Elwood Brehmer

Major producers building carbon pricing into future plans

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

Dunleavy adminstration pumping brakes on gasline direction

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

Microcom founder launches new satellite broadband project

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

AGDC audit recommends minor changes, additional report forthcoming

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

USPS cancels Bypass Mail pilot project at last moment

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

Meyer out as president of Alaska Gasline Development Corp.

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

Senate set to work as House in disarray

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

Dunleavy replaces two AGDC members amid project review

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

Italian major secures full ownership of North Slope field

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

Judge rules on constitutionality of tax credit bonds

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

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

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

More Nanushuk exploration set with $15M test well

A consortium of small oil explorers is ready to test the extent of a suddenly attractive North Slope oil formation. The state Division of Oil and Gas approved Great Bear Petroleum’s plan to drill the Winx-1 exploration well Dec. 14. Anchorage-based independent Great Bear is partnered with Australian explorers 88 Energy, Red Emperor Resources and Otto Energy to drill the well estimated to cost roughly $15 million, according to company filings with the state. The Winx-1 well will be 13 miles due south of the Village of Nuiqsut and about 5 miles east of the Horseshoe well and sidetrack Armstrong Energy drilled into the shallow Nanushuk formation in early 2017. The Horseshoe well extended the prospective Nanushuk formation play more than 20 miles south of the Pikka Unit — in which Spanish major Repsol also holds a significant position — and Armstrong estimates holds roughly 1.2 billion barrels of primarily Nanushuk-sourced oil. CEO Bill Armstrong said when the Horseshoe results were announced that the well is a strong indicator that the Nanushuk resource in the area could be double what is known in the Pikka Unit. Oil Search Ltd. is now developing the Pikka Unit. Slope geologists generally believe the Nanushuk prospect to be a western Slope phenomenon and exploratory drilling has mostly been west of the initial discovery at Pikka. However, 3-D seismic data indicates the area where the Winx well will be drilled could hold 400 million barrels of Nanushuk oil, according to a prior 88 Energy release. The work schedule approved by the Division of Oil and Gas calls for the companies to build ice roads and pads to the drill site through January, with drilling to start in mid-February. Great Bear Chief Commercial Officer Pat Galvin said in a brief interview that the work is on schedule and is being managed by wholly-owned 88 Energy subsidiary Captivate Alaska LLC. Work will wrap up in late April or along with the end of the Slope ice season. Plans are to drill Winx-1 to 12,000 feet using Nordic-Calista Services Nordic No. 3 rig. Armstrong said the Nanushuk oil his company encountered to the north was primarily less than 5,000 feet deep. “The Nanushuk is the primary target and there isn’t a plan to test other zones but sometimes you hit things you don’t expect,” Galvin said. Great Bear and 88 Energy are also continuing work on separate projects along the Dalton Highway south of the developed area of the North Slope. Galvin said Great Bear is preparing to test its Alkaid-1 well drilled in 2015 later this winter. The well is looking for conventional oil targets, he added. Great Bear had previously been focused on unconventional oil prospects on the southern flank of the Slope. 88 Energy is finished with testing its unconventional Icewine-2 well on the southern Slope, which targeted the HRZ shale formation. A late December project update from 88 Energy Director David Wall said the company is working with consultant Baker Hughes and the U.S. Geological Survey on new hydraulic fracturing testing methods to evaluate its wells. While they are small oil companies, 88 Energy and Great Bear hold significant positions on the Slope. Combined, they have an interest in more than 650,000 acres, most of which is along the Dalton Highway south of Deadhorse, where they have focused on unconventional oil exploration. ^ Elwood Brehmer can be reached at [email protected]

OMB director: Budget must match revenues

Alaskans should expect a balanced state budget next year, at least as long as Donna Arduin has a say in it. The new Office of Management and Budget director said she wouldn’t be doing her job if she didn’t draft a budget to present to the Legislature that matched revenue expectations. The alternative would mean relying on speculative income growth or require future government cuts; that’s work she doesn’t plan to leave on the table. “I don’t believe in budgeting towards hoping revenues go up,” Arduin said in a Dec. 28 interview. “The budget should be steady and predictable, so we shouldn’t budget hoping that we’re going to get more revenues next year.” The $5.7 billion fiscal year 2020 general fund budget proposal Gov. Michael J. Dunleavy’s administration released Dec. 14 — mostly crafted by former Gov. Bill Walker’s team as often happens when state leadership changes hands — is projected to result in a deficit of more than $1.6 billion after a roughly $300 million deficit this year. By the numbers, the current fiscal 2019 budget is very similar to the 2020 placeholder plan. The single biggest difference is a much larger Permanent Fund dividend appropriation in the 2020 proposal, which, coupled with an lower oil price forecast from the Department of Revenue, adds up to $1.6 billion more in spending than the state is likely to collect over the year. The 2020 fiscal year begins July 1. Shortly before leaving office Walker released his budget as balanced, but that was based on a $75 per barrel average oil price forecast; a number derived in October when Alaska North Slope crude prices averaged $80.02 per barrel, according to the state Tax Division. New Revenue Commissioner Bruce Tangeman curbed the $75 per barrel projection to a $64 per barrel average for 2020 as prices for Alaska crude, which is priced to the international Brent benchmark, have retreated to the mid-$50s. Dunleavy is ardently averse to new or higher taxes and dedicated to paying statutory formula-based Permanent Fund dividend that would collectively be about $920 million more than the latest PFD payout of $1.02 billion, according to OMB documents. That means reducing government spending by $1.6 billion — or 28 percent of a $5.7 billion budget — in other areas is pretty much the only remaining option. On the prospect of making those spending cuts, Arduin said, “If you don’t do them this year you’re going to have to do them next year. It doesn’t get any easier.” Legislators have found spending cuts of that size unworkable in recent years following several years of cuts totaling more than $3 billion, as state budgets have stabilized roughly at the current level over the past three fiscal years. Several recent annual deficits were so large there was little expectation the gap would be closed in a single year, and the Legislature drew down some $14 billion from state savings accounts in order to cover the gaps. The vast majority of the structural budget gap was filled last spring when legislators approved Walker’s landmark legislation to establish a 5.25 percent of market value endowment-style draw from the Permanent Fund, while additionally setting dividends below the statutorily calculated amount. Making those tough spending decisions is nothing new to Arduin. The conservative budget fixer has led the crafting of budgets for Republican governors in Michigan, New York, Florida and California over the past 25 years in addition to consulting roles for other Republican politicians across the country. Arduin agreed to join the Dunleavy administration because transforming state spending plans “is what I enjoy doing,” she said. “I enjoy the challenge and working with fiscally conservative governors to make sure that — in most state it’s taxpayers; here it’s dividend recipients and hopefully not future taxpayers — are first and foremost at every policy table and every policy discussion,” Arduin explained. Alaska’s budget structurally isn’t all that different from other states, she said, aside from the fact that most of the revenue comes from oil and other obvious differences such as the PFD. Arduin, who arrived from her home state of Michigan in late November, said she has received great help from OMB staff and other administration officials. The Office of Management and Budget now includes the administrative services directors who were who apart of 13 executive branch departments. Dunleavy made the staffing change, which Walker’s administration considered but didn’t implement, through a quiet early December administrative order. Those individuals were largely in charge of the department budgets and detailed operations and were moved to OMB “precisely for the reason that we can work through every detail of what the agencies do and know who to talk to within the agencies and how to analyze their functions,” she said. “I have an amazing team at OMB,” Arduin continued. “I was able to recruit — even prior to the inauguration — some of the most talented people around state government and then we moved the (administrative services directors) here so the Budget Office doesn’t look like it did a month ago.” Laura Cramer, a former chief of staff to Finance Committee co-chair Sen. Anna MacKinnon is Arduin’s deputy OMB director. The office is currently conducting a policy driven analyses of everything the state does. She declined to discuss the possibility of major changes to state operations in order to close the gap. Arduin also couldn’t say when the Dunleavy administration would release its first original budget, but it has a Feb. 15 deadline to do so. She reiterated a point the governor has emphasized when asked how she views the Permanent Fund is best utilized. “We need to follow the law,” she said, in reference to the fact that the statutory PFD formula has not yet been changed despite that it hasn’t been followed recently. Arduin later added, “The Permanent Fund is designed to invest and grow. The Constitution and statute tells us which revenues go into the fund and once earnings are realized how much of those earnings can be used and that the first use of those (earnings) is for the statutorily calculated dividend.” The 2020 POMV draw is projected to be roughly $2.9 billion, which would leave about $1 billion available to support government services and pay down the deficit. About $1.7 billion in fund earnings is being used for that this year. The Revenue Department expects nearly $2.2 billion in other unrestricted revenue to be available in fiscal 2020, versus about $2.7 billion in the current year, adding to the expected deficit. On less pressing matters, Arduin said she tries to apply all of her prior experiences across the country to her current work. “We can learn so much from each other. It’s just been very valuable to me having worked in other states where everything is slightly different,” she said. “On the other hand, I can anticipate what may happen in the future based on my experience.” She has had less success anticipating Juneau’s weather, but she’s still warmed to the city. “I love Juneau. I love all the boots that I’ve now acquired,” Arduin joked. “If only someone out there could invent one that converts from rain to snow to ice during the same walk — I enjoy it. The people are nice; the city is charming and it’s beautiful.” ^ Elwood Brehmer can be reached at [email protected]

New state ferries may face delays entering service

Whether Alaska’s two newest ferries will be put to work next summer remains unknown despite the fact that they both should be ready to go. There are several reasons for the likely delay, but Alaska Marine Highway Executive Director Shirley Marquardt said a primary one is that modifications have not yet been made to the Haines ferry dock that would allow the ferries to be used efficiently. The twin, 280-foot M/V Tazlina and Hubbard “day boats” were built for shuttle service in Lynn Canal and have stern and bow doors to allow for the quickest possible loading and unloading of vehicles and other freight. The original plan was for the two ferries “to feed each other, coming nose-to-nose into the dock at Haines and you basically drive off one and drive on the other and it would go back to Skagway,” Marquardt explained during a joint Dec. 18 meeting of the Marine Transportation Advisory Board and the AMHS Reform Steering Committee. However, challenges accounting for the bulbous bows on the new ferries in the dock design have delayed the project that is being done by another division in the Department of Transportation, she said. A DOT spokesperson did not respons to questions about the Haines dock in time for this story. The $25 million Haines ferry dock would be built mostly with Federal Highway Administration grants and is scheduled for funding in the current and future fiscal years in the Statewide Transportation Improvement Program. The dock won’t be finished until late next year or early 2020, according to Marquardt. The Tazlina and Hubbard are scheduled to be ready for service when the busy summer AMHS schedule starts May 1, according to DOT. Then-First Lady Donna Walker christened the Tazlina Aug. 11 at Vigor Industrial’s Ketchikan shipyard and work on the Hubbard has followed close behind. Without the modified dock, the day boats, which do not have crew quarters, will struggle to make the round trip from Juneau to Haines-Skagway and back within the U.S. Coast Guard’s 12-hour crew work limit, Marquardt said. Housing the 24-person crews in Haines and Skagway during the peak of the summer season is not seen as a viable option around the daily work limit and it also could complicate scheduling and limit service. AMHS General Manager John Falvey said he has a verbal commitment to a waiver from Coast Guard officials that would allow the day boats to operate 14 hours per day, but that could butt against crew labor agreements. Marquardt added that cuts to the AMHS budget and fleet — notably taking the ferries Chenega and Taku out of service — and changes to its expected route structure over the past 10 years mean the Tazlina and Hubbard generally don’t meet what the system needs in new vessels either. The AMHS operating budget has been cut by about 30 percent over the past five years, adding another layer of challenges to running the already complex system. Without side doors common on other state ferries or crew quarters for extended voyages they are functionally limited to working out of Juneau in northern Lynn Canal. Meanwhile, AMHS is facing a 10-month service gap in Prince William Sound when the M/V Aurora eventually goes to a dry dock for new engines, work Marquardt said has been pushed back a year to 2020 in hopes of finding a solution. She also questioned whether the day boats would be able to go to-and-from Juneau in 12 hours during tough, slower winter conditions even with the proper shore side facilities. “We believe that the optics of tying two new vessels up until they can fulfill their required service needs are far more justifiable than placing two ill-equipped vessels into service,” Marquardt read from a letter to former Gov. Bill Walker about the situation. She is sending the same letter to Gov. Michael J. Dunleavy’s administration as well. The operational challenges were discovered after Marquardt and other AMHS leaders began assessing from numerous angles what it would take to fold the new ferries into the 10-vessel fleet shortly after she joined the system June 1, she said. Marquardt noted that the day boats were conceptualized at a time when the Juneau Access project to extend the Glacier Highway nearly 50 miles further north of the capital city, which would have shortened the shuttle runs the ferries would make in Lynn Canal. Former Gov. Bill Walker officially decided against the long-debated road extension project estimated at $680 million in July. While the project would increase vehicle capacity in and out of Juneau, its economic viability is an open question among other issues. Dunleavy has supported the Juneau Access project in the past and was critical of Walker’s decision. These types of issues are among those that many AMHS leaders and stakeholders believe can be better addressed if the system is turned into a public corporation, similar to the Alaska Railroad Corp. The general belief is that a state ferry corporation led by a board of apolitical subject matter experts would be better equipped to draft and execute long-term plans to make the system more efficient and hopefully take it out of the Legislature’s annual budget battles. Currently, the AMHS is ostensibly a division of the Department of Transportation immediately overseen by a DOT deputy commissioner, a politically appointed position with high turnover. The structure largely leaves system managers to worry about day-to-day operations while long-term goals shift around them. MTAB chair Robert Venables noted that Dunleavy is the fifth Alaska governor to have a hand in crafting the Tazlina and Hubbard before they have even entered service. Last April the House Transportation Committee introduced a 53-page bill to overhaul the AMHS to the public corporation model. It is expected the legislation will be amended and reintroduced early in 2019 after being reviewed by stakeholders, but who will sponsor it is unclear at this point. In regards to the Tazlina and Hubbard, the consensus solution from AMHS officials is to add side doors and 24 crew berths to the new ferries — stripping them of the “day boat” title but making them immensely more valuable to system operations, Marquardt contends. The upgrades are expected to cost roughly $15 million per vessel, which the system has in its replacement and operating funds, but legislative approval is need to access the money. Because the nearly $60 million has not yet been spent on the docks, the state can instead get much more use out of putting $30 million into the ferries, she insisted. Marquardt inquired about getting approval through the Legislative Budget and Audit Committee while the Hubbard was much earlier in the construction process but was told such a large request should go through the full Legislature, she said, which is what she insisted she wants to do. She expects to talk to administration officials about the situation very soon Marquardt said, noting Walker put the funding authorization requests in his budget that was taken by Dunleavy’s team. Elwood Brehmer can be reached at [email protected]

Major projects have permitting milestones ahead in 2019

Environmental reviews are underway on a suite of development projects that could permanently change the face of Alaska. The fate of several of those projects could largely be known by this time next year. It doesn’t get any bigger than the Alaska LNG Project. Estimated to cost roughly $43 billion by the Alaska Gasline Development Corp., it would be one of the largest infrastructure developments in the history of the country and the 18,000 jobs the Labor Department says it could generate by all accounts would send Alaska into a building frenzy. Long term, Alaska LNG is seen as a means not only to monetize the state’s stranded North Slope gas reserves, but also as the key to unlocking economic development in the Interior and other remote regions of the state by providing more affordable natural gas to areas that currently rely on fuel oil for heat and diesel for power generation. Former Gov. Bill Walker, the project’s biggest champion, insists increased access to natural gas could spur the development of other, currently economically challenged resource projects across Alaska, notably Interior mines. The Federal Energy Regulatory Commission is scheduled to release the first draft of the Alaska LNG environmental impact statement in February, with a self-imposed final EIS deadline coming Nov. 8, 2019. The subsequent deadline for a record of decision on the project is set for Feb. 6, 2020, according to FERC’s schedule. Gov. Michael J. Dunleavy was roundly critical of Walker’s state-led Alaska LNG Project plan during his campaign, but he has mostly been quiet about his plans for the project — particularly on the financing-partner side — since being elected. Regardless, Dunleavy’s administration is expected to continue the federal permitting effort, given FERC approval would be needed for any iteration of an LNG export project. A record of decision is also expected any day for AGDC’s smaller, in-state Alaska Standalone Pipeline, or ASAP, gas project from the U.S. Army Corps of Engineers. On the North Slope, a couple big projects are in the midst of EIS reviews as are a couple contentious federal land-use plans. The next step for the Nanushuk oil project, now led by Australian-based Oil Search Ltd., is also a record of decision after the Corps issued its final Nanushuk EIS Nov. 2. With the potential to produce upwards of 120,000 barrels per day the Nanushuk project is the largest oil prospect moving towards development in the state. Oil Search Alaska President Keiran Wulff said in November that the company plans to exercise a $450 million option to purchase additional Alaska assets from Armstrong Energy sometime next year. Oil Search bought an operator stake in the Nanushuk project from Armstrong for $400 million in a deal announced in late 2017. First production from the Nanushuk project in the Pikka Unit is scheduled for the end of 2023, according to Wulff. The Bureau of Land Management is in the early stages of drafting an EIS for ConocoPhillips’ $4 billion to $6 billion Willow oil project to the west of Nanushuk in the federal National Petroleum Reserve-Alaska. BLM issued a notice of intent for the EIS in August after the company submitted its “Master Development Plan” for Willow. ConocoPhillips estimates Willow could produce upwards of 100,000 barrels of oil per day at its peak; first oil is pegged for the mid-2020s. A timeline for the Willow EIS is not yet available; however, Deputy Interior Secretary David Bernhardt has issued a directive to Interior agencies including BLM to have environmental impact statements done within a year. BLM also kicked off the scoping period to begin revising the NPR-A Integrated Activity Plan Nov. 21, a move made with the intent of opening more of the reserve to oil and gas leasing and potential road development. The emergence of the Nanushuk geologic formation as a major oil target across the Slope since the last plan was written, as well as advances in drilling technology make it an appropriate time to rewrite the federal land-use plan, according to Assistant Interior Secretary Joe Balash. The most prospective Nanushuk area, according to the U.S. Geological Survey, is in the northeast portion of the NPR-A around Teshekpuk Lake that was made off-limits to oil and gas leasing in the 2013 plan. Balash said when scoping commenced that rewriting the NPR-A Integrated Activity Plan should take about a year or a little longer. The scoping period for the NPR-A plan is open through Jan. 7. To the east, BLM is busy — or will be when the government shutdown ends — working on the Arctic National Wildlife Refuge oil and gas lease sale EIS. The agency released a draft version of the two-volume, 756-page document Dec. 20 on the eve of the shutdown that started at midnight Dec. 21. The draft EIS offers three leasing scenarios with varying limitations on available acreage and activity timing intended to account for wildlife migrations and local subsistence activities. Each alternative would allow for at least 400,000 acres of the 1.5 million-acre ANWR coastal plain to be open for leasing over multiple lease sales Congress ordered be held before 2025. Interior officials have said they very much want to hold the first ANWR lease sale in late 2019, which would require a completed EIS. Public comments on the draft ANWR EIS are being accepted through Feb. 11. BLM has yet another EIS in the works for a project a ways down the Dalton Highway from the North Slope oil fields. The Alaska Industrial Development and Export Authority is leading development of a 211-mile industrial road to access the Ambler mining district, which stretches for about 75 miles along the southern flank of the Brooks Range in the upper Kobuk River drainage. BLM is writing the EIS for the road and the first draft of that document is expected in March 2019, with a final EIS following late next year, based on the current schedule. The $280 million to $380 million limited-access gravel road is seen as the first step towards developing multiple mines in the Ambler mining district, which holds more than 30 known metal deposits; but its remoteness has precluded significant development. Not coincidentally, Trilogy Metals Inc., which for years has been exploring the Ambler district, intends to initiate an EIS for its Arctic copper, zinc and precious metals prospect next year, too, according to CEO Rick Van Nieuwenhuyse. Finally, the long-anticipated draft EIS for the Pebble mine project is expected in January from the Army Corps of Engineers. Corps Pebble project manager Shane McCoy said in a November briefing on the work that the draft EIS will evaluate three development alternatives in addition to the requisite “no-action” option. However, because of the large scope of the project — infrastructure including 35 miles of roads, a subsea natural gas pipeline, a ferry across Iliamna Lake and a major port — the EIS will have multiple “sub-alternatives” for the mine’s support infrastructure, according to McCoy. The draft Pebble EIS will touch on, but not delve into, one of the primary concerns held by those who oppose the project, McCoy said. The Army Corps of Engineers is primarily tasked with adjudicating Pebble’s Clean Water Act Section 404 wetlands fill application — a construction permit. As such, evaluating the likelihood of and potential consequences from a mine waste release is not in the Corps’ purview. That is a job for state Dam Safety Program officials and Pebble hasn’t yet applied for its tailings dam permits. However, McCoy said the Corps conducted a cursory review of spill risks given it was a prominent topic in the comments the agency received during the scoping phase of the EIS. “We did convene folks together for a very high-level spill risk scenarios that included the folks from Pebble, the folks from the state as well as AECOM’s specialists, but it’s at a much higher level than what would be required for an actual dam permit,” he said. AECOM is the third-party contractor tasked with compiling the EIS data for the project. A final Pebble EIS is tentatively scheduled for December of next year. Additionally, Pebble Limited Partnership spokesman Mike Heatwole said conducting a preliminary economic assessment for the project is on the company’s “to-do list” but it’s not a pressing matter at this point. Pebble’s opponents have long questioned the economic viability of the mine, particularly the smaller mine plan the company is currently advancing. Pebble CEO Tom Collier told the Journal in April that he wanted to have an economic analysis of the project published sometime in 2018. Attempting to permit a large mine before conducting multiple reviews of its economics is a departure from typical mine development processes. Corps officials have said they would like Pebble to provide them economic information for inclusion in the final EIS, but Heatwole contended it is not a requirement for completing the document.   Elwood Brehmer can be reached at [email protected]

Uncertainty rings in 2019 for Juneau

The forecast is cloudy with a chance of big PFDs. Alaska’s political future has gotten murkier, not clearer, since Election Day despite the fact that Republicans hold a majority of seats in both chambers of the Legislature as well as the governor’s office. The picture is likely to get a little clearer sometime shortly after the morning of Jan. 4 when the Alaska Supreme Court will hear arguments in the disputed House District 1 race between Republican Bart LeBon and Democrat Kathryn Dodge. The Downtown Fairbanks House race has gone from LeBon holding a slim, 79-vote lead immediately after the election to being certified as a tie by the Division of Elections after Thanksgiving to now a one-vote lead for LeBon after a recount and reviews of disputed ballots. Anchorage Superior Court Judge Eric Aarseth upheld the recount results Dec. 21, but his ruling is still subject to a Supreme Court review of the matter. Control of the state House could hang on the Supreme Court’s decision — due by Jan. 14, just a day before the Legislature convenes in Juneau — but only if Republicans can rein in enough members of their own party. House Republicans staked their claim to control of the chamber immediately following the election with a minimum 21-member majority in the 40-seat body with Healy Rep. Dave Talerico as speaker. However, that control relied on LeBon’s victory and each member consistently toeing the caucus line. It fell apart Dec. 8 when Kenai Republican Rep. Gary Knopp announced he would not be a part of a group with no margin for dissention, contending it would be doomed to fail at some point during the legislative session. Knopp is calling for a bipartisan majority that would stay away from partisan policy issues. Staunchly conservative Wasilla Rep. David Eastman regularly broke from other Republicans in votes and was the House’s lone “no” vote on multiple non-controversial matters last year. Republican Reps. Gabrielle LeDoux of Anchorage and Louise Stutes of Kodiak drew the party’s ire by caucusing for the past two years with Democrats in a bipartisan majority. It appears unlikely, though not impossible, that LeDoux and Stutes will join a Republican-only caucus this go-round. Still, House Republicans congratulated LeBon on his District 1 seat victory in a Dec. 22 statement with “Alaska House Majority” letterhead. The release, signed by 19 Republicans including LeBon, states that “The Alaska House Majority remains strong and welcomes Representative-elect LeBon and additional members joining the team to help lead the Alaska State House of Representatives.” Eagle River Republican Sharon Jackson, appointed by Gov. Michael J. Dunleavy to fill the District 13 seat left by acting Corrections Commissioner Nancy Dahlstrom, did not sign the statement but is likely to caucus with the Republican group. It all leads to the strong possibility that control of the House will be up for grabs when the Legislature convenes Jan. 15. In that case, Republican Lt. Gov. Kevin Meyer would preside as Speaker pro tempore until a majority of the representatives settled on a leader of their own. Policy debates on tap On the policy side, there are so many permutations of what the final formation of the House could be — and more scenarios if Dodge ends up winning District 1 — that nearly everything seems possible. Legislators of all stripes along with Dunleavy have insisted that improving public safety across the state is a top priority for 2019. Criminal justice changes could be made regardless of the makeup of the House given it is a bipartisan issue, but the prospect of a full repeal of the beleaguered Senate Bill 91 criminal justice reform package passed in 2016 is unclear in all scenarios. Dunleavy’s desire to return Permanent Fund dividend payments to their historical, statutory formula is also a bipartisan proposition throughout the Legislature as well; however whether or not it can make it through the Senate, where Republican leaders have stressed the need to use most of the annual Permanent Fund earnings draw for government services in-lieu of new taxes will be a sticking point. Dunleavy called for a PFD calculated by the statutory formula of roughly $3,000 in the budget proposal he inherited from former Gov. Bill Walker. He declined to include PFD “back payments” from the last three years the dividend was set at lower-than-formula amounts by Walker and legislators, but those appropriations could still be part of Dunleavy’s final budget proposal due in mid-February or a separate bill. An Alaska Supreme Court decision that followed Walker’s 2016 veto of half the PFD appropriation declared that the constitutional power to appropriate, either through a veto or through legislative action, trumps the statutory formula and allows the governor or the Legislature to ignore the formula currently in law. Dunleavy said at a debate in Fairbanks on Oct. 24 that he would have to consider whether to veto the budget if the Legislature sends him one without the PFD amount set according to the statute. The combination of back payments and a 2019 dividend totaling roughly $6,700 per Alaskan has been calculated as about a $4 billion appropriation from the Earnings Reserve Account, which holds the spendable portion of the Permanent Fund. The Earnings Reserve held about $16 billion that could be spent as of Nov. 30, according to the Alaska Permanent Fund Corp.’s latest financial statement. However, the fund’s total balance has fallen from nearly $62.3 billion on Nov. 30 to $61.3 billion as of Dec. 20 as financial markets have contracted in recent weeks, according to the APFC. Those losses come out of the Earnings Reserve. Specifically to the budget, the final composition of the House may not have a huge impact on what the final fiscal year 2020 budget looks like if legislators elect to fill a presumed budget deficit from traditional sources. That’s because accessing the state’s remaining savings account, the $1.7 billion Constitutional Budget Reserve, requires a three-quarters vote from each legislative chamber, meaning the ruling majority would have to make budget compromises to use the CBR, as has been the practice in recent years. Legislators could instead fill the current projected $1.6 billion 2020 deficit — destined to ebb and flow on the size of the budget and oil prices — from the Earnings Reserve through simple majority votes, but that would be the closest thing to-date of a true and oft-dreaded “raid” of the Permanent Fund. Elwood Brehmer can be reached at [email protected]

Year in Review: Prices drop, new production, permits for Liberty and ConocoPhillips, tanker transitions in Sound and Inlet

Alaska’s budget got a boost for much of the year, and then oil prices did what they always seem to — the unexpected. For the most part oil prices were on a slow but steady increase in 2018. Alaska North Slope crude went from an average of $66 per barrel in February to more than an $80 per barrel average in October, according to the state Department of Revenue. The consistent increase in value had some market analysts predicting $100 per barrel oil was again in the near future. It led former Gov. Bill Walker’s administration to the conclusion prices would average $76 per barrel for the current 2019 fiscal year, which ends June 30, when they held their annual forecasting session in October. At the time, state officials believed prices would stabilize and average $75 per barrel in 2020 as well. Those price projections would have made for the first balanced state budget since 2012. President Donald Trump’s reapplication of economic sanctions on Iran was expected to keep much of the country’s oil out of world markets, causing a market imbalance that would drive prices upward. However, oil sales waivers in those sanctions to some of Iran’s largest customers meant more oil continued to be available, which sent prices south this fall. By the time Walker’s team had assembled a budget he could present as balanced in late November — an objective that was far out of reach for much of his term — prices had again fallen to the mid-$60 per barrel range. Through much of December ANS crude has hovered just above $60 per barrel. On Dec. 17 the price for Alaska oil fell to $59.22 per barrel, according to the Revenue Department. The Revenue Department is now predicting Alaska oil will average about $68 per barrel in 2019 and $64 per barrel in 2020. 2. GMT-1 starts production, GMT-2 advances ConocoPhillips achieved another accomplishment Oct. 5 when first oil began flowing from its $725 million Greater Mooses Tooth-1 oil project in the National Petroleum Reserve-Alaska. Production from GMT-1 was not only the culmination of years of work for the company, it also marked the first commercially produced oil to come from federal lands on the North Slope. ConocoPhillips first began permitting the project, which is expected to produce upwards of 30,000 barrels per day at its peak, in 2013. Meanwhile, the company also got good news throughout the year on its similar, but slightly larger, Greater Mooses Tooth-2 project about eight miles away. In late August the Bureau of Land Management issued the final environmental impact statement for GMT-2 and selected ConocoPhillips’ preferred alternative for development approval. That became official Oct. 15 when the U.S. Army Corps of Engineers and BLM issued a joint record of decision formally approving the GMT-2 plan. Company executives quickly sanctioned the more than $1 billion project Oct. 25 so construction could begin this winter. First oil from GMT-2 is expected in late 2021 and peak production estimates have gradually grown to nearly 40,000 barrels per day. The GMT projects not only provide substantial sources of new oil, but they are the start of infrastructure development in the NPR-A that industry, the state and the North Slope Borough hope to continue across much of the 22 million-acre reserve. 3. Liberty EIS completed For much of the year it appeared Hilcorp Energy had a clear path to finally building the long-planned $1.5 billion Liberty manmade island oil project just off the shores of the North Slope. In late August the Bureau of Ocean Energy Management approved the company’s plan to construct a 24-acre gravel island in the federally-controlled shallow waters about six miles offshore and just east of Deadhorse in the Beaufort Sea as its preferred option for developing the estimated 330 million barrels of light crude oil at the heart of the project in its final environmental impact statement. Hilcorp Alaska leaders have said the project could produce between 60,000 and 70,000 barrels of oil at its peak. It is planned for a 15- to 20-year production life. A 12-inch, roughly seven-mile, mostly subsea oil pipeline would connect the Liberty Island to onshore oil infrastructure near Deadhorse. Specifically, the pipeline would tie into the Badami oil line, which feeds the Trans-Alaska Pipeline System. However, a consortium of five conservation groups filed suit against BOEM in the 9th U.S. Circuit Court of Appeals Dec. 17, contending the agency did not consider the environmental impacts of a possible oil spill from the project, or its potential impacts on endangered species. BP purchased Liberty from Shell in 1996 after Shell discovered the prospect with four exploration wells in the mid-1980s. BP first planned to build an island to develop Liberty but put those plans on hold in 2001 to further study the project, according to the EIS. In 2005 the London-based oil major proposed drilling ultra-extended-reach wells from onshore to eliminate the need for an island and minimize the project’s impacts on Alaska Native subsistence whaling hunts in the area. That plan was scrapped in 2012 and Hilcorp subsequently took over the project in 2014. 4. Cross-Inlet oil pipeline Hilcorp Energy made quick work of a $90 million endeavor to drastically reduce oil tanker traffic in Cook Inlet and shutter the precariously positioned Drift River oil tank terminal on the west side of the Inlet. The company said in May 2017 that it would commence a long-discussed project to turn a cross-Inlet gas pipeline into an oil line, which along with other work, would allow oil produced from west Cook Inlet fields to arrive at the now-Marathon refinery in Nikiski via pipeline instead of by tanker. Hilcorp held a ribbon cutting for the project, which for years was also a goal for the Cook Inlet Regional Citizens’ Advisory Council Oct. 19 in Kenai. To complete the cross-inlet connection, Hilcorp laid about six miles of new pipe from the Tyonek Platform to the existing west-side pipeline network. The displaced gas will travel through another pipeline that historically carried gas produced from the Tyonek Platform to the now inactive LNG export terminal on the Inlet’s east side. Drift River’s outflow into Cook Inlet is among the few places where the west-side coast has depth to accommodate tankers, but as a location for a crude oil terminal, it has a downside, too; the Drift River tank farm sits in the shadow of the volcanic Mount Redoubt and has been threatened twice by its eruptions. 5. Edison Chouest takes over Valdez tug responsibilities It wasn’t quite a seamless transition, but Edison Chouest Offshore took control of the Ship Escort and Response Vessel System out of Valdez for Alyeska Pipeline Service Co. July 1 as scheduled. The Louisiana-based company was selected by Alyeska to take over for Crowley Maritime Services on a 10-year contract in mid-2016. Crowley previously held the SERVS contract since 1990. The new responsibility required Edison Chouest to build 14 new tugs, spill response barges and other vessels and get them manned and ready for service out of the Valdez Marine Terminal in just about two years. Edison vessels were involved in two accidents in training leading up to the official SERVS handoff but neither resulted in injuries or a fuel or oil spill. On June 27 the 105-foot tug Ingot dented the hull of the oil tanker Florida as it helped the tanker dock at the terminal. A couple days later, an unoccupied skiff was crushed between a tugboat and a barge it was hauling. Alyeska was also at odds with the Prince William Sound Citizens’ Advisory Council, which has strongly advocated for conducting tug training exercises in adverse weather and sea conditions up to the point where normal tanker escorts would be stopped. Alyeska officials contend the bad weather training would put tug crews in unnecessary danger, while the council argues it is the only way to know if crews are prepared to handle conditions they will inevitably face.

Year in Review: Donlin, WOTUS, Ambler and Fort Knox

In August, after nearly 25 years of work, Donlin Gold LLC got one thing every major project developer in the country desires: a favorable record of decision from the federal government. In this instance, it came as a first-of-its-kind joint ROD issued by the U.S. Army Corps of Engineers for the environmental impact statement and by the Bureau of Land Management for the project’s natural gas pipeline right-of-way authorization across federal land. Donlin’s final EIS was published in April; the Corps of Engineers recommended the company’s preferred project plan for approval in its ROD. Later in August the Alaska Department of Fish and Game approved a slew of Title 16 permits for development activity in salmon habitat. Donlin Gold was also one of the primary players in the successful effort to defeat Ballot Measure 1, which would have greatly increased the state’s requirements for obtaining a Title 16 permit and would have seriously challenged development of the mine, especially under its current plan. As envisioned, Donlin would be one of the world’s largest open-pit gold mines, extracting about 33 million ounces of gold over an initial 27-year life. The company is open to partnerships to help build out much of its support infrastructure — including 30 miles of road, ports and a 315-mile gas pipeline from west Cook Inlet to the Kuskokwim River mine site — which could help mitigate some of the high fixed costs the project faces, according to spokesman Kurt Parkan. A 50-50 joint venture between Canadian companies Barrick Gold Corp., the world’s largest gold producer, and NovaGold, Donlin Gold LLC has spent roughly $500 million exploring and permitting the open-pit gold project over nearly 25 years, Parkan said to the Alaska Miners Association in November. Still, that money is not factored into the $6.7 billion estimated construction cost calculated during a 2011 economic study of the project. Parkan said in an interview that the seven-year-old figure is what the company continues to work from; the focus now is on bringing it down. As a result, Donlin’s owners are resistant to putting a definitive timeline on the project, according to Parkan. While Donlin has its federal Clean Water Act Section 404 wetlands permit, the BLM right-of-way and a special permit from the Pipeline and Hazardous Materials Safety Administration, it still needs state approvals that will take several more years to acquire. 2. WOTUS revamped President Donald Trump administration took a big step towards limiting which waters and wetlands the federal government has authority over Dec. 11 when a new, draft version of the waters of the U.S. rule was released. The move is the final step in the Trump administration’s nearly two-year effort to replace an Obama-era version of the rule, oft referred to as WOTUS, finalized in 2015 but challenged in court by 12 states including Alaska. Acting Environmental Protection Agency Administrator Andrew Wheeler and Assistant Secretary of the Army R.D. James signed the proposed rule Dec. 11. The Corps of Engineers adjudicates applications for development permits in navigable waterways across the country on behalf of the EPA. The EPA has the final say over regulating development in and around navigable waters through is Clean Water Act authority. The new WOTUS rule covers traditional, large navigable waters and their tributaries that contribute year-round or intermittent flow and wetlands adjacent to other jurisdictional waters. It focuses on wetlands and other areas with surface water connections as falling under federal jurisdiction. The 2015 rule had a broader scope, including areas with subsurface water flow. Development in waters that fall under the Clean Water Act typically require some sort of mitigation or offset to the impacts of the activity, which development proponents often lament as being very costly. The members of Alaska’s congressional delegation welcomed the announcement in statements from their offices. In February 2017 President Donald Trump issued an executive order titled, “Restoring the Rule of Law, Federalism, and Economic Growth by Reviewing the ‘Waters of the United States’ Rule.” That order led to a lengthy public process to repeal the 2015 rule, which concluded earlier this year. The rule had been suspended from taking effect by the 6th Circuit Court of Appeals in Alaska and the other mostly western states that sued to stop it in 2015. 3. Ambler cost drops; permitting on horizon as road advances Early in the year Trilogy Metals CEO Rick Van Nieuwenhuyse said the overall cost to build and operate the company’s proposed copper, zinc and precious metal mine in the Ambler mining district was coming down. By the end of the year Van Nieuwenhuyse was saying the company plans to start permitting the mine in the first half of 2019. The pre-feasibility study for Trilogy’s Arctic deposit was released Feb. 20 with a development cost of $780 million, up about 9 percent from a 2013 estimate. However, a 60 percent drop in expected annual operating and 20 percent decrease in closure and reclamation costs — to about $65 million each — cut the all-in cost for the initial 12-year mine by 5.5 percent from $964 million in 2013 to $911 million today. Trilogy executives said during a call with investors that the drastic drop in operating costs is due to changes in the plan for waste rock and tailings management, fuel and federal tax reform. The Alaska Industrial Development and Export Authority is leading development of a 211-mile industrial road to access the mining district. The Bureau of Land Management is writing a separate EIS for the road and the first draft of that document is expected in March 2019, with a final EIS following late next year, based on the current schedule. The National Park Service is also preparing an environmental and economic analysis that is also expected to be finished next spring. At its core, the Arctic prospect is about as good as undeveloped metal deposits come these days, according to Van Nieuwenhuyse. With just more than 43 million metric tons of probable reserves averaging 2.3 percent copper, 3.2 percent zinc and smaller amounts of lead, gold and silver, it’s “about 10 times the average grade being mined in open pit copper mines today,” he said in October. The Clean Water Act Section 404 wetlands fill permit from the Corps — large enough to trigger an EIS — is likely the only federal permit the mine will need, according to Van Nieuwenhuyse, noting the Environmental Protection Agency has oversight of the water and air quality permits issued by the State of Alaska. 4. Fort Knox expands Interior business interests got welcome news in June when they heard one of the largest employers in the region should be open for 10 years longer than originally planned. Kinross Gold Corp. announced June 12 that it has decided to move forward with a $100 million expansion to the Fort Knox gold mine about 25 miles northeast of Fairbanks. A feasibility the Toronto-based Kinross conducted on the prospect, known as the Gilmore project, indicates it could yield 1.5 million ounces of gold and initially extend operations at Fort Knox to 2030. Milling at the mine is expected to stop in late 2020 without it, according to Kinross. Now, mining is expected to continue into 2027 with ore processing running to 2030. The mine opened in 1996. Gilmore also increased the proven and probable gold reserves at Fort Knox by 2.1 million ounces to 3.4 million ounces overall, according to a company statement.] CEO J. Paul Robinson said the company will likely be able to fund the $100 million expansion with Fort Knox’s existing cash flow, which will help Kinross maintain financial flexibility. Fort Knox is on land owned by the state Alaska Mental Health Trust Authority; the expansion, known as the Gilmore project, is on a recently acquired 709-acre parcel of state land just to the west of the existing mine pit that was previously held by the federal National Oceanic and Atmospheric Administration. First gold from the Gilmore project is expected in early 2020.

Draft EIS released for ANWR lease sale

Alaskans got their first look at what oil development in the Arctic National Wildlife Refuge might look like exactly one year to the day after Congress ordered the Trump administration to start leasing portions of its coastal plain. On Dec. 20 the Bureau of Land Management released the draft version of the environmental impact statement that will inform what areas of the roughly 1.5 million-acre coastal plain are open to oil and gas leasing and what other sideboards that should be put on oil exploration in the area. The ANWR rider to the Tax Cut and Jobs Act passed last December directs the Interior Department to hold two oil and gas lease sales, each covering at least 400,000 acres of the coastal plain before 2025. It limits permanent development to 2,000 acres of federal land. The Alaska Native village corporation Kaktovik Inupiat Corp. also owns about 92,000 acres around the coastal village of Kaktovik within the refuge, land that would also be open to development. The draft EIS offers three leasing scenarios with varying limitations on available acreage and activity timing intended to account for wildlife migrations and local subsistence activities. The 756-page, two-volume document also includes a “no action” alternative — a part of all environmental impact statements — as a baseline to compare other options against but Assistant Interior Secretary Joe Balash noted in a call with reporters the no action option won’t be chosen because the law mandates lease sales be held. Balash stressed that the input of residents from villages that use the refuge played a big role in how the leasing alternatives were formed, including input from Gwich’in Tribe members who rely on the Porcupine caribou herd as a primary food source and strongly oppose the industry activity. The eastern Alaska-western Canada caribou use large swaths of the coastal plain as calving grounds and what impact oil development could have on the herd has been a primary debate point in the battle over ANWR oil exploration. Exactly how long it will take to finalize the coastal plain EIS is unclear; however, Interior leaders expect to hold the first lease sale sometime in 2019. A 45-day public comment period on the draft is scheduled to commence Dec. 28 when the document is published in the Federal Register. The members of Alaska’s congressional delegation and Gov. Michael J. Dunleavy praised BLM’s work in formal statements. Sens. Lisa Murkowski and Dan Sullivan said they appreciate the diligence with which the agency built the first draft of the Coastal Plain Oil and Gas Leasing Program EIS. “I am particularly pleased to see the serious and necessary considerations for the Porcupine caribou that migrate through the region, as well as the abundant level of stakeholder input — including from the Alaska Natives in the area, the vast majority of whom support responsible drilling in the 1002 (coastal plain),” Sullivan said. “This draft EIS brings us that much closer to unleashing America’s energy potential, filling up the Trans-Alaska Pipeline, boosting our economy, and providing good jobs for Alaskans, all while protecting the ecosystem in ANWR’s 1002 as we’ve done on the rest of Alaska’s North Slope for over 40 years.” The coastal plain has also been dubbed the “1002 area” for Section 1002 of the 1980 Alaska National Interest Lands Conservation Act, which carved out the potential for industry development in the otherwise off-limits 19 million-acre refuge. Dunleavy said the document “is a significant milestone in Alaska’s long journey to responsibly explore and develop the 1002 area in ANWR. The potential oil discovered will spur new jobs and investments for generations to come, extending the life of the Trans-Alaska Pipeline.” The least restrictive to development, Alternative B would open the entire 1.5 million acres to leasing. Industry activity restrictions during the Porcupine herd’s May-June calving season would apply to about 585,000 acres mostly in the eastern portion of the coastal plain. Another 360,000 acres — mostly along the coast and major river corridors — would be leasable but with a “no surface occupancy” stipulation prohibiting construction of permanent facilities there. Activity restrictions along the rivers and coast are a theme in all the leasing scenarios. The remaining 618,000 acres would be open to leasing under the program’s general conditions. The Central Arctic caribou typically migrates into the western half of the coastal plain in July and August but calving takes place mostly on state land just to the west of the refuge, according to the EIS. Alternative C would also open the entirety of the coastal plain for leasing but place the no surface occupancy restriction over more than 930,000 acres including the caribou calving area and major river corridors. Timing limitations on industrial activity would be put on another 317,000 acres and about 314,000 acres would be open with general conditions. Finally, Alternative D would place the most restrictions on development activity in order to protect biological and ecological resources, the EIS states. A little more than 1 million acres would be available for leasing; however, permanent oil and gas facilities would be prohibited over 708,000 acres and another 124,000 acres would have other use restrictions. Sub-options to Alternative D would have the remaining roughly 204,000 acres either be open with general conditions or open with timing limitations. Approximately 530,000 acres of primarily Porcupine herd calving grounds would be off-limits to leasing under Alternative D. Exactly what level of interest industry will have in the coastal plain leases is also unknown. The most recent U.S. Geological Survey assessment of the oil and gas underneath the coastal plain, done in 1998, put the mean oil estimate at 7.6 billion barrels for the coastal plain-1002 area. The USGS additionally estimated there is a 5 percent probability the area holds nearly 12 billion barrels of technically recoverable oil, which says noting of the economics of extracting it. SAExploration Inc. has a 3-D seismic survey plan for the coastal plain before Interior officials, but whether or not the plan will be approved in time for work this winter is up in the air. Balash said the U.S. Fish and Wildlife Service is reviewing the seismic plan for how the work could impact denning polar bears. Elwood Brehmer can be reached at [email protected]

Year in Review: Shakeups lead top stories of 2018

Several analogies can be drawn between the Nov. 30 Southcentral earthquake and the year in Alaska politics even without stretching them too far. Earthquakes, even large ones, are an accepted and to a point expected part of life in Alaska. Admittedly, the lead up to the election in the governor’s race was highly unusual. What was for months a three-way race between incumbent Gov. Bill Walker, Mark Begich and Michael J. Dunleavy suddenly shifted to a head-to-head matchup when Walker dropped out of the race with less than three weeks to go following the sudden resignation of Lt. Gov. Byron Mallott for unspecified inappropriate comments to a woman. Similarly, even many of Alaska’s most ardent Democrats understand the demographic reality that their state’s politics generally lean red. To that point, Republicans retained a majority of seats in the Legislature as they have for years and Dunleavy’s Election Night victory over Begich — built on a broadly popular campaign of being tough on crime and larger Permanent Fund dividends — was widely predicted. And while the earthquake struck just three days before Dunleavy’s administration was set to take over, the work of former Gov. Walker’s team in concert with Dunleavy’s people made for a smooth transition of power in the midst of a natural disaster. One caveat to that was a request by Dunleavy Chief of Staff Tuckerman Babcock that upwards of 800 non-union executive branch employees tender their resignations and reapply for jobs with an expressed desire to work in a Dunleavy administration. Such a resignation request is standard procedure for political appointees during an administration change, but the broader scope of Babcock’s demand was met with vocal disdain among many inside and out of government who felt it was a demand for a loyalty pledge. Still, the largely smooth transition under difficult circumstances was a general reflection of how well Alaskans — from well-trained school kids to on-the-ground Department of Transportation personnel — handled the earthquake. Miraculously no one was seriously hurt or killed in the shaking, and damaged roads were repaired with amazing efficiency. However, there is still much left unfinished in the aftermaths of Election and Earthquake day even though life for most Southcentral residents has returned to normal. Severely damaged schools in Eagle River and the Mat-Su Borough remain closed, as to many businesses in Eagle River. Countless homeowners across the region also still face daunting repairs. On the political front, much is still unresolved as well more than six weeks after the election. While Republicans have regained their usual position at the helm of state government, the state House is in disarray. House Republican leaders quickly formed a 21-member majority caucus a day after the election. However, that slim majority fell apart even before it had a chance to take office. For starters, it relied on House District 1 Republican candidate Bart LeBon maintaining his 79-vote Election Night lead over Democrat Kathryn Dodge — which after counting absentee ballots, questioned ballot reviews and a recount has shrunk to a single vote. Dodge, unsurprisingly, is challenging those results in the Alaska Supreme Court. Additionally, Kenai Republican Rep. Gary Knopp said Dec. 8 that he would be withdrawing from the caucus because the tenuous one-vote majority could be held hostage by the whims of any single member and as such was doomed to fail eventually. Knopp instead has proposed a bipartisan House majority caucus comprised evenly of Democrats and Republicans. At the time of this writing, who will be leading the House when the Legislature convenes Jan. 15 is anyone’s guess. Things are more settled on the Senate side, at least structurally. Republicans retained control of the body, despite taking a blow in Republican Senate President Pete Kelly’s defeat to Democrat challenger Rep. Scott Kawasaki for his Fairbanks Senate seat. Senate Republicans are aligned with Dunleavy on many policy items, but the size of future PFDs, at this point, is not one of them. Along with Walker, Senate Majority leaders last year led the charge to utilize Permanent Fund income to pay for government services and greatly reduce the state’s ongoing budget deficits in-lieu of new taxes; however, the consequence was likely reducing the size of future dividends. Dunleavy used the historical dividend formula in his first budget proposal released Dec. 14, but he refrained as yet from requesting “back payments” from three prior years of reduced dividends at least initially, which was one of his campaign pledges. On the surface both politically and physically, much has returned to normal, but many of the all-important underlying details remain unresolved. 2. Voters reject Ballot Measure 1 The intense statewide debate over whether Alaska should enact sweeping changes to its salmon habitat protection laws came to an abrupt end on Election Night, when voters rejected Ballot Measure 1 by nearly a 25-point margin. What started as a promising year for measure backers, who in January submitted more than 42,000 signatures to the Division of Elections from Alaskans supporting the initiative, ended in disappointment. The business-backed campaign group Stand for Alaska drummed up more than $10 million of support, led by contributions from Alaska’s “big three” oil producers as well as Donlin Gold LLC, which is planning a large gold mine in Southwest Alaska. Stand for Alaska painted the issue as an attack on responsible development in the state. Yes for Salmon backers insisted it was a way to update nearly 60-year old anadromous fish habitat permitting laws and prevent politics from influencing permitting decisions that could degrade salmon habitat over time and leave Alaska trying to restore lost habitat at great expense as other Pacific Northwest states are now doing. Each side argued the other was driven by Outside interests; either activists wanting to “lock up” Alaska or corporate interests wanting nothing more than to fleece the state of its resources and leave. In reality, the eight-page measure would have put strict sideboards on impact mitigation requirements for developments in salmon habitat, while establishing a public input process for the permitting decisions and provided Fish and Game officials with more authority to penalize permit violators. Opponents argued the state permitting regime is already sound and that while adjustments may be needed, the initiative was overly broad and would threaten development. In August the Supreme Court struck a key provision of the initiative as unconstitutional that would have mandated the ADFG commissioner reject any permit for which “major” impacts could not be mitigated on site. Ballot Measure 1 proponents, who raised less than $3 million, or about 25 percent of what Stand for Alaska had to spend, said after the election that the funding disparity made it impossible for them to overcome Stand for Alaska’s messaging that included a barrage of television ads. The opponents countered that they had the better message regardless of the funding disparity. 3. North Slope enjoys “renaissance” ConocoPhillips started 2018 by going “six for six” with its exploration drilling program last winter. The company hit commercial quantities of oil in each of the greenfield wells it drilled, drastically adding to what was already a feeling of optimism among those in the oil industry. Three wells were drilled to better delineate its $4 billion to $6 billion Willow discovery — another Nanushuk prospect — which was first announced in January 2017. Preliminary estimates from the company put Willow at about 300 million barrels of recoverable oil, with production potential reaching 100,000 barrels per day. Alaska oil experts believe the Nanushuk formation, which for decades hid in plain sight, is largely a western Slope phenomenon; it quickly peters out to the east of the Colville Delta. ConocoPhillips’ westward push on the North Slope took reached another milestone Aug. 7 when the Bureau of Land Management began asking for public input as it drafts permitting documents for the company’s proposed multibillion-dollar Willow oil development. The remote Willow prospect is west of the existing North Slope oil fields in the National Petroleum Reserve-Alaska. ConocoPhillips’ initial development plan calls for a central processing facility and pad, up to five drilling pads with up to 50 wells each, access roads, an airstrip and a gravel mine within the NPR-A, according to BLM. The proposal also contemplates a temporary island in state waters to facilitate module deliveries via sealift barges. The company sent BLM a letter in May requesting authorization for the development, a BLM release states. In October, oil production commenced from the company’s Greater Mooses Tooth-1 project in the NPR-A. ConocoPhillips also sanctioned GMT-2 and increased the peak production estimate to 38,000 barrels per day. ConocoPhillips has been busy in Alaska — also trading its interest in a North Sea field for BP’s share of the large North Slope Kuparuk River field — but its activity is in addition to several other large developments that are underway. Oil Search’s Nanushuk project, with the potential for 120,000 barrels per day, received a final EIS from the Army Corps of Engineers in November. Hilcorp Energy’s manmade island Liberty project was also approved by the Bureau of Ocean Energy Management. It is a 60,000 barrels per day development, although environmental groups sued to stop it on Dec. 17. Rough estimates put the cumulative potential production from these and smaller projects — with $13 billion of investment — at upwards of 400,000 thousand barrels per day. 4. POMV passes Gov. Walker saw his signature piece of legislation passed May 8 when legislators approved an endowment-style formula to draw from the Permanent Fund Earnings Reserve with most of the money going to support government. Hailed as a victory for drastically reducing the state’s multibillion-dollar budget deficits while maintaining the long-term value of the $63 billion Permanent Fund by proponents and as a “raid” on the fund by others, the Legislature’s vote on SB 26 cut across all party and caucus lines. At the time, Senate Bill 26 was expected to cut the fiscal 2019 deficit from roughly $2.5 billion to $700 million. Oil prices and production will determine the final budget gap. While each body passed a version of SB 26 in 2017, it languished on the sideline of budget debates for more than a year as the contrasting contingencies put on a POMV draw by the House and Senate made it a particularly touchy subject. SB 26 was the culmination of three years of work by the Walker administration and a handful of legislators, most notably retiring Eagle River Sen. Anna MacKinnon who often sparred with administration officials on other budget issues, but helped shepherd the bill through the Legislature. 5. Oil tax credit resolution faces legal challenge Gov. Walker’s other big legislative victory was supposed to be resolving the state’s $800 million-plus oil and gas tax credit obligation. After contentious debate, the Legislature approved his administration’s unique but untested plan to sell bonds allowing the state to pay them up front while managing cash flow into the future, which is expected to require shoestring budgets for several years. The plan relies on tax credit holders — small oil companies and banks — taking up to a 10 percent discount on the value of their credits to get them paid quicker. The state would turn around and use the discount to cover the cost of borrowing the money. However, questions about the constitutionality of the scheme started early in the session when a Legislative Legal Services attorney issued an opinion suggesting it may fall outside the Alaska Constitution’s tight restrictions on allowing the state to contract debt. Former University of Alaska Regent Eric Forrer put turned legality questions into action shortly after the Legislature passed the plan in House Bill 331 by suing the administration over it. Forrer actually sued before the bill was signed into law, but state attorneys declined to have it dismissed based on the timing issue, acknowledging that Forrer could just re-file the suit. The Superior Court case that many wanted resolved quickly has been slow and winding. A ruling on the state’s initial dismissal motion was expected in early November; however, none has been issued as of this writing. 6. Pebble applies for permits Pebble Limited Partnership finally made good on a long held promise to start the permitting process, which is seen by many as a way to settle the fight over the massive and divisive mining project. The Army Corps of Engineers kicked of the Pebble mine environmental impact statement scoping process last January. Pebble leaders have touted a much smaller mine plan without the use of cyanide for gold recovery, a new transportation plan and revenue sharing payments for area village corporations and tribes as reasons for opponents to reconsider their stance. Bristol Bay Native Corp. and other area opposition groups have been critical of the Corps’ handling of the EIS, which is being done on a two-year timeline for the huge and complex development. In June, Gov. Walker’s administration called for the Corps to suspend the EIS until Pebble offered an economic review of their plan. CEO Tom Collier told the Journal in April that the company was working to develop a preliminary economic assessment on the project by the end of the year, but one has not been published to this point. Pebble backers scored a two-part victory on Election Night when Ballot Measure 1, the salmon habitat initiative, was roundly rejected by Alaska voters and staunchly pro-development Gov. Dunleavy beat former Begich, who has long opposed the mine. 7. Tourism keeps booming More and more people continue to want to come to Alaska. Alaska’s tourism industry continues to record visitor numbers to the state — and more are predicted for 2019. It’s also been one of very few growth sectors in the state’s economy over the past three years. Final numbers for the year are still being tallied, but the total of cruise passengers visiting Alaska was expected to be up 7 percent from the more than 1 million who came to the state in 2017, according to CLIA Alaska. More cruise ships and bringing more people are coming in 2019 as well. According to Travel Alaska, 37 cruise ships will traverse the state’s waters next year. CLIA Alaska says those vessels will carry nearly 1.2 million passengers. Passenger traffic at Ted Stevens Anchorage International Airport was up 3.1 percent through October, according to airport officials. The growth was 5.3 percent year-over-year in the third quarter. In October, Gov. Bill Walker announced direct passenger service between mainland China and Alaska will begin in 2019. TSAIA Manager Jim Szczesniak said in November that the outlook for 2019 is good as well with daily summer service to New York from United. 8. Roadless Rule reopened Gov. Walker’s administration cracked the Roadless Rule code Alaska loggers and other development interests had been working on for years over the course of 2018. In August, former DNR Commissioner Andy Mack and Interim Forest Service Chief Victoria Christensen signed in a working agreement that laid the foundation for the agencies to revise the Roadless Rule on the likely prospect of reopening more Tongass National Forest land to development of some kind. The August agreement was borne out of a petition sent in January from former Walker’s administration to Agriculture Secretary Sonny Perdue requesting a full exemption from the sweeping Clinton-era Roadless Rule that timber companies in the state blame for crippling their industry. By late November the 13-member Alaska Roadless Rule Citizen Advisory Committee picked by Walker had drafted four general options for revising the conservation measure and a list of recommendations for Forest Service officials to consider in their rewrite of the Tongass Management Plan. Several committee members said they felt their work went well and incorporated input from members who spanned the various Tongass stakeholder groups. The four proposed Roadless Rule options include maintaining all existing inventoried roadless areas, or IRAs, except for those with roads that pre-date the rule; removing previously roaded areas as well as areas identified in the management plan for timber production and others where a modified landscape has been deemed acceptable; removing areas in timber production and modified landscape IRAs identified by conservation groups as critical salmon habitat conservation areas in addition to the other exemptions; and, most broadly, removing all IRAs that are not currently designated with a non-development land-use priority, according to the committee’s report. 9. Rural health care funding fight In May, the Cordova Community Medical Center received a shut-off notice from Alaska Communications for its broadband services unless a balance of nearly $1 million was paid by June 30. Federal Communication Commission Chairman Ajit V. Pai stepped into the dispute and warned the Anchorage-based telecom provider that it’s against the Communications Act to shut down services. However, the Cordova Hospital wasn’t the entity not paying its bill. At that time, Alaska Communications hadn’t received funding for going on 11 months through an FCC that bridges the high cost of bringing broadband service to rural Alaska, called Rural Health Care, or RHC. The Cordova hospital is just one of about 40 rural health care facilities that Alaska Communications supplies broadband services. Alaska Communications and fellow in-state telecom GCI Liberty were owed millions from the RHC program through the first half of the year. By law, Internet service providers have to serve rural health care clinics at the same cost they give to urban health care clinics, and to make up the difference, they can apply for funding through the RHC program. The catch is that they have to justify the rates they’re charging for rural connections. After an investigation, the FCC found that two non-Alaska carriers were inflating their rural rates to increase their payments from the program in 2017 and fined the companies about $40 million. The agency then requested more information from the participating companies to justify the rural rates they charged. That proved to be an issue for Alaska telecom providers, where Internet connections are notoriously expensive and limited outside urban centers. The FCC announced Oct. 10 that GCI would receive $77.8 million in funding through the program. That’s about $28 million less than the company requested in its cost estimates. GCI objected, saying in an Oct. 12 press release that the reduction from the funding request essentially forces the company to swallow $28 million in services that had already been provided. The FCC emphasized the “fiscal responsibility” of the decision to reduce the funding to GCI in a prepared statement. Alaska Communications previously outlined the difficulties in meeting the information request specifications for the FCC to approve its rural rates. As of mid-October, most of the requests from the providers the company served in 2017 had been approved, but a handful had not yet been approved and therefore not funded, according to an Alaska Communications spokeswoman. In June 2018, the FCC increased the available funding from $400 million to $571 million, which has since been scaled to $581 million for inflation, according to an FCC spokesman. 10. NPR-A plan revisions Led by former Alaska Department of Natural Resources commissioner Joe Balash, in November Bureau of Land Management officials began the process of reopening the National Petroleum Reserve-Alaska Integrated Activity Plan on the prospect of opening more areas to oil exploration. Now an assistant Department of Interior secretary, Balash said in a call with reporters that the emergence of the Nanushuk geologic formation since the last plan was written — the primary source for two discoveries with the potential to produce upward of 100,000 barrels per day each — as well as advances in drilling technology make it an appropriate time to rewrite the federal land-use plan. One of those discoveries, ConocoPhillips’ Willow prospect, is in the eastern part of the NPR-A. BLM is in the early stages of an EIS for the $4 billion to $6 billion Willow project. The most prospective Nanushuk area, according to the U.S. Geological Survey, is in the northeast portion of the NPR-A around Teshekpuk Lake that was made off-limits to oil and gas leasing in the 2013 plan. Last December the USGS dramatically increased its mean recoverable oil estimate for the reserve to nearly 8.7 billion barrels. The Bureau of Land Management started a 45-day scoping period Nov. 20 to seek input on what should be considered in drafting the environmental impact statement, or EIS, that will drive the work. State and local officials have also pushed BLM to reconsider the current land use plan for the reserve. The North Slope Borough is a major financial benefactor of oil development in the NPR-A as the local government, by federal law, is eligible to use up to half of the federal royalty revenue from oil production in the NPR-A for capital grant projects. On Dec. 12 the agency held its annual NPR-A oil and gas lease sale. BLM received 16 bids over 16 oil and gas leases covering 174,044 acres, which netted a total of $1.13 million. Balash concluded that the relative lack of bidding compared to what has happened recently on nearby state lands “underscores the need for us to take a look at the NPR-A Integrated Activity Plan.”


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