetize the massive North Slope natural gas resource. “Should we find an impasse on these agreements, we will not stand in the way of the project and will make our gas available to the state on commercially reasonable terms,” Ehrhard said. In early December, the state received commitments from BP and ConocoPhillips to sell their shares of gas to the state for “commercially reasonable terms” in the event either pulls out of the Alaska LNG Project for any reason. Analysis of the potential purchase found the state would have to come up with $19.2 billion to purchase ConocoPhillips’ 22 percent share of the project’s gas at a price of $4 per thousand cubic feet. That would be on top of the $13 billion-plus the state is already committed to for its quarter-share of Alaska LNG Project construction costs. The three producers and the state are collectively paying more than $690 million for the current preliminary front-end engineering and design phase, or pre-FEED. A decision to move to the full front-end engineering and design, or FEED, will require a commitment of $2 billion or more among the four parties proportional to their ownership shares. “In these times we have to be careful stewards of our cash,” Ehrhard said. Negotiating the Gas Balancing Agreement, also known as the gas supply agreement, is mostly up to the producers, the companies acknowledge. It determines how the parties, each with varying shares of gas in two fields, Prudhoe Bay and Point Thomson, will manage offtake from the fields. After the Gas Balancing Agreement there are seven other issues that must be hashed out. According to Gov. Bill Walker’s administration, they are as follows: byproduct handling terms; field cost allowances; modifications to state leases for the Point Thomson field; marketing agreements; project governance agreements; system use agreements; and in-state gas sales. Department of Natural Resources Deputy Commissioner Marty Rutherford said the state is involved in the negotiations but is not a signatory to the balancing agreement. (Editor's note: Rutherford told the Journal in a follow-up interview that she misspoke in her committee testimony and that the State of Alaska is a signatory to the agreement.)  She noted the producers have been good at recognizing the state’s share in the process. Having two fields to draw from provides security that gas will always be available, but it adds challenges as well. The agreement becomes increasingly complex when accounting for field downtime, for maintenance or otherwise, on top of making sure each party can get its gas off the field when the market wants it. These issues are usually resolved earlier in the process through field unitization that helps simplify the agreements, Ehrhard said. In the case of Alaska LNG, blending varied ownership of multiple gas fields into one pipeline adds to the challenge. “We have probably the only project in the world that’s being sourced from two separate fields with separate interests across those fields,” he said. Once in place, the Gas Balancing Agreement provides the state with a path to its 25 percent share of the project’s gas derived through royalty and tax payments, according to Ehrhard. “We see that it’s unlikely, from just the amount of time that’s left in front of us, to try and conclude an agreement of this complexity,” he said. “On the commercial side, we’re just not as far along as we’d like to be. We’d like to be in a position to have this agreement behind us.” Walker has said for several months the fiscal terms of the project need to be hashed out by sometime this spring in order to hold a special legislative session so the state can give its approval, or not. The long-term commercial agreements will bind the parties together for at least the 25-year initial life of the LNG export project. They also need to be done soon so the administration can draft a constitutional amendment required to allow the state to enter long-term the financial contracts, which amount to tax commitments. The Legislature must vote on and approve the amendment in time to send it to the Division of Elections by June 23, the deadline for placing it on the general November ballot, at which point the voters will take up the issue. Because amendments to the state Constitution must be taken up on a general election ballot, falling short of the timeline likely means delaying the project at least two years. Rutherford told the Senate committee that much progress has been made on the technical side of the project, mainly aimed at reducing costs, but the administration is concerned about the pace of the negotiations, as the governor noted in a Jan. 18 letter to the Alaska leaders of the producers. “We will have to step up the pace in order to meet the spring special session,” Rutherford said. In his letter, Walker wrote that he is “increasingly concerned” about the progress of the negotiations, given a 2015 deadline set out in the original Heads of Agreement to have fiscal terms completed has already passed. “I have been extremely patient in allowing the negotiations to proceed in the hope that the parties will reach alignment on the agreements necessary to move the AK LNG Project forward and thereby commercialize Alaska’s gas,” the governor wrote. He continued to explain that he would seek to move a gas project forward in other ways if the parties fail to reach alignment in 2016. “If the parties do not reach alignment on these important contracts and issues, then I will have no other choice but to consider other options for commercializing Alaska’s gas,” Walker wrote. “In addition, absent any such alignment on all of these agreements and issues, my administration will be unable to support any fiscal contract that the producers may seek, or a constitutional amendment supporting such fiscal contract.” Pre-construction work is all but complete on the state-led Alaska Stand-Alone Pipeline project, but the economic viability of the smaller project is seriously questioned.

‘Permission slip’ offered to use Fund earnings

Politicians are often accused of being childish, and the leaders of some of Alaska’s largest companies and interest groups are asking Alaskans to sign a “permission slip” allowing legislators to use Permanent Fund earnings as the basis for a solution to the state’s nearly $4 billion budget deficit. Led by GCI co-founder and CEO Ron Duncan, the newly formed Alaska’s Future coalition has the singular mission of pushing the Legislature to finally use the $50 billion Permanent Fund for its original purpose: to pay for state operations when resource revenues are depleted. Speaking during a Jan. 29 forum in Anchorage hosted by the policy think tank Commonwealth North, Duncan stressed that state government needs to solve its budget problem not only to save itself, but more importantly to save the private economy. He noted GCI’s capital budget, at $225 million this year, as one of many potential casualties of inaction by the Legislature this session. GCI also employs more than 2,200 people in Alaska. “If in June or July or August or September or whenever the legislators go home this year there is no solution in sight there is no way (GCI) can continue to make that investment because we will be looking out the front window and seeing an economic cataclysm within 18 months,” Duncan warned. The list of Alaska’s Future co-chairs is short but powerful. It includes Duncan, NANA Development Corp. President Helvi Sandvik, Cook Inlet Region Inc. CEO Sophie Minich, former Democratic Gov. Tony Knowles, Alaska AFL-CIO President Vince Beltrami, former Administration Commissioner and founder of the Andrews Group management firm Eleanor Andrews and Fairbanks businessman Steve Frank. Duncan said he took an interest in the daunting issue of closing the multi-billion dollar gap in late summer when he examined what taxes and spending cuts would do to his business. He quickly became consumed by the grim budget situation. Alaska’s Future projects, much like many Alaska economists and general budget gurus have, that the state can maintain its current revenue system and live off its total savings of about $15 billion for three more years — give or take a year with market, oil price and spending fluctuations — before going broke. Spreading a politically ambiguous mantra is Alaska’s Future’s job, according to Duncan. The group, that just formally launched Jan. 26, will employ a broad media campaign to spread the word, he said in an interview. The home page of GCI’s website incorporated a scrolling Alaska’s Future ad Feb. 1. “When we did our focus groups we learned that people believe that there’s a problem; they’re willing to make some personal contributions to solve it, but they don’t believe what their public officials are telling them.” Duncan said. “They do believe their employers; they believe their labor unions; they believe their teachers; they believe people in their community councils and their churches and to get this message out we need to get people who are willing to carry this message to their affinity groups.” Alaska’s Future’s members list included the names of nearly 90 Alaska businesses, nonprofits and influential Alaskans on Feb. 1. If the Legislature does not move to capture the investment earnings of the fund for government operations this session, Duncan predicted businesses statewide will pull back spending and trigger an “economic catastrophe” ultimately resulting in the loss of upwards of 10,000 private sector jobs. Historically, the Permanent Fund’s realized earnings have primarily been reinvested in the fund and paid dividend checks to Alaska residents. The principle of the fund is off-limits to the Legislature per the state Constitution. “If you like the current dividend formula you can keep it for three years,” Duncan said. “You’ll give up your economy in the process, but you can keep the dividend.” Gov. Bill Walker has proposed shifting state resources to what is known as a “sovereign wealth fund,” which would pump revenue that had previously gone directly into the General Fund through the Permanent Fund, so the money can earn an investment return. The state would then draw from the earnings of the Permanent Fund each year to pay for operations. Duncan credited Walker’s overall plan that includes further spending cuts and increased taxes for putting “a target on every special interest in the state,” but emphasized that Alaska’s Future is not endorsing any specific political plan. Sen. Lesil McGuire, R-Anchorage, introduced her own proposal to revamp how the state uses the Permanent Fund last session in Senate Bill 114. “We will cheer for either plan that gets adopted,” Duncan said in an interview. He noted that maintaining a sustainable dividend is a related emphasis of the group. Walker’s New Sustainable Alaska Plan would pay dividends with half of the state’s annual resource royalties, likely cutting the projected size of future dividends. McGuire’s bill would use a similar, but slightly more dividend-friendly formula. While recent dividends have some of the largest the state has paid, it bears noting that future PFDs under the current system are tied to often-fickle financial markets, much the same way Alaska’s General Fund is coupled to a collapsed oil market. SB 114 would sustainably pull roughly $2.5 billion from the fund’s Earnings Reserve account each year and the governor’s plan would put more money directly into the fund each year and draw about $3.2 billion annually. Knowles said factions on either side of the political spectrum that demand more cuts to government spending or revenue generation — taxes in some form — before using the Permanent Fund are missing the point of the argument. “The reason why the cornerstone of the Permanent Fund earnings comes first is because that gives you the time before you lose the crucial mass of your (savings) assets to make other tough decisions,” Knowles said. “It’s not a question of what you like the best, it’s a question of what’s the most effective.” Taking the one big step of revamping how Alaska uses its wealth in the Permanent Fund would give the Legislature and Walker another two years to hash out the finer points of taxes and spending cuts. The state cut about $800 million from its overall 2015 fiscal year budget; however, about half of the reduction came from one-time cuts in the capital budget. Walker’s plan includes additional but smaller cuts to spending over the next two fiscal years. Sandvik said in an interview that she became comfortable with joining Alaska’s Future when she learned that keeping a dividend is part of the group’s mission. Originally from the Northwest Alaska village of Kiana, she said the checks every fall help rural families and struggling urban residents alike pay essential bills. Using the Permanent Fund properly also allows the state to stabilize its finances without wholesale cuts to critical programs. “You feel the pain a little bit sooner in rural Alaska when you start cutting state services,” Sandvik said. Elwood Brehmer can be reached at [email protected]

Anchorage LIO owners submit proposal to Legislative Council

A proposal to resolve the political hot potato that has become the Anchorage Legislative Information Office lease has been submitted to Legislative Council chair Sen. Gary Stevens. The building’s owner group, 716 West Fourth Ave LLC, released a statement Feb. 2 saying it would not release the details of the proposal out of respect for the Legislative Council process, but noted that the group had met the timeline laid out by the council in mid-December and also likely resolved a lawsuit over the terms of the lease. “Our discussions with Sen. Stevens over the past 45 days have pushed us to dig deep for short-term interim savings,” 716 spokeswoman Amy Slinker wrote in an email. “That then set the stage for a long-term solution to save millions of dollars and help avoid any negative financial implications for the state. In addition, the conversations with Sen. Stevens appear likely to result in dismissal of the lawsuit by Alaska Building Inc.” The leaseholder company name is the Downtown Anchorage address of the LIO. The current 10-year lease has the Legislature making rent payments totaling $3.3 million per year for the built-to-suit, six-story office building with underground parking and 45,000 square feet of usable space. It is paid through May 31, 2016. Anchorage Democrats, the public and legislators from elsewhere in the state have disparaged the LIO lease terms as far too expensive at a time when the state is facing annual budget deficits approaching $4 billion. Anchorage attorney Jim Gottstein, owner of the adjacent Alaska Building, filed suit against 716 West Fourth Avenue and the Legislative Affairs Agency, which manages business for the council, last March alleging the LIO lease is illegal because it is neither an extension of an existing lease, nor 10 percent below market value, as statute requires for a long-term lease extension. On Dec. 19, the Legislative Council — at a meeting in the Anchorage LIO —unanimously recommended the full Legislature vote not to fund the lease unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days, or by Feb. 5. Multiple news outlets were denied a copy of the proposal when requests were made to Stevens’ office. A move to the nearby state-owned Atwood Building, home primarily to executive branch agencies, would first require a $3.5 million remodel and then $664,000 per year to operate the 30,000 square-foot space, according to a cost analysis presented at the Dec. 19 council meeting. Purchasing the LIO in some fashion — 716 West Fourth Avenue managing member and project developer Mark Pfeffer has said the group would sell for $37 million plus closing costs — would require the initial payment and covering of operations costs estimated at $525,000 per year for its 45,000 square feet of space. However, the state would immediately begin building equity in the property, Pfeffer has noted. The building houses off-season offices for 25 Anchorage legislators and is the de-facto home to much of the general Legislature’s out-of-session activity. The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, who has announced he will not seek reelection this year, decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said. Appraisals of the six-story building plus its underground parking facility have been as high as $48.5 million by the Alaska Housing Finance Corp., while numerous estimates by lenders involved in the construction and long-term loans appraised its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer. His group first drafted and submitted terms for the state to purchase the building for $37 million plus fees this past Oct. 9; a proposal requested by the Legislative Affairs Agency. The original terms agreed to by Legislative Affairs attorneys in an Oct. 22 letter to Pfeffer set a Jan. 31 deadline to act on the sale terms, according to correspondence between attorneys for both sides. The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. Pfeffer has indicated an intention to sue if the Legislature walks away from its obligation. Elwood Brehmer can be reached at [email protected]

AVTEC gets $5M donation from oilfield co.

Alaska’s primary vocational school is upgrading its Maritime Training Center, for free. AVTEC’s Seward campus will soon receive new equipment and state-of-the-art simulators valued at more than $5 million as part of a donation from Superior Energy Services Inc., a Houston-based global oilfield services company, according to the state Labor Department. “This generous donation comes at a critical time when state dollars for workforce training are dwindling,” AVTEC Director Ben Eveland said in a formal statement. “On behalf of the students and staff at AVTEC, we are so grateful to Superior Energy Services for donating these valuable training resources.” AVTEC’s maritime training programs attract mariners from around the world to Seward to use the school’s vessel simulators. The simulators are a key element to its ice navigation course — the only such certified course in the country and one of a handful worldwide. They have also been used by the Alaska LNG Project to model its prospective marine and jetty facilities planned for Cook Inlet near Nikiski; and the City of Seward engineered its new marine industrial park breakwater by imputing and testing various designs in the vessel simulators. Along with new maritime, crane and vehicle simulators, Superior Energy Services is also donating computers, HVAC units and office equipment. “Alaska’s workforce will benefit from this generosity, and Alaska’s budget will benefit from the money saved,” Labor Commissioner Heidi Drygas said. AVTEC has nearly 900 students and boasts a 77 percent “on-time” graduation rate, according to the state Labor Department.   Elwood Brehmer can be reached at [email protected]

AEDC: jobs down 1% in 2016

It was a message of disconcert, but not dread, at the Anchorage Economic Development Corp.’s annual economic forecast presentation Jan. 27. AEDC projects Alaska’s largest city will lose about 1 percent of its job base in 2016, which totals about 1,600 positions. Nearly hand-in-hand with the job losses will be a general population decline of about 2,200 Anchorage residents. “This is not the disaster some people have been fearful of,” AEDC President Bill Popp said while unveiling the figures. “It’s going to be a pinch, not a punch, based on what we’re seeing.” Popp clarified that the job and population declines include the start of anticipated force reductions at Joint Base Elmendorf-Richardson, plans which are currently under review by Defense officials. Not surprisingly, the oil and gas and government sectors will lead the way, shrinking by a combined 1,100 positions, according to AEDC. The oil and gas decline, pegged at 600 jobs, would be a loss of about 16 percent of the industry’s workforce in Anchorage. Popp noted that the 3,700 oil and gas jobs over the past two years have been record-high numbers, and the projection would only take the city back to 2011-2012 industry employment numbers. A cut of 500 government jobs will come primarily from the state side as opposed to the federal reductions seen in recent years. Anchorage lost about 370 state government positions in the second half of 2015 — the first half of the 2016 state fiscal year, which began July 1 — the first decline in state jobs the city has seen in more than 20 years. “When you cut $800 million from the state budget there are consequences and we’re seeing those consequences in jobs,” Popp said, referring to the state’s 2016 fiscal year budget. Statewide, government positions fell by 1,600 in the latter months of 2015, Popp said. The construction sector and business and professional services sector are both expected to lose about 400 jobs; again, largely due to decreased state and oil industry spending. The finance industry is forecasted to absorb a loss of 100 jobs, a result of Anchorage’s ever-strained real estate market that restricts deal flow and subsequent loan demand. “We have a very tight (housing) market that we need to untangle,” Popp said. Anchorage lost 1,500 people in 2015, but about 1,300 of those folks moved just beyond the municipality to the Matanuska-Susitna Borough in search of cheaper homes, proof that Anchorage’s lack of available housing is directly impacting the economic health of the city, Popp contends. Alaska as a whole, including Anchorage as its economic hub, has been on a remarkable run of growth for 25 years. Statewide employment has increased each year since 1990, with the exception of a 0.4 percent workforce loss in 2009, according to state Labor Department data. The bright spots in the coming year will be in 300 new health care jobs and continued record high leisure and hospitality employment, according to AEDC. Health care has added 5,000 jobs and roughly $500 million in payroll to Anchorage over the past decade, Popp noted. Leisure and hospitality is one of the sectors in the city that benefits from low oil — more correctly low gas prices — as Outside travelers have more money to spend and find it cheaper to get to Alaska. Ted Stevens Anchorage International Airport also benefits from low fuel prices as more passengers move through its gates and the air cargo business improves. The Anchorage airport is the world’s fifth busiest cargo hub. Combined, the airport and hospitality businesses support about 20 percent of Anchorage jobs, meaning a substantial portion of the city’s economy fares better when oil prices are low, Popp said. The future may tenuous, but unemployment in Anchorage remained low at 4.9 percent in December. Economists often consider unemployment in the 5 percent range to be full employment. Statewide unemployment remained flat compared to 2014 at 6.5 percent, below Alaska’s historical average of about 8 percent unemployment. Confidence in the city’s economy has waned among Anchorage business leaders who are uncertain about the future given low oil prices and a state budget deficit approaching $4 billion, according to an AEDC survey, but Popp noted that survey respondents still consider the ability to find qualified employees a major impediment to growth. “If you can pass a pee test, be on time and not look at your phone every five minutes, you can probably find a job,” he quipped. He urged business leaders and consumers alike to not overreact during uneasy times, saying that pessimism can lead to a “vicious downward cycle” and artificially hurt an otherwise adequate, but not great, economy.   Elwood Brehmer can be reached at [email protected]

UA plan focuses on campus strengths

The University of Alaska Board of Regents and university President Jim Johnsen have agreed on a framework to restructure the system’s campuses at a time when saving money is paramount. “Each main campus — Anchorage, Fairbanks and Juneau — will focus its research, teaching and service on its unique strengths, capabilities, advantages and opportunities. “The ‘lead campus’ model will eliminate duplication and strengthen degree programs, reduce duplicative administration and put a greater emphasis on delivery of courses through technology,” Johnsen said in a formal statement. The draft strategic outline resulted from a two-day regents work session held in Anchorage Jan. 21-22. The unrestricted General Fund portion of the University of Alaska’s budget has been cut significantly in recent years and Gov. Bill Walker’s 2017 fiscal year budget would cut it by another $15 million, to $335 million next year. Under the university plan, the University of Alaska Anchorage, for example, would focus on workforce development in nursing and lead economic and policy sciences research, a UA release states. The University of Alaska Fairbanks would focus on technological and engineering research — its historic strengths; and the Southeast campus would focus on interdisciplinary studies and programs to support the maritime and mining industries. General education classes required as prerequisites for most all coursework would still be available at all campuses, according to the university system. “While this will have impacts on students, communities and university employees, restructuring will preserve excellent and diverse program options across the system and respond to the unprecedented reductions in our budget,” Johnsen said. “The board of regents and university leadership believe this is the best way to use increasingly scarce resources to meet the needs of students and our state.”

Walker bills would shift tax credits to development loans

After more than six months of speculation, Alaska got its first look at Gov. Bill Walker’s solution for what he calls an “unsustainable” oil and gas industry incentive program Jan. 19 when Senate bills 129 and 130 were read for the first time on the Senate floor. Walker jumpstarted the oil and gas tax credit debate last June when he nixed $200 million in credit payments from state operating budget before signing it. What started as a $10 million per year tax credit program in 2003 has grown to a $700 million obligation this year and that payment could eventually hit $1.2 billion if left untouched, the governor contends. SB 130, if enacted, would significantly trim the current credit program and nearly immediately save the state an estimated $500 million at a time when oil prices below $30 per barrel have edged the state’s budget deficit ever closer to $4 billion. The bill would cut spending by eliminating the Qualified Capital Expenditure and Well Lease Expenditure refundable credits applicable to Cook Inlet basin work. When combined with closing a loophole that currently allows some North Slope companies producing “new oil” to claim a 20 percent Gross Value Reduction Credit on top of a net operating loss, repealing the credits would save about $200 million per year. The Qualified Capital Credit reimburses up to 20 percent of all capital development costs and the Well Lease Credit covers up to 40 percent of drilling expenses. Both of the Cook Inlet credits are transferrable. Another $200 million in savings would come by way of adding stipulations companies must meet before the state will directly repurchase tax credits from small producers, according to a fiscal analysis of the bill. Walker’s proposal would cap annual repurchases at $25 million per company and directly tie the refundable percentage of a credit certificate to a company’s — and its contractors’ — Alaska resident hire rate. The remaining credit amount not eligible for a refund based on Alaska hire limits could still be applied to a tax liability. Small producer credits would still be transferrable; however, companies not meeting the stricter guidelines would have to hold the credits until they accrue a tax liability with the state. Credits held for too long would expire after 10 years. Finally, SB 130 would “harden” and raise the minimum gross production tax for oil from North Slope fields not eligible for the Gross Value Reduction Credit. It would prevent several credits, including the Net Operating Loss, or NOL, Credit from being applied to take a production tax obligation below the minimum, often referred to as the tax “floor,” which is currently at 4 percent. That 4 percent minimum production tax would go up to 5 percent in the governor’s bill, a move that would generate about $100 million per year to the state in additional revenue. The increased floor would be applied to all North Slope fields, even new fields eligible for the 20 percent Gross Value Reduction. In its final report, the Senate Oil and Gas Tax Credit Working Group assembled over the summer by Resources chair Sen. Cathy Giessel also recommended hardening the tax floor to prevent large producers from paying no production tax, but the group did not weigh in on raising the minimum tax. Everything the working group proposed was with the future in mind, Giessel said in an interview Jan. 26, and Walker’s bill, as currently constructed, would make the tax floor change retroactive to Jan. 1, 2016. She also called raising the minimum tax to 5 percent a “blatant change” to the More Alaska Production Act, better known as Senate Bill 21, something Walker said he would not do after it was upheld by the voters in an August 2014 referendum. SB 129 Senate Bill 129 would form an Oil and Gas Infrastructure Development Program within the Alaska Industrial Development and Export Authority. A $200 million appropriation would be needed to jumpstart the fund, which would finance oil and gas infrastructure development projects on proven reserves for small and medium-sized companies in lieu of some credits. AIDEA, as the state’s financier, manages revolving loan funds aimed at economic development and holds business interests around the state. The authority typically invests with market returns in mind, but its goals can change with legislative direction. Revenue Commissioner Randy Hoffbeck said during a Jan. 22 press briefing that there is flexibility within the loan program, but AIDEA should be able to recover a competitive rate of return and still offer more attractive financing than private lenders. “What we’re trying to do is build a loan program that steps in where some of these companies are paying venture capital rates or private equity rates that run in the neighborhood of 18 to 20 percent on some of these projects,” Hoffbeck said. “We feel that we can step in and give (companies) a rate that’s a little more reflective of a project that’s a little further down the road because we see a little more certainty in what they’re doing than what they’re finding in the marketplace.” Smaller companies often use the cashable credits as collateral for loans to fully cover exploration costs. AIDEA board member and former Fairbanks-area state senator Gary Wilken said he is excited about the prospect about helping support Alaska’s premier industry and has no qualms about the authority’s ability to meet the challenge. “I think the seven people on the board, including myself, will have the talent to figure out how to execute this if we’re given the responsibility,” Wilken said in an interview. “I think we see the vision; I think we see the benefit and I just have to believe that we’ll reach out and get whatever it takes. If it’s beyond our resources we’ll go get the proper resources to do this right.” While under the auspice of the Commerce Department, AIDEA is a self-funded, for-profit entity that is not bound by the state’s current budget challenges and therefore could expand to manage an additional program. Giessel said the idea of running a loan program through AIDEA would put the state in competition with private lenders, a move that “makes no sense.” The authority on its own has partnered with small producers to finance development projects on the Slope and in Cook Inlet in recent years. It would also mean money already in Alaska would be recycled through the program, while the tax credits, as loan collateral, are bringing in new money from Outside lenders, she said. Impact of changes Walker’s remodel of the oil and gas tax credits is without question a substantial shift from the status quo, something the Oil and Gas Tax Credit working group report urged against — at least right away. His $200 million deferment from the 2016 fiscal year still left the state paying $500 million of what was a $700 million General Fund line item. The remaining $200 million from 2016 is included in a transition fund of nearly $1 billion to pay off credits expected to be earned before the legislation could be enacted. From there, the state’s obligation would shrink to about $200 million per year through 2022, a projection based on the remaining tax credits. Under the current system, the State of Alaska pays upwards of 65 percent of development costs on many projects and up to 85 percent of the cost of exploration because of the ability to “stack” credits, according to the Department of Revenue. A sea change is exactly what representatives from the industry and their supporters in the Legislature have said they don’t want. Walker said in an interview with the Journal that his administration met with each independent exploration and production company that has used the tax credit system to make sure none “fall through the cracks” during a shift away from the current credit structure. “We’re unique with the credit program across the country and (the companies) realize that,” Walker said. His critics on the issue largely agree with the governor that Alaska is unique; they contend the state has a uniquely high cost of doing business, and therefore the credits are essential to spurring development. Alaska Oil and Gas Association President Kara Moriarty said in an interview that she understands the fiscal pickle the state is in, but changing the tax credit system at a time when the companies are also cash-strapped brings about the ever-dreaded political uncertainty. “Policymakers cannot control the price of oil, so you want to have policies that attract investment even when the price of oil is low,” Moriarty said. A member of Giessel’s working group, she also questioned the equity of hardening the production tax floor and not allowing producers to claim a loss against future tax burdens that would take them below the minimum tax threshold. Moriarty said allowing oil and gas producers to claim NOLs, regardless of the minimum tax, is no different than companies in other industries deducting losses on future corporate tax liabilities. On raising the minimum tax, Moriarty was clear: “That will impact production, it just will.” A Revenue Department analysis of SB 130 states that — based on the department’s Fall 2015 Revenue Sources Book — Alaska North Slope crude prices should rebound by 2019 to a point where hardening and raising the production tax floor to 5 percent will no longer factor into tax payments for producers. Revenue is predicting an average ANS price of $68.95 per barrel in fiscal 2019. Now, early in 2016, the state has 12 credits available to explorers and producers across the state. Most are specific to the Slope and Cook Inlet basins, while two are for “Middle Earth” exploration and development credits for work outside of the developed areas, such as Doyon Ltd’s drilling in the Nenana basin near Fairbanks. Four of those credits will sunset by Jan. 1, 2017, if the program continues unchanged. The governor’s proposal to eliminate two of the Cook Inlet capital credits would leave six on the table at the start of next year: three nontransferable and one refundable Slope credit; a refundable Middle Earth exploration credit; and a lone 25 percent Carry Forward Annual Loss Credit for Cook Inlet. Sen. Bill Wielechowski, D-Anchorage, another working group member, has said the state has employed a “scattershot approach” to the credits without thoroughly vetting their benefit. Credit benefits A brief Department of Revenue report examining the fiscal pros and cons of the North Slope credits made public over the summer determined that the credits don’t represent a sound financial investment for the state. Hoffbeck said the seven-page report was incomplete and should not have been released because it limited the benefits to historical production and did not include assumed future production aided by the credits in its analysis. Definitively concluding whether the credits are a good investment for the state is “almost an unanswerable question,” Hoffbeck said in an interview. It’s unknowable whether certain projects would have moved forward or not without the state’s help. The department is more focused on figuring out what’s affordable for the future rather than analyzing historical credits, he said. Those wary of major changes to the credits at a time when North Slope producers are faced with production and transportation costs — in the $48 per barrel range, according to the Revenue Department — far exceeding oil prices that have slid to less than $30 per barrel, say the benefits of the subsidies go well beyond the state’s bottom line. Pat Galvin, chief operating officer for Great Bear Petroleum LLC and a former Alaska Revenue commissioner, recalled during a Jan. 8 discussion panel on the issue a conversation he had with a member of the Walker administration, who said the state will go from paying two-thirds of most exploration costs to about 30 percent under the governor’s plan, with the anticipation the companies themselves will be willing and able to cover the gap. Great Bear Petroleum, founded in 2010, conducted a $50 million exploration drilling last winter on its Slope prospects south of Prudhoe Bay. Galvin said just the exploration credits already set to expire July 1 with the start of the 2017 fiscal year would directly impact activity. “By taking on that exploration risk, the state is allowing for more exploration activity,” Galvin said. “Exploration leads to discoveries; those lead to development, which leads to production. If you don’t get enough projects in the hopper you don’t get enough exploration activity taking place you’re going to get less discovery, less development and less production at the end of the day.” Increasing exploration is the best way for the state to assure future production, he said. He added that if AIDEA is too risk averse and won’t lend to explorers, the loan program won’t accomplish much. Kenai Peninsula Borough oil and gas expert Larry Persily said during the Jan. 8 panel that the credits should be examined not only by their contribution to the state treasury, but what they do for local economies. A study commissioned by the Alaska Oil and Gas Association calculates each direct Alaska exploration and production job supports another nine private sector positions. While Cook Inlet oil carries no production tax and gas from the basin has a minimal tax, the production still contributes royalties, property and corporate income taxes to the state, Persily said. He also noted that incentivizing Cook Inlet gas production helped stave off the natural gas shortages that were feared in Southcentral just three years ago. “There’s no question that tax credits have been good for Cook Inlet, good for utilities, good for customers, good for production — certainly good for the local economy and jobs. Whether they’ve been a net plus, a net gain to the state General Fund is a separate question,” Persily said. Lease expenditures in Cook Inlet have increased fourfold since the state focused in incentivizing activity in the basin in 2010, according to Persily. Giessel concurred with him, saying even small producers not paying production tax bring back three to four times to state coffers what they receive in credits. “This oil tax credit program is a rebate. Folks do not get this money unless they spend money,” Giessel said. “It’s not a giveaway.” The Senate Resources Committee will take up the bills in a couple weeks and get plenty of illumination from the administration on the legislation’s finer points, she said. “I need more clarity as to how it increases production,” Giessel said. She added that she certainly has ideas on how to adjust the tax credit system and a separate bill could be on the way in several weeks as well. Transparency Giessel’s working group also encouraged opening the books, at least a little, so the public can see what the state’s oil and gas tax credit investments are returning. “Though it is not advocated for the names of the operators to be disclosed at this time, the public disclosure of investment amounts can better inform both the public and policymakers, on any other changes to make to the credit system,” the working group report concluded. “Alaskans deserve to know what the other side of the table is spending on a project if their money is investing in its success.” Walker would support more disclosure of the tax credit program, he said, but current statutes tightly restrict what data the state can release and his bills do not address the issue of transparency. He said if the state goes to a broad-based tax on residents while continuing to fund the credits it would definitely be more appropriate for Alaskans to understand what the state is investing in. Moriarty said she believes her member companies are forthright in explaining what the credits have done for them, but contended narrowing disclosures to specific projects “would really allow policymakers and the public to pick winners and losers” amongst the companies, a situation she is not comfortable with. “We’re open to ideas to be more transparent as long as that information is not used against us by other policymakers,” she said. In most years the governor’s 38 pages of oil and gas tax credit and loan program legislation would be enough to dominate the Legislature’s time, as oil industry policy has in the past. This year, however, even bigger budget issues, the Alaska LNG Project and criminal justice and Medicaid reform make oil and gas tax credits just another item on the Legislature’s daunting to-do list. Elwood Brehmer can be reached at [email protected]

Interior Energy Project decisions moved back again, to Feb.

The Alaska Industrial Development and Export Authority should have its new Interior Energy Project partner in place by the end of February, according to project leaders. A partner recommendation can be expected the second week of February, IEP manager Bob Shefchik said in an interview, with a special AIDEA board meeting to be held later in the month to take formal action on the staff recommendation. The time between the announcement and the board meeting will allow the AIDEA board and the public to scrutinize the IEP team’s recommendation, Shefchik said. AIDEA officials spent much of 2015 evaluating new proposals to get natural gas to Fairbanks-area consumers for the project’s stated goal of $15 per thousand cubic feet, or mcf, of gas. What started as 16 ideas in early August has been whittled to two: Spectrum LNG’s proposal to build a North Slope LNG plant and a plan by Salix Inc. to build a Cook Inlet-sourced LNG facility at Point MacKenzie. Oklahoma-based Spectrum LNG operates a small LNG plant in Arizona and helped develop Fairbanks Natural Gas’ supply chain in the late 1990s to feed the utility with LNG trucked from Southcentral. Salix is a subsidiary of Avista Corp., which owns electric and natural gas utilities in Idaho, Washington and Oregon. Avista also owns Alaska Electric Light and Power Co., the Juneau-area electric utility. Shefchik said that the project team is working to secure natural gas contract terms from both Cook Inlet and North Slope producers before making a final suggestion to the AIDEA board. “We want to make sure we have gas contracts underneath the North Slope and Cook Inlet so that as we’re making recommendations on $50 (million) to $80 million investment we’re not modeling what the gas costs, we know what it costs,” Shefchik said. Golden Valley Electric Association, the Interior’s main electric utility, has a 15-year gas supply agreement for North Slope natural gas with BP that the utility has made available to the Interior Energy Project as well. Shefchik said the group is evaluating all supply options. The omnipresent contrast between lower wholesale gas costs from the Slope against lower construction and transportation costs in Southcentral has made defining a clear-cut winner difficult. The desire to have a complete project for review is what led to pushing an initial, self-imposed early December deadline for a project recommendation back two months, he said. Spectrum’s plan is for an $85 million North Slope LNG plant that would need $30 million in equity and $50 million in low-interest loans from AIDEA. Spectrum would contribute $5 million in equity. Salix is hoping to build a $68 million Southcentral plant also with a $30 million equity investment by AIDEA and a $28 million loan, with Salix offering a $10 million investment. The new oil price reality Alaska’s lawmakers are dealing with is also straining the economics of the Interior Energy Project. “We’re challenged on the differential between the price of oil translating into fuel oil and the target price of gas, so we’re being pretty careful on having lowered our conversion expectations and then deciding how can we continue a project in a low price environment,” Shefchik said. Revised estimates on the demand for natural gas, once it becomes available in the Interior, have lowered the demand forecast by as much as a 30 percent since the project began. Natural gas at $15 per mcf is about half the energy equivalent cost of $4 per gallon fuel oil — roughly the price scenario facing Fairbanks when the Legislature funded the project in 2013. Since then, plummeting oil prices have pulled the price of fuel oil closer to $2 per gallon, which makes it less likely residents will spend potentially thousands of dollars to convert their home heating systems. Consequently, AIDEA is also working to consolidate state and federal energy rebate and loan programs to help offset conversion costs for residents and keep the Interior Energy Project financially viable. Elwood Brehmer can be reached at [email protected]

Legislature gets first update on pros, cons of AK LNG Project

Legislators got their first briefing of the session on the Alaska LNG Project on Jan. 25 direct from the project’s lead manager, ExxonMobil’s Steve Butt. In presentations to the House and Senate Resource committees, Butt implored legislators to view themselves as the board of directors for the state, as a 25 percent owner of the $45 billion to $65 billion prospective development. “We view ourselves as kind of a project organizer evaluating technical and economic viability of the AK LNG Project; does it make sense to the investors?” he said to House Resource members. In a time of a depressed global LNG market — spot prices have fallen by some 50 percent over the last three years — Butt outlined some of the simple but not-to-be understated benefits of Alaska’s project and how it compares to others around the world competing for market share. First, Alaska’s North Slope resource of 32 trillion cubic feet, or tcf, of natural gas is well defined and largely developed. The gas beneath Prudhoe Bay has been captured and re-injected many times to maximize oil production and the wells and other infrastructure needed to retrieve the gas from the reservoir are in place.  ExxonMobil and BP have spent roughly $4 billion developing Point Thomson to the east of Prudhoe Bay to supply about 25 percent of the gas for the AK LNG Project, but that work is also wrapping up as Point Thomson will begin producing about 10,000 barrels of natural gas liquids per day to go into the trans-Alaska Pipeline System this year. Further development will still be needed to equip Point Thomson for gas production and transport to the AK LNG Project, however. Butt said many other LNG projects worldwide have upstream development costs that Alaska does not. Additionally, the Federal Energy Regulatory Commission, as the federal overseer of the project, enjoys the knowledge of known resources and established infrastructure in its decision-making process, he said. Alaska’s relatively close location to Asian markets that will likely be the buyers of from the project is a benefit that has been well documented. Shipping LNG from Alaska to Japan, Korea and China is cheaper and faster than from export projects in the Gulf of Mexico or Australia where competing projects are likely to be. Alaska’s location in the northern hemisphere also allows the project to maximize production efficiency that matches swings in market demand, according to Butt. LNG is produced by chilling natural gas to minus-260 degrees Fahrenheit, which results in a condensed, easily transportable liquid product. Alaska’s cold, dry climate allows liquefaction plants here to produce 10 percent to 15 percent more LNG than comparably sized plants in the Middle East or other warm locales. “Buyers are in the northern hemisphere and they want more LNG in the winter — January and February — when the turbo machinery in Alaska is more efficiently generating LNG,” Butt said. A more efficient process means a more cost-effective project. Those advantages hopefully offset the AK LNG Project’s big but unavoidable disadvantages, he said, which are the North Slope gas treatment plant and the 800-mile pipeline needed to get the gas to an ice-free port. The natural gas coming out of Prudhoe Bay is about 12 percent carbon dioxide; a higher carbon dioxide concentration than the gas source for any currently producing LNG project in the world, he noted. When combined with the 4 percent carbon dioxide gas of Point Thomson, the project will have a blended gas of about 10 percent carbon dioxide makeup. That 10 percent carbon dioxide must be separated from the methane that is the usable natural gas and re-injected into the Prudhoe Bay reservoir. As a result, the project requires an upstream treatment plant pegged at roughly $15 billion. “That’s why there are no projects around the world handling this amount of (carbon dioxide) — it’s very expensive,” Butt said to the Senate Resources Committee. The $15 billion pipeline and associated infrastructure is the other major cost hurdle. LNG projects have been done with pipelines up to about 400 miles, he said, but Alaska’s would be double that. Therefore, minimizing cost by maximizing efficiencies in transportation, design and construction is paramount for a project with tremendous overhead in a highly competitive marketplace, Butt emphasized. Elwood Brehmer can be reached at [email protected]

Alaska Air does it again with record $842M profit in 2015

The State of Alaska might be rubbing pennies together, but its namesake airline is not. Alaska Airlines’ parent company, Alaska Air Group Inc., once again posted record fourth quarter and full-year earnings in 2015. Alaska Air Group executives reported a $186 million fourth quarter profit and a 2015 net income of $842 million in a Jan. 21 investor conference call. The quarterly profit is a 49 percent year-over-year improvement and the full-year return is 47 percent better than 2014. Many domestic carriers have seen profits grow as fuel costs have fallen over the last six quarters; however, Alaska Air Group’s strong performance, led by Alaska Airlines, has withstood high fuel prices as well. The company has now posted six consecutive years of record profitability. Seattle-based Alaska Air Group also owns Horizon Air, a regional carrier that serves Kodiak, Anchorage and Fairbanks. “While every airline has benefited from low fuel prices, Alaska led the industry in many of the underlying drivers of financial performance: areas like operation reliability, customer satisfaction, customer growth, and low fares-low cost,” Air Group CEO Brad Tilden said during the investor call. Alaska’s average fuel cost was $1.88 per gallon in 2015, down 39 percent from $3.08 per gallon a year prior. Tilden noted that markets constituting 95 percent of Alaska Air Group’s revenue would still be profitable at fuel prices of $3 per gallon. Fuel can account for up to a third of a major airline’s operating cost at higher prices. Flight capacity increased 10.6 percent for the year with the addition of 20 new markets in 2015, primarily on the back of 10.7 percent capacity growth by Alaska Airlines. That led to a 33 percent decrease in actual fuel cost. Consolidated yearly revenue was nearly $5.6 billion, up 4 percent from 2014, while total operating expenses fell 2 percent. At $1.3 billion, Air Group’s pretax income was up 35 percent. Air Group also used its strong year to buy back 5.5 percent of its outstanding stock. Since 2007, the company has repurchased 35 percent of its stock, according to Chief Financial Officer Brandon Pedersen. The $842 million full-year profit translated to adjusted earnings of $6.51 of per share, a 56 percent increase over 2014. Alaska Air Group stock sold on the New York Stock Exchange for $72.60 per share at the close of trading Jan. 21. The company also announced on Jan. 21 a 27.5-cent per share quarterly dividend that will be paid March 8. It paid a 20-cent per share dividend in the fourth quarter of 2014. Pedersen said non-fuel operating costs declined 1.3 percent in the fourth quarter and 0.8 percent for the year. “We recognize that low fuel prices will probably not last forever, so we remain focused on creating a permanent, sustainable advantage by lowering nonfuel unit costs and increasing the fuel efficiency of our fleet,” Pedersen said. Alaska Airlines is in the midst of phasing out older, Boeing 737-400s over several years and replacing them with newer, more efficient 737s. Air Group’s fuel burn improved 2 percent per available seat mile in 2015, Pedersen said. That led to an 8.3 percent increase in overall fuel consumption despite the 10.6 percent increase in capacity. Alaska Air Group continued to pay down debt in 2015. At the end of the year its debt-to-capitalization ratio stood at 27 percent, leaving the company in a $300 million net cash position with $686 million in outstanding long-term debt, according to Pedersen. The median debt-to-cap ratio for S&P 500 companies is 45 percent, he noted. “Alaska (Airlines) remains one of only two U.S. airlines to have an investment grade balance sheet,” Pedersen said. The other is Southwest Airlines. Tilden said Air Group’s return on invested capital, or ROIC, was 25.2 percent for the year, up from 13 percent in 2012. He added that the company’s 15,000 employees will share in the record year through $120 million in bonuses expected to be paid this year.

Alaska Air does it again with record $842M profit in ‘15

The State of Alaska might be rubbing pennies together, but its namesake airline is not. Alaska Airlines’ parent company, Alaska Air Group Inc., once again posted record fourth quarter and full-year earnings in 2015. Alaska Air Group executives reported a $186 million fourth quarter profit and a 2015 net income of $842 million in a Jan. 21 investor conference call. The quarterly profit is a 49 percent year-over-year improvement and the full-year return is 47 percent better than 2014. Many domestic carriers have seen profits grow as fuel costs have fallen over the last six quarters; however, Alaska Air Group’s strong performance, led by Alaska Airlines, has withstood high fuel prices as well. The company has now posted six consecutive years of record profitability. Seattle-based Alaska Air Group also owns Horizon Air, a regional carrier that serves Kodiak, Anchorage and Fairbanks in the state. “While every airline has benefited from low fuel prices, Alaska led the industry in many of the underlying drivers of financial performance: areas like operation reliability, customer satisfaction, customer growth, and low fares-low cost,” Air Group CEO Brad Tilden said during the investor call. Alaska’s average fuel cost was $1.88 per gallon in 2015, down 39 percent from $3.08 per gallon a year prior. Tilden noted that markets constituting 95 percent of Alaska Air Group’s revenue would still be profitable at fuel prices of $3 per gallon. Fuel can account for up to a third of a major airline’s operating cost at higher prices. Flight capacity increased 10.6 percent for the year with the addition of 20 new markets in 2015, primarily on the back of 10.7 percent capacity growth by Alaska Airlines. That led to a 33 percent decrease in actual fuel cost. Consolidated yearly revenue was nearly $5.6 billion, up 4 percent from 2014, while total operating expenses fell 2 percent. At $1.3 billion, Air Group’s pretax income was up 35 percent. Air Group also used its strong year to buy back 5.5 percent of its outstanding stock. Since 2007, the company has repurchased 35 percent of its stock, according to Chief Financial Officer Brandon Pedersen. The $842 million full-year profit translated to adjusted earnings of $6.51 of per share, a 56 percent increase over 2014. Alaska Air Group stock sold on the New York Stock Exchange for $72.60 per share at the close of trading Jan. 21. The company also announced on Jan. 21 a 27.5-cent per share quarterly dividend that will be paid March 8. It paid a 20-cent per share dividend in the fourth quarter of 2014. Pedersen said non-fuel operating costs declined 1.3 percent in the fourth quarter and 0.8 percent for the year. “We recognize that low fuel prices will probably not last forever, so we remain focused on creating a permanent, sustainable advantage by lowering nonfuel unit costs and increasing the fuel efficiency of our fleet,” Pedersen said. Alaska Airlines is in the midst of phasing out older, Boeing 737-400s over several years and replacing them with newer, more efficient 737s. Air Group’s fuel burn improved 2 percent per available seat mile in 2015, Pedersen said. That led to an 8.3 percent increase in overall fuel consumption despite the 10.6 percent increase in capacity. Alaska Air Group continued to pay down debt in 2015. At the end of the year its debt-to-capitalization ratio stood at 27 percent, leaving the company in a $300 million net cash position with $686 million in outstanding long-term debt, according to Pedersen. The median debt-to-cap ratio for S&P 500 companies is 45 percent, he noted. “Alaska (Airlines) remains one of only two U.S. airlines to have an investment grade balance sheet,” Pedersen said. The other is Southwest Airlines. Tilden said Air Group’s return on invested capital, or ROIC, was 25.2 percent for the year, up from 13 percent in 2012. He added that the company’s 15,000 employees will share in the record year through $120 million in bonuses expected to be paid this year. It will be the seventh consecutive year that each employee will receive a full month’s pay in performance bonuses, Tilden said.   Elwood Brehmer can be reached at [email protected]

Home sales decline around Alaska to end 2015

Home sales declined across much of Alaska in the fourth quarter of 2015, according to data provided by the Alaska Association of Realtors. Single-family transactions in Anchorage fell by 3.5 percent versus the last months of 2014, from 743 sales to 717. Condo sales fell by 9.6 percent in the state’s largest market, to 262 condos sold. Fourth quarter home sales fell by 4 percent in Fairbanks, 3.1 percent on the Kenai Peninsula and 2.6 percent in Southeast Alaska as well, compared to 2014. Average residential sale prices increased 2.4 percent to $358,400 in Anchorage and the average “days on market” also fell by 14.5 percent to 47 days, despite decreased sale activity. Condo prices in Anchorage fell by nearly 1 percent to $216,800. Single-family activity increased by 7.8 percent in the Matanuska-Susitna Borough and average sale price increased by 3.7 percent to $246,700. Along with that, the average number of days on the market for a single-family home in the valley fell from 73 at the end of 2014 to 63 in the fourth quarter of last year. Listing time in decreased by at least 14 percent for Southeast single-family homes and condos, as well as for Fairbanks, where the average single-family unit sold for $213,100 and spent just over two months on the market. Elwood Brehmer can be reached at [email protected]

Judge keeps subcontractors in port lawsuit

Subcontractors are still potentially liable for work done years ago on the disastrous Port of Anchorage expansion project, according to a federal court ruling. U.S. District Court of Alaska Judge Sharon Gleason ruled Jan. 13 that Quality Asphalt Paving Inc. and MKB Constructors, its working partner on the Anchorage port project in the late 2000s, are still subject to a lawsuit filed by the Municipality of Anchorage because the city never knowingly reconciled with the companies. Quality Asphalt Paving, or QAP, joined by MKB, filed a motion for summary judgment in the suit in August, claiming a September 2012 settlement for $11.1 million between the U.S. Maritime Administration, as the port project manager, and the subcontractors released them from liability. Gleason wrote in her Jan. 13 order denying the judgment motion that court records indicate the Maritime Administration, or MARAD, attempted to reassure the municipality shortly after the 2012 settlement that it did “not preclude (the municipality) from pursuing its own litigation.” An Oct. 19, 2012, letter from then Anchorage Mayor Dan Sullivan to MARAD Administrator David Matsuda supports the municipality’s contention that it was unaware of the settlement and further found the federal agency to be a weak negotiator, settling for $11.1 million when the agency found $11.5 million of a $17 million claim to be valid. Sullivan wrote that he was “surprised and disappointed” to learn MARAD settled a contract dispute with Integrated Concepts and Research Corp. on behalf its contractors QAP and MKB regarding the Port of Anchorage Intermodal Expansion Project. MARAD hired ICRC, a former subsidiary of the Kodiak-area Alaska Native corporation Koniag Inc., early in the project to act as its on-the-ground prime contractor. “When pressed whether ICRC (and subsequently its contractors) had been released from further claims, particularly claims that might be asserted by the Municipality of Anchorage, MARAD only made vague and general comments,” Sullivan wrote. “When further pressed as to whether funds of the municipality were used to settle the matter, MARAD pretended not to know the answer, although the clear implication was that the funds provided by the municipality were used without our knowledge or consent.” MARAD, a federal Transportation agency, was brought into the project in 2003 by the municipality to manage construction and be a vessel to acquire federal funding. Originally intended to update and expand the Port of Anchorage’s aging docks, the project was fraught with control and communication issues nearly from its outset. Those issues were manifested in construction problems and led to work being stopped partway through in 2010, which was never resumed. In all, the municipality spent roughly $302 million of state, federal and its money for virtually nothing. The Municipality of Anchorage originally filed suit in March 2013 against ICRC, dock designer PND Engineers Inc. and CH2M, which now owns a former project consultant. Anchorage filed a separate suit against MARAD in Federal Claims Court in February 2014 seeking to recover damages for the project. An August 2013 Inspector General report was deeply critical of MARAD for its handling of the Anchorage port project and other similar work in Hawaii and Guam. PND has long contended the construction problems associated with its patented Open Cell Sheet Pile dock were due to inexperienced contractors, not a faulty design, as the municipality and a study commissioned by the city conclude. PND filed a third-party suit against QAP and MKB, bringing the subcontractors into the tangled legal mess.   Elwood Brehmer can be reached at [email protected]  

Fairbanks wants bigger slice of $15.7B PILT pie

Emotions can run high when $15.7 billion is up for grabs. Decorum held Jan. 15 as mayors of the boroughs along the proposed Alaska LNG Project corridor debated the appropriate allocation of $15.7 billion the state and local governments could get in-lieu of traditional property tax revenue on the project’s infrastructure. However, the Municipal Advisory Gas Project Review Board meeting discussion certainly had an undercurrent of tension. Much of the back-and-forth centered on parsing out what is fair, particularly for the Fairbanks North Star Borough. While it’s widely assumed the Interior local government area will act as a hub for much of the project construction and operating activity, the current route of the 800-mile pipeline would cross only two miles of FNSB territory. That would leave the borough with a 0.2 percent allocation for the pipeline portion of the $15.7 billion payment in-lieu of property tax, or PILT, total. FNSB Mayor Karl Kassel has made it clear that he would not accept a scenario in which the borough received a PILT allocation based solely on infrastructure value within local government boundaries. Revenue Commissioner and board chair Randy Hoffbeck offered an allocation matrix at a December meeting that would split the PILT money based on infrastructure valuation, while leaving a small portion for distribution to local governments statewide based on population. Hoffbeck noted at the time that the model was intended to be a starting point for the discussion — a visual to outline the complex relationship between PILT takes by the State of Alaska, locales within the AK LNG Project corridor and the rest of Alaska. Kassel said in an interview that the Revenue Department’s draft is still the basis for discussion, but added that even as there is “somewhat of a general consensus” the final allocation will be something different, no one, including himself, has come up with an agreeable solution. The $15.7 billion PILT figure was negotiated by the state with the AK LNG Project partners as a sum to be paid over the initial 25-year life of the project. The yearly payments, starting about 2025, would be tied in part to the natural gas throughput of the project, with payments starting at $556 million and escalating to $706 million in year 25. If the project exceeds its initial life as expected and processes more gas, the final PILT sum could increase. Under the Revenue Department model — based heavily on allocating in-area asset valuation similar to a property tax — the Fairbanks North Star Borough would get just $75,600 per year for its two miles of pipeline. The Fairbanks North Star Borough will feel major impacts from the project despite holding only two miles of pipeline, Kassel emphasized. “We’re the supply depot; we’re the hub of the network,” he said in an interview. The Trans-Alaska Pipeline System, or TAPS, has given Fairbanks a very good idea as to what the community can expect with the gasline. Kassel said the borough’s payroll increased 75 percent during TAPS construction. He said he doesn’t expect growth on that scale given the state has matured greatly since the mid-1970s, but expecting growth up to 20 percent is not unreasonable, according to Kassel. He said at the meeting he expects everyone to fight for their communities, but Fairbanks “would rather not see the pipeline filled with the (Revenue Department’s) structure.” Regardless of the model, the State of Alaska will likely take a significant share of the PILT because 304 miles of the pipeline runs through unincorporated areas of the state north and west of Fairbanks and the state, as a 25 percent owner of the project, will presumably recoup its portion of the PILT. Without the state’s quarter share, about $11.8 billion would actually be split between the state and local governments. Matanuska-Susitna Borough Mayor Vern Halter proposed a model allocating 50 percent of the $15.7 billion PILT to the state, including the 25 percent state tax payback; 20 percent to areas with AK LNG Project infrastructure; and 30 percent to local governments statewide based on population each year. The 20 percent share for boroughs and the state with project assets would be weighted, with 70 percent as a ratio of asset value and 30 percent based on population. Kassel said the model has merit, but shouldn’t distribute facility asset values from the North Slope and the Kenai Peninsula boroughs because the gas treatment plant to the north and the massive LNG plant at the end of the pipe are wholly located within those areas. The ratio split should focus on the pipeline asset allocation to acknowledge impacts to Fairbanks, he said. Kassel suggested a 50-50 split of the pipeline portion of the PILT based on the location of assets and the population of the jurisdictions within the pipeline corridor. Hoffbeck noted that allocating based on population within the project corridor is “getting a long way from property tax,” but said it is up to the larger board to decide its recommendation. Halter said he doesn’t want the ultimate allocation “over-weighted to infrastructure,” which the Revenue model is, he contends. Kenai Peninsula Borough Mayor Mike Navarre said the idea that a PILT is not tied to property taxes simply isn’t accurate. The $25 billion LNG plant expected for Nikiski on the Peninsula is projected to bring in massive amounts of tax revenue for the Navarre’s borough even if it is taxed at a lower rate than current borough statute, as the negotiated PILT calls for. Navarre commented at the meeting and Kassel said in an interview that regardless of what the board recommends to Gov. Bill Walker, the Legislature makes the final decision. “I think it’s important for us to be involved and give it a best-faith effort to come up with the best recommendation we can,” Kassel said. “Where it goes from there — we know it goes into the sausage maker of the legislators and what comes out the other end — who knows?”    

Industry: Tongass timber forecast flawed

A U.S. Forest Service study projects growth in Tongass timber harvest over the next 15 years, but leaders of Alaska’s timber industry are saying the forecast is still too low. The draft Tongass National Forest Timber Demand report calls for a timber harvest increase from fiscal year 2014 of nearly 25 percent by 2030 on Tongass lands. Southeast mills took 39 million board feet of lumber from the national forest in 2014; the 2030 harvest is forecasted to be 51.8 million board feet. Alaska Forest Association Executive Director Owen Graham argues the demand analysis is based on a restricted timber supply, which artificially limits demand for Alaska forest products. “The analysis attributes the supply constraints to federal budgets and (National Environmental Policy Act) issues, but fails to acknowledge that its self-imposed standards and guidelines for its timber sale program have greatly increased the cost of harvesting timber sales,” Graham wrote in formal comments about the study. “These high costs are one of the primary reasons the agency has been unable to prepare economic timber sales.” Agriculture Secretary Tom Vilsack issued a memo in 2013 expressing an intent to transition to young-growth harvest in the Tongass National Forest within 15 years. That transition would be faster than was prescribed in the 2008 Tongass Forest Plan. Graham has said the industry needs to harvest at least some old-growth trees for about another 30 years to allow young, or second-growth, stands to fully mature, which takes about 90 years for most trees in Southeast Alaska. Young-growth stands are often more dense and thus hold more board feet of raw lumber. However, Alaska’s downsized timber industry in recent years has survived on high-value, “shop grade” lumber products from large spruce and hemlock trees harvested from the Tongass. Southeast sawmills will not be able to manufacture that high-value lumber from the 60-year-old, young-growth trees that would be available under an expedited shift away from old-growth harvesting, according to Graham. “The spruce custom-cut lumber that currently enjoys very high prices in the Pacific Rim markets will no longer be produced. Likewise, since shop grade hemlock lumber requires logs that are at least 16 inches in diameter, this high value lumber will also disappear,” he wrote. “What the (demand forecast) is missing is the most likely outcome of the transition strategy — the end of timber manufacturing in Southeast Alaska.” Allowing young-growth stands to mature another 30 years to age 90 would roughly double the harvestable volume per acre usable for Alaska mills, Graham said. Smaller logs can be exported to other markets, but that eliminates the value-added sawmill industry from the logging process, he said. The study forecasts the total Southeast timber harvest will increase from 120.6 million board feet in 2015 to 155.1 million by 2030. That includes timber sales from state land and Alaska Native corporation property, primarily the area Native regional corporation Sealaska Corp. Nearly all of the harvest increase will come from logs meant for export — 31 million board feet of the overall Southeast harvest increase of about 35 million board feet is in the form of export saw logs, based on the Forest Service projections. Sealaska, which gained 68,000 acres of formerly Tongass timberland in a conveyance from the federal government last year, exports nearly all of its timber as raw logs because it cannot process the logs in Alaska economically. Sealaska CEO Anthony Mallott has said the company wants to add timber processing and the new acreage will be an opportunity to study the economics of its entire timber business model. The study projects harvest from Southeast Alaska Native corporation lands will increase from 61.5 million board feet in 2015 to more than 80 million board feet 15 years later. Graham contends Sealaska is the only major private timberland owner in the region. According to Sealaska, it can now maintain an average harvest of 45 million board feet for the next 25 years, stretched from earlier projections of 45 million board feet 15 years. Sealaska is also interested in bidding on up to 20 million board feet per year of harvest from public lands. Further, Alaska’s Southeast State Forest has a maximum sustainable harvest of about 12 million board feet per year, according to state Forestry Director Chris Maisch. The study projects harvests from State of Alaska lands in the region to grow from 18.2 million board feet to 23.1 million board feet over the 15-year study period. The Alaska Mental Health Trust Land Office occasionally offers large timber sales upwards of 50 million to 60 million board feet from its Southeast properties. However, Trust Land Office Resource Manager Paul Slenkamp said the large sales are sporadic and none are expected for the next three to four years. Southeast Alaska’s timber industry is a shell of its former self. Average annual harvest from the Tongass ranged from about 280 million board feet to more than 400 million board feet during the late 1980s and early 1990s. The last year timber harvest from the 17 million-acre national forest exceeded 100 million board feet was 2000, which was the last full year before President Bill Clinton issued the Roadless Rule, restricting access to undeveloped tracts of national forests. At its peak, the industry supported more than 4,000 jobs in Southeast, today that number is down to about 300, according to Graham. Study co-author Jean Daniels, a federal research forester, said the demand forecast is a continuation of trends seen in related markets after the global recession in the late 2000s. The study was also kept independent from the Tongass Land and Resource Management Plan ongoing update process, Daniels said. “For the most part we tried to stay as separate from what was going on with the (Tongass environmental impact statement) process as possible to try to be as unbiased as possible with the results of the analysis,” she said. The Alaska Region of the Forest Service released a draft environmental impact statement for the Tongass Management Plan in November. The plan amendment calls for continuing the 15-year transition to young-growth harvest in the Tongass. Susan Alexander, a manager in the Forest Service’s Pacific Northwest Research Station, also helped pen the demand forecast study and said that Graham is looking at the forecast from the supply side, while the Forest Service attempted to figure out demand for all West Coast timber markets, with Alaska and the Tongass harvest subsets to the larger picture. “It’s a demand side analysis and I think that is sometimes confusing for people in Alaska who think that the supply equals demand, but it doesn’t, not from a theoretical standpoint,” Alexander said in an interview. Alexander and Daniels said they viewed Alaska as if timber supply was unconstrained and concluded that the cost of transportation has simply pushed Alaska out of the West Coast market. Demand is growing for lower value construction-grade lumber, but Alaska mills simply can’t compete with the rest of the Pacific Northwest. “Washington and Oregon have made all of the industry retooling necessary to be competitive in commodity markets and that’s a dimension lumber market where you’d be a price taker and Alaska has always been more competitive in the high-quality, shop-grade lumber,” Daniels said. Revamping Alaska sawmills to process dimension, or construction lumber from smaller young-growth trees would require hundreds of millions of dollars of investments and extremely high volumes of timber, Graham says. Additionally, those mills are highly mechanized, mostly eliminating the benefit of jobs in the industry, he argues. Alaska’s congressional delegation has criticized the Forest Service for pushing a quick transition to young-growth timber in the Tongass without helping Southeast mill operators transition their operations.   Elwood Brehmer can be reached at [email protected]

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