Elwood Brehmer

Anchorage utilities, mayor announce $1B consolidation deal

Anchorage’s mayor and electric utilities will ask the city’s voters to approve a $1 billion deal that would consolidate the two utilities and save ratepayers “hundreds of millions of dollars” over many years, according to utility officials. Mayor Ethan Berkowitz and the leaders of Chugach Electric Association and Municipal Light and Power held a joint press briefing Thursday morning to announce their plan for Chugach to buy city-owned ML&P for roughly the $1 billion figure. “It will benefit taxpayers over the long haul and in the short haul. It will benefit ratepayers. It also does a lot for the municipality in terms of stabilizing our revenue picture moving ahead, which is very critical in terms of making sure that our economy is on a firm footing regardless of what happens at the state level,” Berkowitz said. The prospect of a single electric utility in Anchorage has long been discussed; Chugach CEO Lee Thibert said this is the third time it has been analyzed in his 30-year career with the cooperative. The presumption has been that the duplicative overhead needed to run two utilities in a city with a current population of about 300,000 is unnecessary. “There’s lots of things that are very identical with the two organizations and it just makes sense to put this all together,” Thibert said. City-owned ML&P services Downtown and Midtown Anchorage, as well as Joint-Base Elmendorf Richardson. Chugach, a member-owned cooperative utility, covers the remaining majority of the city and small portions of the northern Kenai Peninsula Borough. Because the municipality owns ML&P selling it requires voter approval, Berkowitz will ask the Anchorage Assembly to put a proposition on the April 2018 municipal ballot to allow the sale. The Chugach Board of Directors will also vote on the sale and, as a result of nearly all of Chugach’s member-customers being Anchorage residents, they will get their say through the city vote as well. What Anchorage residents will think of the plan is unclear, but the utility officials said they haven’t heard from anyone who thinks it is a bad idea. If approved by voters, the Regulatory Commission of Alaska would then have its say, an approval process that can take up to six months. That likely puts a final closing date sometime in very early 2019, Thibert said. He estimated the aforementioned savings would be wrought over 30 to 40 years by basically by having one of everything an electric utility needs instead of two — likewise for repetitive operational activities. Industry experts have said the six Railbelt utilities from Fairbanks to Homer have about as many customers as an average Lower 48 utility, albeit over a comparatively vast geographical region.  “Obviously when you put to organizations together you get efficiencies that generate revenue that you wouldn’t get otherwise; it’s a reduction in cost so you can maintain the rate levels the way they are and (decrease rates) over time.” Thibert added. ML&P General Manager Mark Johnston said the rates the utilities charge are usually very similar. “We kind of trade back and forth who’s number one and who’s number two in best rates,” he commented. It was stressed at the press briefing that no layoffs will be associated with the deal, should it go through. Thibert said Chugach would whittle the combined workforce through attrition and reorganization, noting each utility currently has a fair amount of vacant positions. Specifically, Chugach would take on $695 million of debt, make incremental payments to the city totaling about $170 million and continue making the municipal utility service assessment payments, which are essentially ML&P’s payments to the city in-lieu of property taxes, according to Thibert. He also noted that current low interest rates lessening Chugach's borrowing costs make the deal all the more appealing now. Berkowitz said it would allow the city to pay down about $525 million in debt and make additional contributions to its trust fund. Part of debt Chugach would take on would cover a $170 million direct payment to the Municipality of Anchorage, while the rest would be assuming ML&P’s outstanding obligations. They said a series of meetings held by the Anchorage Economic Development Corp. last spring examining how to lower electric rates helped restart the consolidation conversation. At those meetings, a national utility consultant said merging the utilities is the single biggest step that could be taken to capture savings. Subsequent to that the Anchorage Assembly passed a resolution in June encouraging the utilities to examine a merger. Berkowitz said it quickly became clear a straight merger wasn’t feasible because of the inherent challenges in blending a member-owned cooperative with a government-owned utility so discussions evolved into what it would take for Chugach to buy ML&P. The deal, while not expected, is almost a natural evolution considering the multiple ways Chugach and ML&P have partnered in recent years. In January, Chugach, ML&P and adjacent Matanuska Electric Association announced a voluntary power pooling agreement through which the three will trade power down to the hour based on demand requirements. Pooling demand and generating capacity allows the utilities to more fully capture the fuel savings and other operational efficiencies provided by the new generation plants each has put into service since 2013. In 2016 they bought into the Cook Inlet Beluga River natural gas field to gain a reliably priced long-term fuel supply. The two also jointly own the west Anchorage Southcentral Power Project generation plant built in 2013.   Elwood Brehmer can be reached at [email protected]

Pebble Partnership to finally file permit application

The Pebble Limited Partnership has long been criticized for many things, but as of Friday that list will no longer include failure to file for environmental permits. Pebble and its Vancouver-based parent company Northern Dynasty Minerals announced Thursday their plans to file for a Clean Water Act Section 404 wetlands fill permit with the U.S. Army Corps of Engineers on Friday, Dec. 22. Northern Dynasty leaders said early in the year they planned to start permitting for the wildly controversial project by the end of the year, a promise that was met with understandable skepticism. They will have made good on it with nine days to spare. Pebble Partnership and its ownership groups, which have varied over the years, had consistently been faulted for making numerous claims dating back to 2005 that they would soon start the environmental reviews. The permitting process is also seen as one way to eventually provide closure for those on each side of the contentious debate over whether the world-scale mine proposed at the headwaters of a world-scale salmon fishery is appropriate. “For the Pebble team, this day has been a long time in the making and is the result of a tremendous amount of hard work,” Pebble CEO Tom Collier said. “We have listened to our stakeholders, supporters and skeptics, and are presenting a much smaller mine with enhanced environmental safeguards. Since I have been with the project, my main focus has been to initiate the permitting process so that Pebble can be fairly and objectively evaluated by the independent experts hired by the Corp of Engineers.” In 2014, the Environmental Protection Agency proposed blocking Pebble based on a larger mine concept outlined in financial disclosure filings by Northern Dynasty. Shortly thereafter Pebble Partnership sued the EPA, claiming the agency’s actions were made on a biased, anti-mine premise and that it illegally colluded with opponents of the project. That suit was settled in May and since the EPA is currently evaluating public comments on whether to lift the proposed determination that would prohibit the project. With a total mine facilities footprint of 5.4 square miles, the new plan is less than half the overall size contemplated by the EPA but still larger than the 4.2-square mile footprint the agency said could be acceptable. In statements issued shortly after Pebble’s announcement, opposition groups said the permit filing changes little, other than renewing determination to stop the project. “It took Pebble Limited Partnership 12 years just to file the paperwork asking the Army Corps to look at this project,” Bristol Bay Economic Development Corp. CEO Norm Van Vactor said. “The bar is set very low, indeed, if merely filing an application is cause for celebration. Bristol Bay fishermen file paperwork for their permits every single year, without fanfare. And here in Bristol Bay, we will choose our sustainable commercial fishery that generates thousands of jobs over a short-term development project.” Earlier in the week on Tuesday, Northern Dynasty issued a statement saying it is close to finalizing a deal with fellow Canadian mining firm First Quantum Minerals for investment in Pebble. Northern Dynasty is the sole owner of Pebble after previous partners Anglo American and Rio Tinto walked away from the controversial copper and gold project several years ago. In the case of Anglo American, the company ended its partnership on the project in 2013 after spending $541 million on exploration. Since then, company officials have acknowledged the need for a large investment partner to fund Pebble’s development. Under the terms released of the preliminary deal, First Quantum would contribute $150 million to Pebble over up to six years with a $1.35 billion option to buy a 50 percent stake in the project. In a Thursday interview Collier said he expects to have the partnership finalized by the middle of next year. Collier said his company doesn’t yet have a solid cost estimate for the scaled-back mine plan he unveiled in October, but that would materialize as permitting plays out. Alaska Army Corps officials said Thursday that the wetlands fill permit application detailing the types and volumes of fill material the project will use and the area of wetlands it is expected to cover would first be subject to a 15-day completeness review. If the wetlands application is deemed complete the Corps will then issue a public notice saying as much and — given the size of the project — issue a subsequent determination that the project needs to go through the full, multi-year environmental impact statement process. Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Tax overhaul, ANWR heads to Trump’s desk

When President Donald Trump signs the federal tax overhaul into law the coastal plain of the Arctic National Wildlife Refuge will be open to the oil industry. Most Alaskans are happy about it, some aren’t. In the Lower 48 the public seems more split on the issue, if not slightly against it. After 37 years of debate, what more is there to say? The members of Alaska’s congressional delegation, who got the last words on ANWR in Congress when the tax bill passed, wanted to add a little more in a Wednesday morning press briefing with Alaska reporters. “This is a pretty historic day,” Sen. Lisa Murkowski said, and in recognition of it being winter solstice, she added opening ANWR is an “opportunity for Alaskans that will bring many bright days for Alaska.” Rep. Don Young, noting it’s the 14th time he’s shepherded ANWR legislation through the House, compared it to the day in 1973 when Vice President Spiro Agnew cast the tie-breaking vote in the split Senate to authorize construction of the Trans-Alaska Pipeline System. He also gushed about his colleagues in the delegation. “The work these two senators put in is awesome,” Young said. Sen. Dan Sullivan said the ANWR victory should provide a psychological boost to Alaskans struggling through a two-year recession. In a broader sense, Sullivan also said the tax vote is proof that “elections have consequences,” as tax reform is something Republicans in Congress have been pushing for seemingly as long as the Alaska delegation has been stumping for ANWR. Young said the delegation got commitments from House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell early in the year that opening the coastal plain would be a priority in Congress. Murkowski said technological advancements allowing more oil to be extracted via a smaller footprint and the industry’s diligent environmental practices on state lands on the North Slope helped overcome old arguments about how oil activity would damage the fragile Arctic ecosystem. “We heard the same tired rhetoric that we’re going to turn this into an industrial wasteland,” she said. “The way that we operate up there is second to none.” The ANWR rider directs the Interior Department to hold two oil and gas lease sales of at least 400,000 acres each in the coastal plain within the next 10 years, but it authorizes total development of just 2,000 acres in the 1.5 million acre area, the delegation again stressed. Sullivan went a step further, calling opposition arguments “dishonest” and saying, despite claims the oil industry spent millions of dollars supporting the effort, it was actually Outside environmental groups that spent money on the debate. “This was a grassroots effort; it was the three of us and Alaskans that came to testify, that was it,” Sullivan said. “People were tired of the stale talking points by (Washington Democrat Senator) Maria Cantwell and others.” Young went all the way, calling anyone who criticized the plan to drill for oil in the wildlife refuge “very stupid.” Young has also said recently that current oil estimates in the refuge are probably close to 20 billion barrels of available oil. 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. With the political battle for ANWR all but over — at least until Democrats eventually regain control in Washington — now comes the legal fight. Environmental groups will assuredly sue Interior at every turn to at least delay the lease sales. The law mandates Interior hold the lease sales after going through a lengthy National Environmental Policy Act review. It’s unclear what happens if the conclusions of the environmental study don’t support development. What appetite the industry will have for exploring in ANWR given the strong emotions it evokes from much of the public is also unknown. That leads to questions about whether the 800,000-plus acres to be offered in lease sales can generate the $1 billion in federal revenue that’s expected — which is actually $2 billion because the State of Alaska gets half of all revenue from ANWR, per the legislation. Murkowski acknowledged “it will likely be a decade-plus” before ANWR oil production starts, but said the state has waited 37 years and can wait a little longer. “Now we at least have the opportunity we haven’t had,” she said. Elwood Brehmer can be reached at [email protected]

YEAR IN REVIEW: Pebble promises permit application after hurdles fall

This was the first good year in a long time for Pebble Limited Partnership and its owner Northern Dynasty Minerals and equally as bad a year for those trying to stop the massive mining project. After months of talks, the Environmental Protection Agency and Pebble Partnership settled a lawsuit in May that the company filed against the agency in 2014. The suit claimed the EPA, under the Obama administration, was biased in its drafting of the Bristol Bay Watershed Assessment and colluded with anti-mine scientists to reach the conclusion that a large, open-pit mine would cause too much damage to the region’s fisheries. The 1,000-plus page assessment was the basis for the EPA’s 2014 attempt to use its Clean Water Act authority to ostensibly prohibit development of Pebble. Per the settlement, the EPA is in the process of withdrawing its Clean Water Act 404(c) proposed determination and Pebble has 30 months and counting from the time of the May 12 agreement to file for the project’s federal permits. However, Pebble also agreed that the watershed assessment, the only official scientific document examining the potential impacts of the project, would remain valid. The EPA under the Trump administration is just not invoking it any longer. In early October Pebble released a new, smaller mine plan than original concepts that entails a reduced overall footprint and fewer roads to reach it by way of a ferry across giant Iliamna Lake. Pebble executives left open the possibility of expanding the mine after initial development and noted that would require a separate permitting process of its own. They also proposed setting up a corporation to distribute revenue from the mine to local Native village corporations and directly to area residents once it is in production. Most recently on Dec. 18, Northern Dynasty and fellow Canadian mining company First Quantum Minerals announced the framework of an investment deal in which First Quantum could put $150 million into the project over up to six years. The first $37.5 million would go towards permitting costs but First Quantum is still evaluating whether or not to finalize the potential investment, according to its press release about the deal. It could also buy a 50 percent stake in the project for $1.35 billion, according to Northern Dynasty. The parent company to Pebble has said it will need a large investment partner to help fund development and wants to secure one by the end of the year. Additionally, Pebble leaders have said they plan to file environmental permit applications by the end of 2017, which is coming soon. (Editor's note: This story has been changed to correctly state that the EPA is in the process of withdrawing its 404(c) proposal, but has not done so yet.) No. 2: Habitat initiative heads to Supreme Court Three Alaskans from Bristol Bay and Talkeetna filed a proposed ballot initiative to overhaul the state’s anadromous fish habitat permitting requirements and another fight over what are acceptable rules for development in and around salmon habitat has predictably followed. Proponents contend the “Stand for Salmon” initiative would give the Department of Fish and Game much-needed enforcement authority over unlawful salmon habitat disruption, which they say it currently lacks. They further note the state actually has no formal permitting structure for development in salmon habitat; rather, just a couple vague lines of statute that direct the department to authorize projects that provide “proper protection of fish and game.” In a June 30 letter to the sponsors, the Department of Law deemed the first iteration of the initiative an unconstitutional allocation of resources and would prohibit projects such as the Pebble and Chuitna mines and Susitna-Watana dam, which the initiative sponsors have opposed. After the sponsors revised the initiative, Lt. Gov. Byron Mallott still rejected it based on the opinion of Law Department attorneys and wrote that the measure “essentially usurps the Legislature’s resource allocation role.” He has insisted the state’s position is based on the constitutional implications and has nothing to do with the politics. In an interesting twist, Elizabeth Bakalar, the assistant attorney general assigned to the matter, said the June 30 letter was in large part a response to industry concerns about the initiative that the department heard. It is the same type of opinion state attorneys issue on any ballot measure, except earlier, she said. She commented that the department isn’t likely to issue “courtesy” opinions in the future because this one has been incorrectly perceived as the state helping the petitioners. However, it could just as easily be seen as a way to calm development industry concerns by clarifying ahead of time that the initiative would not be certified. The petitioners appealed to the Superior Court and Oct. 9 Judge Mark Rindner overturned Mallott’s decision, meaning the initiative could be put on the 2018 ballot. The state Supreme Court has instructed lower courts interpret initiatives broadly to give voters a say whenever possible, Rindner noted in his order. The state appealed Rindner’s ruling to the Supreme Court Oct. 25. The high court has since been quiet about its path forward and in the meantime the sponsors are gathering the required signatures to place it on the 2018 general election ballot. No. 3: NANA rebound High zinc prices made it a much better year for NANA Regional Corp. NANA, the Native regional corporation for Northwest Alaska, owns the Red Dog Mine — one of the largest zinc mines on Earth — that is operated by Vancouver-based Teck Resources Ltd. In September, Teck said it expects production from Red Dog to be between 525,000 and 550,000 metric tonnes this year. Output in that range would be about 10 percent above prior production forecasts. Zinc sold on spot markets for between 80 cents and about $1 per pound for several years before dipping to 70 cents per pound in early 2016. Since, the corrosion-resistant metal commonly used in steel coatings has steadily increased in value to its current spot price of about $1.45 per pound. NANA CEO Wayne Westlake said Red Dog’s increased revenue of late has largely made up for the recent decline in 7(i) distributions brought on by $50 oil. He noted that the resource development payments — required to be shared among the 12 Native regional corporations, with NANA a major contributor for its mineral royalties — are often one of few private cash flows going into rural Alaska communities. While the oil price depression hit Native corporations through revenue sharing, NANA is also among the group of corporations that is heavily invested in the business side of Alaska’s oil and gas, with seven subsidiary firms working on the support services side of the industry in Alaska, Colorado and the Gulf Coast. About 40 percent of NANA’s revenues come from the oil and gas sector in some fashion, according to company leaders. That led to NANA absorbing a $109 million loss in 2016 and its business operations company, NANA Development Corp., also had its credit rating downgraded last year as a result of its oil business struggles. No. 4: Ambler Road permitting begins with AIDEA in lead Development of the Ambler Mining District road project is now in federal hands. The Bureau of Land Management issued a Federal Register notice Feb. 28 requesting public input regarding what topics the agency should consider in drafting the environmental impact statement, or EIS, for the mining access road. Early environmental and financial study work for the proposed gravel road running west from the Dalton Highway for 211 miles to the remote Ambler Mining District has to this point been led by the state Department of Transportation and more recently the Alaska Industrial Development and Export Authority. The Ambler Mining District stretches for about 75 miles along the southern flank of the Brooks Range in the upper Kobuk River drainage. It has long been identified as an area of great potential for copper, zinc and precious metals but access issues have largely inhibited development. Vancouver-based Trilogy Metals Inc., formerly NovaCopper, is one company that has been busy exploring multiple prospects in the region. According to Trilogy, its well-defined Arctic deposit in the Ambler district likely holds about 2.3 billion pounds of zinc, more than 1.7 billion pounds of copper, 40 million ounces of silver and a small amount of gold. No. 5: Southeast exploration Alaska Mental Health Trust Land Office officials keep plugging away at their heavy mineral prospect on the Gulf Coast near Yakutat. In October, the Mental Health Trust Authority Board of Trustees approved $3 million more for exploration at the Icy Cape prospect in 2018. The prospect is a long stretch of coastline about 75 miles northwest of Yakutat in Southeast Alaska owned by the trust at the entrance of Icy Bay that appears to hold world-class deposits of several heavy minerals. The entirety of the area is roughly 48,000 acres and stretches for more than 30 miles along the Gulf of Alaska coast. Trust Land Office leaders have stressed that they are still in the preliminary exploration phase of evaluating the prospect but early drilling samples from the broad delta at the point of the cape indicate the ore there could be up to 40 percent heavy minerals. Overall, an average of 26 percent of the sands are heavy minerals, according to the Trust Land Office reports. The minerals of value in the “ore” — which is mostly old beach sands — are roughly equal portions of epidote and garnet in the areas of highest concentration with small amounts of zircon and even gold. Epidote and zircon are semiprecious gemstones. Garnet has also been used as a gemstone for hundreds of years, but more recently the hard mineral has been put to use as an industrial abrasive on sandpapers and in sandblasting applications. It is also used in water filtration; garnet’s small pores allow for the passage of liquid while catching some contaminants. If developed, the Trust property would be the only source for garnets on the West Coast, Land Office officials have said.

YEAR IN REVIEW: Port project, King Cove, Alaska-Virgin merger

Anchorage municipal attorneys settled half of their tangled litigation over the long-failed Port of Anchorage expansion project but it was more of the same for port officials trying to drum up hundreds of millions of dollars for the scaled back but badly needed modernization plan. In less than a week starting Jan. 26, municipal attorneys filed documents in U.S. District Court of Alaska announcing settlements with four defendants — CH2M, GeoEngineers Inc., Integrated Concepts and Research Corp., and PND Engineers Inc. — stemming from the lawsuit filed in early 2013 seeking damages for the failed construction project. The municipality started resolving the case in June 2016 when it settled with MKB Constructors, a construction company that partnered with Quality Asphalt Pavement to install the PND’s proprietary Open Cell Sheet Pile dock design, which was at the heart of the court dispute. Work on the project — started way back in 2003 — was halted in 2010 and never resumed after extensive damage to installed sheet pile was discovered. In total, the Municipality of Anchorage settled the port lawsuit against the contractors for $19.35 million. The legal battle now turns to Federal Claims Court, where the city is also suing the U.S. Maritime Administration, claiming its management incompetence over the project led to the construction problems. The city is seeking upward of $300 million in that case but it is progressing very slowly. Port officials are moving ahead with the new plan to replace the existing docks, but that is expected to cost roughly $700 million. They are hopeful phase one — mostly a new fuel and cement terminal — of the five-part project can be done with the $127 million left from the first project. Without the new docks the port has about 10 more years before the steel sleeves now being installed to patch the corroding dock supports start rusting away themselves and begin to limit operations, they say. And that’s if an earthquake doesn’t knock it offline sooner. In June, a cruise ship was docking at the port when a 57,000-pound fender fell off the dock because the steel supports gave way due to corrosion. Luckily, that was the worst of it. As a result the city is examining all options to pay for the new project since state support has to date been nil. That could even include selling the to port to private investors if someone else is looking for a $700 million burden, however slim that prospect might be, according to Port Director Steve Ribuffo. In a ceremonial attempt to drum up funding support the Anchorage Assembly changed its name to the Port of Alaska on Oct. 24, a gesture intended to emphasize the importance of the ailing infrastructure to all of Alaska, not just its largest city. Gov. Bill Walker included $40 million, with a requisite municipal match, from the state for the port in his $1.4 billion plan to address the state’s backlog of infrastructure maintenance — a start — but that has many political hurdles to overcome. No. 2: King Cove road revived Proponents of a road from King Cove to Cold Bay feel renewed hope under discussions with Interior Secretary Ryan Zinke’s administration for a different land swap than was proposed in the past. Discussions involve setting up a federal lands appraisal process on 200 to 300 acres owned by the King Cove Corp. that could be swapped with the federal government for land to complete the road with an 11-mile connection through the Izembek National Wildlife Refuge to reach Cold Bay and its all-weather airport. Under previous administrations since 1997, the community has struck out at attempts to gain the road. At issue is the wildlife refuge designation and its habitat for 98 percent of the Pacific black brant goose worldwide population, according to the Interior Department. Alaska’s congressional delegation and several Alaska governors have pushed for the road between the small, isolated communities, as it would link King Cove to the large runway at Cold Bay and provide a safer route to Anchorage for those in urgent need of medical care in a region known for treacherous weather. In June the Alaska Department of Transportation began survey work to identify the least impactful route for the road through the refuge, which took a few weeks. By July the U.S. House passed standalone legislation with bipartisan support approving the land swap. The Alaska DOT estimates the road will cost about $30 million, which will likely be paid for by the state. Sens. Dan Sullivan and Lisa Murkowski are likely to pick the legislation effort back up in the New Year after the major tax and budget issues are resolved in Congress. No. 3: Alaska-Virgin merger materializes The parent company to Alaska Airlines, Horizon Air and now Virgin America started the year by reporting a $911 million profit in 2016, a seventh consecutive year of record earnings. However, the rest of the year was a little more turbulent for the growing company trying to compete with the industry’s giants. Profitability was not the issue; Air Group continued to report solid financials but its airline’s trademark service started to suffer. Alaska Airlines has long been the top on-time domestic carrier, but since bringing Virgin America into the fold in the fourth quarter of last year those numbers have fallen. Through September, 82 percent of Alaska Airlines flights arrived on time, which is down 6.5 percent year-over-year. For Virgin America-flagged flights the numbers are worse. Just more than 67 percent of Virgin flights have been on-schedule this year, a decrease of 9.3 percent. Additionally, Horizon Air continues to face the same problems retaining pilots as many regional carriers across the country, an issue that forced the airline to curb its schedule in August and September, Air Group CEO Brad Tilden acknowledged in October. Also in October, company officials said after a roughly four-year experiment, Horizon will stop its service in Alaska next March. The regional carrier has been operating flights for Alaska between Fairbanks, Anchorage and Kodiak. Horizon’s routes in the state will be picked back up by Alaska Airlines Boeing 737s. Alaska Airlines is also spending about $100 million upgrading its rural Alaska terminals and is working on a new $40 million hangar at Ted Stevens Anchorage International Airport to accommodate its newer, larger 737s. No. 4: DOT MOU The Alaska and federal Transportation departments inked a deal in August allowing the state to assume permitting responsibility on federally funded projects, which should speed environmental reviews and save government money, according to the agencies’ leaders. The memorandum of understanding, or MOU, shifts environmental assessment and environmental impact statement drafting from U.S. DOT sub-agencies to the state Department of Transportation and removes duplicative federal processes and “interagency squabbling,” DOT Secretary Elaine Chao said during a trip to Alaska. The State of Alaska will still follow the National Environmental Policy Act processes with oversight from its federal counterparts, but will issue its own decisions at the end of the reviews. The standard 90-10 federal-state split on funding for large highway and airport projects still applies regardless of who is leading the studies, so the state will not be adding cost burdens, Alaska DOT Commissioner Marc Luiken said at the time. No. 5: Railroad, MOA fight over funding In April, the Alaska Railroad issued its 2016 financials and reported a $7.4 million loss, the railroad’s first annual loss since 1999, and blamed it on Anchorage Mayor Ethan Berkowitz. That’s because Berkowitz refused to sign a letter agreeing to split federal transportation funds between the railroad and the city; the mayor said the railroad was getting the money on technicalities and the city could better use it for the true public transportation operations as the feds intended. The standoff that started in 2016 had left more than $23 million with the feds — roughly $15 million for the railroad and $8 million for Anchorage under the earned split — for last year and the first half of 2017, as the Federal Transportation Administration would not release the money without the split letter. However, by August the sides agreed to resume the historical funding split, with a property sale driving the resolution. Berkowitz said the 20.2-acre railroad property, to be sold to the city for $1.5 million, is “a critical piece” of land that will help the city progress its much-needed overhaul and modernization of port infrastructure. Because the railroad is owned by the state, the property sale will have to be approved by the Legislature and railroad officials will be in Juneau next spring to make that happen.

YEAR IN REVIEW: Credit program scrapped; Slope discoveries expand

It took six months of debate but the Alaska Legislature ended the state’s refundable oil and gas tax credit program in July — something all sides agreed needed to happen from the get-go. The lengthy debate mostly centered on the House Majority’s push to link a production tax overhaul and increase to the tax credit legislation. The version of House Bill 111 that Gov. Bill Walker ended up signing was much more what Senate Republicans wanted without the tax changes; it ended the 35 percent net operating loss credit for small North Slope operators and expedited the credit phase-out plan passed for Cook Inlet in 2016. The Department of Revenue estimates repealing the cashable credits will save the state roughly $150 million per year over the long-term; however, House Majority members noted that the bill simply swaps what would have been a cash expense into less future tax revenue as companies can still apply the credits as tax deductions against their production taxes. The House coalition did score a victory in that the bill included a provision that allows companies to hold deductions at full value for seven years, after which the value decreases by 10 percent per year. The “downlift” provision is intended to spur development activity by limiting how long the maximum value of the tax deductions can be realized. Lesser used exploration credits for Interior Alaska — mostly used by Native corporations — and refinery and LNG storage credits were not cut in HB 111, but those generally sunset in 2020 or 2021. No. 2: Oil Search buys into Nanushuk Responsibility for Alaska’s largest oil prospect is going to change hands for the second time in three years in 2018 as a result of an $850 million deal between Armstrong Energy and Alaska newcomer Oil Search. Australia-based Oil Search announced the terms of its agreement with Armstrong Oct. 31. Under the deal, Oil Search will get a 25.5 percent stake in the Pikka Unit — which is operated by Armstrong and holds the 1.2 billion barrel-plus Nanushuk oil prospect — and a 37.5 percent interest in the “Horseshoe” leases to the south. Armstrong currently operates the Pikka Unit for its partners Denver-based GMT and Spanish major Repsol. Armstrong is also in the midst of the environmental impact statement process to develop the Nanushuk field, which could produce up to 120,000 barrels of oil per day. The same formation in the National Petroleum Reserve-Alaska is where ConocoPhillips announced a discovery in January it dubbed “Willow” it estimates could produce 100,000 barrels per day. Oil Search has its primary operations in Papua New Guinea and will take over as operator of Pikka from Armstrong on June 1, 2018, according to a company release. The company also has until June 30, 2019, to buy the rest of Armstrong’s and GMT’s interests in the prospects for another $450 million. Oil Search executives said in an interview with the Journal they expect to exercise the $450 million option. Repsol and Oil Search are partners in oil and gas projects in Papua New Guinea. Armstrong took the operator position at Pikka from Repsol in late 2015. The companies first partnered to explore the state lands between ConocoPhillips’ very large Kuparuk and Colville River fields in 2011. Armstrong CEO Bill Armstrong said developing Nanushuk just became too large of a task for his small exploration company, but he plans to continue exploring on the Slope. Armstrong subsequently was an active bidder in the state’s North Slope lease sale held Dec. 6. No. 3: Tofkat tangle Prized oil and gas leases surrounding the Native village of Nuiqsut got a new owner in mid-August after ConocoPhillips agreed to comply with DNR Commissioner Andy Mack’s list of contingencies for gaining control of the 9,100 acres. The leases are now part of Conoco’s large Colville River oil unit. Mack sent a 21-page decision to the company Aug. 1, which lays out a strict drilling and payment schedule the oil major must meet in order to retain control of the area. In it, he required ConocoPhillips to drill an oil exploration well into the Nanushuk geologic formation by May 31, 2018, and make a total of $7 million in payments to DNR. The $7 million is in lieu of the money the department could expect to receive in winning bids if the area were to be put up for bid in the state’s annual North Slope lease sale. Further, ConocoPhillips must also decide by Aug. 15, 2018, if it wants to continue exploration and commit to drilling another well by June 2020. The company was first awarded the leases — this go-round — in November 2016 after a series of decisions to put the leases back up for bid by former DNR officials were reversed by Mack. ConocoPhillips chose not to drill an exploration well on the leases last winter because of concerns from Nuiqsut residents about exhaust from the diesel-powered drilling rig that would have been running continuously for several weeks about three miles from the village, the company said. Mack took umbrage with the decision because the lease transfer was granted on the condition Conoco would drill the well. Small oil company Brooks Range Petroleum Corp. held the leases for years but applied to transfer them to ConocoPhillips early in 2016 because it couldn’t secure an access agreement from Kuukpik Corp., which jointly holds surface rights to the area with the state, and in turn explore the area. ConocoPhillips held the acreage in the early 2000s but had to give it back to the state after failing to meet drilling requirements. While a relatively small area in North Slope terms, the 22 former Tofkat leases are adjacent to the southern edge of the Colville Unit and also close to the Armstrong Energy’s massive Nanushuk oil discovery in the Pikka Unit just to the east. It’s a highly prospective area. If the company misses any of the benchmarks or decides to give up on exploring the area it will immediately relinquish the leases back to the state, according to Mack’s ruling.No. 4: Arctic OCS projects advance A long-anticipated North Slope oil project took a big step forward Aug. 18 when the federal Bureau of Ocean Energy Management released the draft environmental impact statement for Hilcorp Energy’s proposed offshore Liberty development. Houston-based Hilcorp and its partners in Liberty — BP and Arctic Slope Regional Corp. subsidiary ASRC Exploration LLC — are planning 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. The island would allow Hilcorp as the project operator to access the up to 330 million barrels of light crude the companies believe are in place. With 16 wells, Hilcorp expects it could recover 41 percent to 48 percent of the oil in place. Peak production could hit up to 70,000 barrels per day a couple years after initial production, according to the company’s Alaska leaders. Liberty would produce for 15 to 20 years based on the current reserve estimates. Hilcorp has pointed to the four large existing North Slope oil development islands — Endicott, Spy, Oooguruk and Northstar — as strong evidence that Liberty can be done safely. Hilcorp is majority owner and operator of the Northstar and Endicott fields, after purchasing BP’s interests in them in a 2014 deal that also gave it a 50 percent interest in Liberty. BP subsequently sold 10 percent of its stake in Liberty to ASRC Exploration. 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. To the west of the Liberty prospect Italian major Eni is undertaking a unique offshore exploration program. Eni, which produces about 20,000 barrels per day from the Nikaitchuq field off of Oliktok Point, is in the midst of commencing a two-well exploration plan to reach potential oil deposits. The first roughly 35,000-foot well will be drilled from its manmade Spy Island drill site in state waters off of Oliktok Point into formations beneath federal waters further offshore. The company has previously drilled several wells up to 25,000 feet on its state leases, according to an Eni Alaska spokesman. If successful, Eni plans to drill a second, similar exploration well next winter. The company currently believes the offshore reservoir it’s targeting could double the 180 million barrels of reserves the Nikaitchuq field originally held when it started producing in 2011. No. 5: State lease sale record Interest was again high among oil and gas lease bidders for state acreage on the North Slope in Dec. 6 lease sales but that was not the case for the federally controlled National Petroleum Reserve-Alaska. Winning bidders spent $21.2 million for 216,000 acres of state land and water across 119 lease tracts. The vast majority of that, $19.9 million, was for 179,000 onshore acres and the remaining $1.2 million was for 37,000 acres of state-owned, near shore waters of the Beaufort Sea. It was the third-most spent to win state lease bids in the past 20 years, Division of Oil and Gas Director Chantal Walsh said. According to DNR, the average winning bid of $110 per acre was the largest since the current area wide lease sale format began in 1998. Spanish major Repsol, which holds a 49 percent stake in the large and in-permitting Nanushuk oil project, dominated the onshore Slope sale, spending up to $293 per acre in some bids to win 45 tracts. Much of that acreage is in the few tracts south of the Pikka Unit that holds the Nanushuk project that were not leased and open for bidding. Despite offering all 10.3 million acres available for leasing, the Bureau of Land Management received only seven bids for 80,000 acres in the NPR-A, all of which came from ConocoPhillips. Last year’s NPR-A sale netted more than $18 million in high bids for 613,000 acres, mostly from ConocoPhillips, which has led the foray into the vast undeveloped area. No. 6: Point Thomson plan dispute Division of Oil and Gas officials rejected ExxonMobil’s plan to expand the Point Thomson North Slope gas project in late August because it doesn’t live up to a prior settlement between the state and the company, according to Director Chantal Walsh. Separate from but related to the Expansion Project POD, the division parsed out and approved the Initial Production System POD despite the company not meeting production expectations of natural gas condensates at Point Thomson because of technical challenges. Walsh wrote a six-page letter to ExxonMobil Alaska leaders contending the Point Thomson Expansion Project Plan of Development is far too vague and offers no commitment that the company will live up to the 2012 Point Thomson Settlement Agreement. ExxonMobil outlined its plans to move gas from Point Thomson and inject it into the Prudhoe Bay oil and gas pool as a way to further enhance oil recovery from the large oil field in the plan, but stopped short of committing to do so. In the unique case of Point Thomson, development is prescribed by the settlement, which the Division of Oil and Gas considers to be a contract with the state, meaning its terms must be upheld regardless of extenuating circumstances, according to Walsh. The Point Thomson Settlement, reached under former Gov. Sean Parnell, ended years of litigation between the state and the company in which the state argued ExxonMobil had not fulfilled its responsibility to develop the leases it held for many years. It also set a course for ExxonMobil to develop Point Thomson and start production by May 2016. The field was discovered in 1977. ExxonMobil, which operates Point Thomson, and BP, its primary working interest owner partner, spent roughly $4 billion developing the gas field since 2012. Production started in late April 2016. For its part, ExxonMobil responded in an October letter to DNR Commissioner Andy Mack insisting it is in compliance with the settlement and has said it can’t compel its partners in either field to move forward with the expansion plan. Walsh noted Exxon’s Point Thomson and Prudhoe partners are the same companies, meaning they would largely be negotiating with themselves. A further ruling from DNR is expected soon.

Pebble prospect owners might have new investor

The owners of the Pebble project are one step closer to securing the investment partner that will be key to advancing the contentious mine, according to Dec. 18 announcements. Vancouver-based Northern Dynasty Minerals Ltd. has inked what a company press release characterizes as a “framework agreement” with fellow Canadian mining company First Quantum Minerals Ltd. “The option agreement contemplates an option payment of $150 million (U.S.) staged over four years which option will entitle First Quantum to acquire the right to earn a 50 percent interest in the Pebble Limited Partnership for $1.35 billion,” a Northern Dynasty release stated. First Quantum can also extend the option and make the payments over an additional two years, according to the company. Northern Dynasty is the sole owner of Pebble after previous partners, Anglo American and Rio Tinto walked away from the controversial copper and gold project several years ago. Northern Dynasty leaders have said they will start filing environmental permit applications for Pebble by the end of the year. At the same time, they have acknowledged the company needs a new partner to help fund permitting and development. “We have made good progress in the partnering process and are very pleased to be in advanced-stage discussions with First Quantum, an industry leader in mine development and management,” Northern Dynasty CEO Ron Thiessen said in a formal statement. As soon as the agreement is finalized, First Quantum will make a $37.5 million payment to Northern Dynasty to fund permitting, according to a company release. First Quantum operates six mines worldwide primarily producing gold, copper and zinc. Thiessen added that Northern Dynasty will initiate state and federal permitting “in the very near term.” According to a release from First Quantum the company is still conducting a due diligence review of the potential partnership and will finalize the agreement contingent upon a favorable review. First Quantum CEO Philip Pascall said his company remains primarily focused on advancing a copper project in Panama, but Pebble could provide long-term growth for the mine developer. “We are well aware of the environmental and social sensitivity of (the Pebble) project and will utilize the lengthy option period to apply our extensive project development and operating expertise to ensure that this project can be developed with the support of stakeholders,” Pascall said further. Opposition stakeholders from the Bristol Bay region quickly responded with statements that they will continue to fight Pebble development and First Quantum should follow Northern Dynasty’s ex-partners and stay out of the project. “An overwhelming majority of Bristol Bay residents — fearful of the threat large-scale mining poses to their livelihoods and their way of life — are strongly against the Pebble project,” House Speaker Bryce Edgmon, D-Dillingham, said. “As their representative in the state House, it is my clear responsibility to oppose development of the proposed Pebble mine and the unacceptable risks it represents for the Bristol Bay watershed and the many communities I serve. A new investor in Northern Dynasty’s venture does nothing to change that.” The Pebble Limited Partnership unveiled high-level plans in early October for a smaller Pebble mine aimed at lessening the project’s environmental impacts and appeasing skeptics. Pebble CEO Tom Collier said the company might eventually look to expand the project but noted that would require another thorough permitting examination. A Northern Dynasty investor presentation from earlier this year states the company estimates the Pebble prospect holds 1.9 percent of all the gold ever mined in recorded history. Elwood Brehmer can be reached at [email protected]

Gov’s budget aimed at economic recovery

Gov. Bill Walker’s budget proposal released Dec. 15 focuses on paying down growing state obligations and bolstering Alaska’s economy, actions which administration officials say should in the long run help address the ongoing budget deficits. Overall spending from Unrestricted General Funds, known as UGF, in the governor’s fiscal year 2019 budget is $4.7 billion, down 1.7 percent from 2018. State agency spending is up about 1 percent due to $34 million in response to higher crime rates. That money will go to additional public safety spending to pay for more prosecutors, rural State Trooper positions and growth in drug treatment programs. An additional $27.2 million is needed to cover increased Medicaid formula costs. Walker said the two years of economic recession have pushed more out-of-work individuals to utilize the safety net and is a large contributor to the cost growth. The $4.7 billion total also includes an increase of $82 million for state retirement liabilities and flat funding for K-12 education and the University of Alaska. Accompanying legislative proposals start with bonding to end the state’s oil and gas tax credit obligation, which administration officials estimate will require $900 million to fully pay off over the next couple years. In July, the Legislature passed a bill ending the refundable tax credits for small companies working in Cook Inlet and on the North Slope, but after three years of the state not paying the credits as they came due — first via governor vetoes and then a minimum payment by the Legislature — the sizable debt still needs to be paid. Revenue Commissioner Sheldon Fisher said the state would sell subject to appropriation bonds to fund the payments and offer the credits at a discount of up to 10 percent, reflecting the decline in net present value companies would absorb if the state continued to pay the statutory minimum credit amount each year and prolong the payments for many years. Department officials expect the state can borrow the money for less than 6 percent interest over 10 years. Fisher said his agency, in coordination with the Department of Natural Resources, could also work to lower the discount rate for companies with production through negotiating a slightly higher royalty rate on their leases. It’s a proposal he believes will be well-received after discussions with industry representatives. “We believe the discount we will offer these companies will be significantly less than their cost of capital,” Fisher said. While the state has technically followed the tax credit statutes by appropriating less than $100 million in the past couple years, the break in precedent from paying them in full each year has hurt Alaska’s credibility in the oil and finance industries, officials acknowledge. Lacking the payments has also kept small companies from leveraging the credit funds for larger private investments to pursue work in the state. Another bill, dubbed the Alaska Economic Recovery Act, would allocate $800 million over three years from the governor’s 1.5 percent payroll tax that will sunset in 2021 to fund state deferred maintenance projects. The administration estimates the state has roughly $1.8 billion worth of backlogged projects from school and university building repairs to cleaning up contaminated sites and road projects. With local and federal matches for some other projects, including funding for the much-needed Port of Anchorage rehabilitation, the package would be a $1.4 billion infusion to the state’s construction industry. “We have the highest unemployment, I believe, in the nation and we need to put Alaskans back to work. We need to fix that part of our economy,” Walker said in a press briefing on the budget. Alaska’s unemployment rate was 7.2 percent in October, compared to 4.1 percent nationally. Walker added that the relatively small size of the more than 60 projects planned to receive funding means small, local contractors across the state will get most of the work. The tax, introduced in the October special session, would sunset at the end of 2021 after the three-year construction program. Walker first proposed bonding for capital projects every two years as part of his overall plan to balance the budget two years ago. However, with the fiscal situation much the same — and the state continuing to run annual deficits of more than $2.5 billion — the state’s ability to take on additional debt remains limited, according to the administration. Senate Majority Republicans have blocked attempts by the governor and the Democrat-led House Majority to pass an income tax the past two years, contending government spending needs to be cut further before adding taxes to a strained economy. Walker said he believes the sunset clause and committing the revenue to growing one of the industries hit hardest by the recession should change Republicans’ thinking on the tax. “They thought it would grow government; it doesn’t. They thought it would go on forever; it doesn’t,” he commented. House Finance co-chair Rep. Paul Seaton, R-Homer, commended the governor for holding education spending steady in a caucus release and Senate Minority Leader Berta Gardner similarly praised the plan to add public safety resources. However, Gardner said she is skeptical that Alaskans will be comfortable with a tax to fund infrastructure projects while at the same time prioritizing the oil tax credit payments. The rest of the capital budget is much as it has been for three years now; “very, very austere” is how Office of Management and Budget Director Pat Pitney described it. At about $150 million, the basic capital budget funds the state’s 10 percent match to more than $1 billion of federal transportation program funds and supplies several small state energy efficiency and housing programs. Permanent Fund The governor’s budget appropriates $818 million for Permanent Fund Dividends — enough for about $1,200 per Alaskan. The PFD total is 30 percent of the 5.25 percent of market value, or POMV, draw from the fund that is in Senate Bill 26, the Fund reform bill that passed the House and Senate last spring and awaits conference committee reconciliation. Administration officials said the 30 percent for dividends is simply a compromise to the 25 percent in the Senate version of the bill and 33 percent in the House’s SB 26. The remainder of the roughly $2.7 billion planned draw from the Earnings Reserve Account of the $61 billion Permanent Fund would go towards closing the deficit. In the event SB 26 is not reconciled and dies in the Legislature, the governor’s budget includes the POMV formula language to draw from the Permanent Fund based on the bill. Either way, the state will likely pull about $800 million from the dwindling Constitutional Budget Reserve to close the rest of the expected fiscal 2019 budget gap. “The wait-and-see program that some in the Legislature have adopted has cost us $14 billion,” Walker said, with most of that savings amount coming from the CBR over the past four years. The administration, after a request from the Alaska Permanent Fund Board of Trustees, also included a nearly $2.4 billion inflation-proofing transfer from the Earnings Reserve to the corpus of the Fund. The Legislature has not inflation-proofed the corpus for three years, which APFC CEO Angela Rodell told the Journal is a growing concern for the corporation. Budget process reforms Walker also said he will submit legislation to move the state to a biennial budgeting format as well as stop legislator pay and per diem if budgets are not passed in the standard 90-day special session. For three years the Legislature has blown past the 90-day regular session and the 120-day constitutional session limit without passing a budget. Similarly, the proposal would cut the governor’s pay if the budget plan is not released by the Dec. 15 deadline; however, that is rarely an issue. “There’s no question the process is broken that we use in Alaska for budgeting,” Walker emphasized. “It’s just a terrible way to run a state.” Legislators have generally been open to the idea of a two-year budget cycle, in which they would focus on the budget in the first year of a two-year Legislature and, after making true-ups, focus on policy issues in year two. The large budget deficits of late have made seemingly every appropriation contentious in recent years, dragging out budget debates and tainting negotiations on other issues as well. The budget delays have forced state agencies to issue “pink slips” notifying workers of a potential government shutdown and associated layoffs. It has also caused confusion among state ferry officials, commercial fishery managers and others in industries that have significant state oversight as to what exactly would happen to private businesses in the event of a government shutdown. While he has declined to comment on many legislative proposals and preferred to push legislation from behind the scenes during session, Walker said he would aggressively pursue the pay and per diem restriction this year. He called it “silliness” to use the budget as a negotiating tool with respect to other issues at hand during the legislative session. “There has to be consequences for what you do and you don’t do,” Walker said. “(Delaying the budget) is expensive, it’s demoralizing and it gives us another sign of instability as a state.” Elwood Brehmer can be reached at [email protected]

House majority won’t push income tax again

Legislative leaders from both parties claimed success when reviewing 2017 despite achieving little to solve the state’s most pressing issue: ongoing multibillion-dollar budget deficits. Democrat House Speaker Bryce Edgmon and Republican Senate President Pete Kelly spoke about the year’s legislative sessions and their expectations for the upcoming session that starts Jan. 16 to a Dec. 13 lunch gathering of the policy analyst group Commonwealth North in Anchorage. Edgmon said his House Majority coalition met each of its four major goals during the prolonged 2017 sessions: the House made “surgical cuts” to the operating budget; ended the refundable oil and gas tax credit program for Cook Inlet and North Slope work; passed legislation to enact a percent of market value, or POMV, draw from the Earnings Reserve of the Permanent Fund; and approved an income tax. “Amid all the acrimony and endless special sessions we did get some work done,” he said, noting the passage of bills to allow ridesharing companies in the state, address the federal REAL ID mandate and the state’s opiod addiction epidemic that Gov. Bill Walker signed, among others. With control of the House for the first time more than 20 years, Edgmon added the Democrats strengthened personal relationships with Senate Republicans, which could prove beneficial in 2018. “The point of it is we took action,” he said, acknowledging the caucus was aware not everything it passed would become law. Similarly, Kelly noted the Republican-dominated Senate made good on plans to cut the operating budget by roughly $300 million in its version of the budget; approved a revised state spending cap; passed the Permanent Fund POMV legislation; and voted down the House’s income tax, thereby protecting the private sector, he said. The only budget-directed bill to reach the governor’s desk was House Bill 111, which ended the oil tax credits. It reduces future state obligations but does little to fix the immediate budget gap. Meanwhile, the Legislature spent a record 211 days in session this year; prolonged budget battles pushed the state to within nine days of a government shutdown; the $2.7 billion fiscal year 2018 budget deficit was again filled with savings from the dwindling Constitutional Budget Reserve; and ratings agencies further downgraded Alaska’s creditworthiness. Looking ahead, Edgmon said his caucus is still focused on fixing the state’s budget in the standard 90-day session if at all possible. He also said the House Majority “heard the message loud and clear” from the Senate and will not push for an income tax again this year. The Senate gaveled out from the special session Walker called this fall without taking up his latest proposal for an income tax. Rather, the House will shift its focus to separating education funding from the annual operating budget, overhauling how the Alaska Marine Highway System is managed and paid for, and continue to push for a new, “non-regressive revenue source” for the state that doesn’t disproportionately impact rural Alaska, according to Edgmon. “We can’t simply cut people’s dividends in half and then use the Earnings Reserve to fill the gap — which doesn’t really fill the gap,” he said. The Office of Management and Budget’s 10-year forecast recognizes inflation but only reflects the costs the state is currently covering with its $4.3 billion unrestricted general fund budget, he stressed. Alaska’s last three capital budgets have mostly been cut to include only mandatory items and the minimum 10 percent state match to formula-driven federal funds for transportation programs crippling the construction industry while the deferred maintenance bill on state facilities has grown to about $1.8 billion. Additionally, Edgmon noted there are still no plans to expedite how the state will pay down its leftover $700 million oil tax obligation, stabilize education funding or handle potential cuts to federal assistance. On top of Edgmon’s unfunded list, state employee retirement payments — $163 million this year — will again grow to over $400 million by 2022, according to OMB. Economists have said long-term the state likely needs to add roughly $1 billion per year to its current annual deficit amounts because of the issues it has put off addressing. Kelly said the Senate Majority will stay focused on cutting the budget, protecting the private sector and getting the Permanent Fund bill to the finish line. “The Senate is going to come from a starting position that we’re in a recession,” he said, contending the state can find its way through its current fiscal issues without new taxes that could further damage the economy. “We can’t make decisions about the long-term future of the state based on what’s hitting us right now.” Alaska crude prices are back above $60 per barrel and there are at least five significant North Slope oil prospects that could grow production beyond the incremental increases of the past couple years, he stressed. Kelly said it’s a “pretty safe assumption to say we’re going to have 300,000 to 500,000 (additional) barrels per day flowing in 2021.” However, getting there would mean those projects would have to meet or beat in-service schedules and high-end production estimates. As a result, with further budget cuts and the addition of $2.1 billion and growing of Permanent Fund revenue each year the state can live off its reserves and have a balanced budget by 2023, according to Kelly. He said further that the Walker administration has lacked the innovative ideas needed to reform government and instead, along with House Democrats, has just said government needs more money. Kelly touted his Medicaid reform bill passed in 2016, which could save the state up to $400 million over six years. The bill got strong bipartisan support and directs agencies to study more structural changes to how chronic health issues are managed and how the state administers its own health care and insurance programs. The expected savings come largely from taking advantage of federal health care laws that give states opportunities to secure more federal funding for existing programs. Revenue forecast up The Department of Revenue issued the official Fall 2017 Revenue Sources Book Dec. 12 with a revelation that the state will have $247 million more than first thought. That should cut the current-year deficit to roughly $2.5 billion. The downside is that the new money is short-lived; it’s coming from unexpected back production tax payments made after the preliminary fall forecast was released in late October, according to a department release. The $247 million will bump fiscal year 2018 unrestricted revenue up to over $2.1 billion, but the department predicts it will fall back to $2 billion in 2019 and gradually grow to $2.8 billion by 2027. Elwood Brehmer can be reached at [email protected]

‘Aggressive’ timeline for AK LNG needs one year for permitting

State gasline officials have made headway of late with potential buyers and investors in the Alaska LNG Project, but progress on the regulatory side has been harder to come by. The Alaska Gasline Development Corp. filed an environmental impact statement application with the Federal Energy Regulatory Commission, or FERC, for the $43 billion project in mid-April. At nearly 60,000 pages, AGDC leaders said they believed it to be the largest EIS filing in the history of the National Environmental Policy Act process, which became the federal permitting standard in 1970. The size of the EIS filing could end up being a mixed blessing for the project. The 13 exhaustive resource reports that comprise the bulk of the material are the end product of the $600 million the state, BP, ConocoPhillips and ExxonMobil spent evaluating the project during the preliminary front-end engineering and design, or pre-FEED, period, when the companies were equity partners with the state. That arrangement ended last year as the producers handed off the lead role to the state as global LNG prices bottomed out. AGDC emphasizes that the massive filing illustrates the comprehensive nature of the pre-FEED work and limits regulators’ needs for supplemental information; that should help speed the EIS along. President Keith Meyer is targeting a final investment decision on the Alaska LNG Project by early 2019, and, as a result, a record of decision on the EIS by the end of 2018, which he acknowledges is “aggressive.” However, whether AGDC’s regulatory timeline is feasible is still an unanswered question simply because of the project’s size and the need for statutory public comment periods. Also, the municipally-owned Alaska Gasline Port Authority has urged FERC to evaluate routing the Alaska LNG Project to Valdez as opposed to AGDC’s planned Nikiski terminus, but how much consideration the request will receive and how that could affect the EIS timing is also unknown. FERC is generally regarded as one of the most expeditious federal agencies when it comes producing environmental permits but has yet to publish a schedule — which is fungible regardless — for the EIS. Meyer said AGDC can still sign the many binding commercial agreements it needs for the project before FERC issues its record of decision; those agreements would just need clauses indicating they are contingent on a favorable decision from regulators. “If we don’t (get a decision in time) we can deal with it,” he said. AGDC regulatory Vice President Frank Richards wrote a letter to FERC commissioners Nov. 16 requesting, among other things, that the commission publish the Alaska LNG schedule by Dec. 15. AGDC leaders originally hoped FERC’s timeline would be published sooner. “The issuance of a schedule will provide valuable assurance to the market that the regulatory process, and particularly commission review of Alaska LNG, is on track and consistent with Alaska LNG’s (2025) targeted in-service date,” Richards wrote. He said during the corporation’s Dec. 7 board meeting that AGDC is hopeful a final EIS is published by mid-2018 to stay on its desired timeline. Meyer and Richards have stressed the support the project has received from Trump Administration and actions the White House and federal agencies have taken to streamline infrastructure permitting, but to get there it seems FERC would really have to get moving soon. EIS public scoping meetings to determine what all regulators should evaluate were held in late 2015 under the former ExxonMobil-led project structure. The next major step under a standard EIS development would be for FERC to issue a preliminary draft EIS for cooperating federal agencies to review and comment on. Subsequent to that, the resulting draft EIS would be issued, initiating a public comment period of at least 45 days — on very large or contentious projects it is often longer — and associated public meetings. FERC would then respond to the appropriate comments and incorporate them into the final EIS publication, after which a minimum 30-day waiting period must be held before a record of decision on the project is reached. Richards also asked FERC to publish the schedule before getting responses to all of its questions in his Nov. 16 letter, noting the commission could adjust the schedule if AGDC is too slow in responding to stay on track. His team has responded to 584 of FERC’s 801 questions and requests for additional data stemming from the application filed in April as of the Dec. 7 meeting, Richards said. AGDC was waiting for questions on the last of the 13 resource reports at that time as well. Additionally, he urged FERC to adopt or otherwise incorporate the supplemental EIS that the U.S. Army Corps of Engineers is in the midst of finalizing for the smaller $10 billion Alaska Standalone Pipeline, or ASAP, project and defer to the Corps on wetlands issues. “The Alaska District of the Corps of Engineers has regulated the construction of infrastructure projects through Alaska’s continuous and discontinuous permafrost for many decades, and construction planning in Alaska has centered on the application of the Corp of Engineers’ guidance,” Richards wrote. He continued: “The commission should rely on the experience and expertise of the Alaska District of the Corps of Engineers and require a duplicative demonstration justifying a waiver of the Office of Energy Projects’ wetlands procedures. If not waived, these procedures will have a significant impact on project construction planning, schedule and cost.” Such a waiver would lift wetlands construction and mitigation requirements from FERC’s Office of Energy Projects that are more restrictive than those the Alaska District of the Corps uses, according to Richards. AGDC notes the pipeline corridors for Alaska LNG and ASAP are virtually identical and therefore evaluation of the route does not need to be duplicated. The primary differences in the two pipelines is the line for the ASAP project, meant for in-state gas use, is 36 inches versus the 42-inch Alaska LNG pipe and would stop near Big Lake in the Matanuska-Susitna Borough. The Alaska LNG line would continue south, cross beneath Cook Inlet and end at the LNG plant in Nikiski. Experts have said EIS for the Alaska LNG is basically three separate evaluations in one document; one each for the North Slope Gas treatment plant, the pipeline and the Nikiski plant. ASAP decision delayed While AGDC wants FERC to use the Corps’ ASAP work, the Corps added public meetings to the supplemental EIS for ASAP and thus has pushed back its schedule for issuing a decision on the backup gasline project to July, according to Richards. Prior to the adjustment AGDC had been expecting a final supplemental EIS in December with a record of decision in March. In late 2012, the Corps approved an EIS for a smaller version of ASAP with a 24-inch pipeline but when the state upped the size of the proposed gasline to 36 inches, the Corps determined differences between the in-state plans — changes to the gas conditioning modules, a North Slope barge dock, pipeline route and a smaller overall footprint with fewer pipeline compressor stations — necessitated an SEIS. The draft SEIS was once expected to be out in mid-2015 but wasn’t published until July of this year. Yukon designation pulled In an unsurprising move, the Environmental Protection Agency’s Region 10 has dropped its push to designate the Yukon River an aquatic resource of national importance, or ARNI, as it relates to the ASAP project. EPA Region 10 officials wrote a letter to the U.S. Army Corps of Engineers Alaska District in late August detailing the agency’s concerns with AGDC’s approach to building the ASAP project through wetlands in the Yukon watershed. Roughly half of the 737-mile pipeline corridor is through the massive river drainage. They did not feel AGDC’s compensatory mitigation plan for filling wetlands in the Yukon drainage was sufficient. Gov. Bill Walker responded with an early October letter to EPA Administrator Scott Pruitt contending Alaska’s wetlands — 43 percent of the state’s acreage — are so vast “it would not be practicable, nor environmentally justifiable, for this project to mitigate for all wetland impacts along the entire pipeline route.” Region 10 officials did not send the Corps a second letter as called for under the 1992 agreement between the agencies that established the process for designating an ANRI, rendering the issue moot, according to Richards. Also, Walker’s former Commerce Commissioner Chris Hladick took over as Region 10 administrator earlier this month after being appointed to the post by Pruitt in October. Elwood Brehmer can be reached at [email protected]

AIDEA approves deal with gas utility for Interior Energy Project

The Interior Energy Project is finally on its way to Fairbanks. After nearly five years of analysis, negotiations, debate and a wholesale route change, the Alaska Industrial Development and Export Authority on Dec. 7 transferred control of the project to the Interior Gas Utility. The IGU is owned by the Fairbanks-North Star Borough and will take over the plan to expand natural gas use in the area. Transfer of the unfinished project mostly means handing off the responsibility to fulfill the $331.2 million development plan the two organizations jointly crafted to complete the IEP. It also includes the $54 million sale of Pentex Alaska Natural Gas Co., which, through Fairbanks Natural Gas and its other subsidiaries, is already trucking Cook Inlet-sourced LNG to supply its group of customers in the core of Fairbanks; the IEP builds on that model. The AIDEA board of directors previously approved the IEP plan and Pentex sale Oct. 26, but technical changes to the finance agreement meant the AIDEA leaders had to approve the amended document again. The Interior Gas Utility board approved the deal Dec. 5. The two first signed a memorandum of understanding establishing the framework of the deal about a year ago. While the MOU first set a deal deadline date of March 31, 2017, it was extended to allow negotiations to continue and give AIDEA project officials time to secure a new gas supply contract needed to support the other aspects of the plan. AIDEA announced success on the gas contract in September. “This represents the culmination of nearly a year of in-depth due diligence and negotiations between ADIEA and IGU. AIDEA welcomes this approval of the sale and financing package that we anticipate will create a unified, locally controlled gas utility for the Interior by next spring,” AIDEA board chair Dana Pruhs said in a formal statement. The Regulatory Commission of Alaska must still approve the agreement by May 31, at which point AIDEA and IGU can officially close the deal. Until then, AIDEA’s lead IEP manager Gene Therriault said the authority will continue to advance the plan under the terms of the MOU while getting concurrence from IGU on all decisions. When the deal closes the authority will resume its more normal role as a financier and loan administrator, Therriault said, adding, “AIDEA will be involved (in the IEP) if and when IGU needs to access bonds.” Additional gas is expected to start flowing from the expanded LNG trucking plan sometime in 2020. AIDEA and Gov. Bill Walker absorbed criticism from some Republican lawmakers in the state when the authority worked out a deal to buy Pentex from its private investors in January 2015. Critics argued it was inappropriate for a state entity to buy the one private utility that had managed to do what the IEP proponents wanted — albeit on a smaller scale and at a higher cost to customers — and ostensibly killed the prospect of a private sector-generated solution to Fairbanks’ energy problems. However, AIDEA leaders contended the move was intended to facilitate consolidation of Fairbanks Natural Gas and IGU to avoid duplicative costs and achieve the operational efficiencies possible through running one utility versus two in a relatively small service area. Some also noted the call for a private solution to Fairbanks’ energy needs had gone unanswered for decades and AIDEA’s purchase of Pentex was the state’s attempt to fix what was for years a problem of high-cost fuel oil and has morphed into primarily an air quality quandary. Fairbanks Natural Gas CEO Dan Britton has long said his utility repeatedly tried to expand its service but could not secure a long-term gas supply contract from Inlet producers to do so. In 2013, leaders of the utilities sparred in front of the RCA over service territory rights for the areas surrounding FNG’s existing business in the core of Fairbanks. The RCA ultimately sided with IGU; setting up the scenario where two gas utilities would operate in the Fairbanks area. Also in the spring of 2013, the Legislature approved a $332.5 million package of grants, loans and bond financing to spur the IEP and tasked AIDEA with managing it. The legislation included a requirement for North Slope-sourced natural gas. At the time there were fears of a gas shortage in Cook Inlet, which drove gas prices higher and left no gas available for the Interior at a viable price. Through much of 2013-14, AIDEA evaluated the feasibility of a North Slope LNG plant to capture potential savings afforded the IEP by cheaper Slope feedstock natural gas. However, the high cost of building on the Slope forced AIDEA to scrap the plan late in 2014 and falling oil prices — a mixed blessing for the project — gave Fairbanks-area residents a reprieve from high fuel oil prices and project leaders additional time to review alternatives. They eventually turned south for a solution as the Southcentral natural gas market stabilized into 2015 and lawmakers agreed to open the IEP financing legislation to an Inlet-sourced option. The pending deal between ADIEA and IGU is the culmination of the second try at the IEP. The structure of the financing exemplifies the complex nature of the project and the unavoidably challenging economics it must overcome. Anatomy of the deal IGU will buy Pentex for the $54 million AIDEA spent on the utility company in 2015, but the purchase also includes the interest ADIEA is required by law to recoup on its in-house investments. Therefore, the final price will be closer to $59.6 million, according to the financing agreement. AIDEA bought Pentex with funds from its own Revolving Fund and did not use the state IEP funds it was given management of in 2013. Currently a start-up utility with no customers or revenue, IGU will use $42.4 million of state IEP grants and other low-interest project loans, which AIDEA now holds and will supply the utility, to buy Pentex. Buying the working utility will also give IGU a revenue stream it can leverage to finance the gas supply and distribution infrastructure buildout set forth in the agreement. The infrastructure financing will also come from the state through AIDEA in the form of about $83 million in Sustainable Energy Transmission Supply Fund loans and $150 million of state-backed bonds. The 50-year loans will be used more as an active line of credit IGU can call upon when needed and defers interest and payments for 15 years after which a 0.25 percent interest rate kicks in. According to AIDEA, IGU can also defer principle payments on the SETS loans if future gas demand doesn’t meet expectations. AIDEA leaders have also been criticized for continuing ahead with a project that needs such favorable financing terms to work. While lower oil prices eased heating fuel prices for Interior consumers, it also meant lowering expectations about how many residents and businesses would make the personal investments needed to convert from fuel oil to natural gas heating systems. It should also be noted that AIDEA — with it expertise in financing and investing in projects above managing them — is complying with its directive from the Legislature in keeping the IEP alive. Doyon offers gas alternative On Nov. 28, Doyon Ltd., the Alaska Native corporation for the Interior region, announced via press release its plans for next summer to drill another oil and gas exploration well in the Nenana area it has been exploring for a decade. A significant gas find near Nenana could be a long-term energy solution for Fairbanks because it is only about 60 miles from the city. Doyon leaders noted as much in their press release, calling it “unfortunate timing” for IGU and AIDEA to commit to their IEP plan. Doing so straps IGU to the $46 million Southcentral LNG plant expansion, $52 million Fairbanks LNG storage and regasification facilities and associated LNG tankers and trucks at least until the state loans on the infrastructure are paid off decades later, Doyon Natural Resources Vice President Jim Mery said in an interview. That, in turn, discourages IGU from buying gas from other sources in the future that could include a North Slope gasline or Nenana if a discovery is made, he said. An AIDEA spokesman noted the gas supply contract recently inked with Hilcorp only runs through 2020 at the request of IGU leadership on the hope the utility can secure a more favorable contract once the is system proven and in place. Doyon has drilled three exploration wells in the Nenana basin with mixed results. While the company is targeting oil first, a 2013 well hit substantial zones of gas-saturated reservoir rock and if not for a faulty geologic trap could have been a commercial find, according to Doyon leaders. Most recently, a well drilled in the summer of 2016 was unsuccessful. IGU General Manager Jomo Stewart said in an interview that the utility wants Doyon to be successful; he emphasized the notion that the LNG trucking portion of the IEP is a placeholder until another gas source is available. “This was always envisioned as a starter project meant to get more gas here. You’re building infrastructure so people could access gas, but then create the utilization of that infrastructure through expanded deliveries of gas,” Stewart said. More than $140 million of planned expenses in the overall project are for gas distribution infrastructure — street-level gaslines for residents and businesses to tie into — regardless of supply source, according to the financing document. Stewart also said the refined designs of today’s small LNG plants makes them mobile enough to be relocated to where they are needed most. “It’s not as simple as backing up tractor-trailers, unbolting and driving away, but it is modular enough that it could be relocated,” he described. “Under a large volume scenario, particularly via pipeline, the expectation is that you could be able to take this LNG facility — you would move it to Fairbanks — the gas to the consumer would go directly into the pipelines that feed the consumer, but you would also have a line that would go to this LNG facility and you would use this LNG facility as peaking capacity and (gas) security.” It could also be used in conjunction with the 5.2 million-gallon LNG storage tank planned for Fairbanks to supply other road system communities that are out of economic reach of a large gasline, Stewart noted, in much the same way the smaller Southcentral plant is currently used for Fairbanks. AIDEA leaders have discussed the possibility of such a scenario, but it is still a hypothetical one. Finally, Stewart said the IEP plan, even if the infrastructure stays put, only feeds the most densely populated areas of Fairbanks and North Pole and additional gas from any source could supply many more customers in the region. Elwood Brehmer can be reached at [email protected]

AGDC gets interest from Tokyo, questions from lawmakers

Legislators got their first chance to publicly question Alaska Gasline Development Corp. officials about a recent agreement with Chinese companies to advance an LNG export project during a Dec. 4 hearing. Meanwhile, AGDC executives in Japan were busy putting the finishing touches on the state-owned corporation’s latest pact to cooperate on developing the $43 billion Alaska LNG Project with potential customers. Shortly after AGDC President Keith Meyer told the House Resources Committee and other legislators in attendance that his team was close to signing a letter of intent with Tokyo Gas Co., the corporation issued a release announcing just that. “Tokyo Gas and Alaska have a special relationship in LNG and I was pleased to host (company President Michiaki) Hirose for meetings and a project update in Juneau this past August to help continue that kinship,” Gov. Bill Walker said in an official statement. The Japanese utility, with more than 11 million customers, was itself a customer to ConocoPhillips’ Kenai LNG plant, which first exported to Japan in 1969. The plant has seen little use in recent years as down prices globally have challenged the competitiveness of Cook Inlet-sourced LNG. “Alaska is a trusted source of LNG. For more than 40 years Tokyo Gas Co. Ltd. received shipments of LNG from Alaska. As the closest source of North American LNG to Japan, with a shipping time of as little as seven days point to point, Alaska LNG is naturally an economic and reliable source of LNG for Tokyo Gas Co. Ltd.,” Hirose said, reiterating AGDC talking points, in the release. The letter of intent is for the sale and purchase of LNG but it also includes a commitment by Tokyo Gas to look at other ways to support the Alaska LNG Project, according to AGDC. Corporation leaders have stressed the distinctions between how its different agreements with potential gas customers and project investors are characterized, highlighting the fact that the Asian utilities and companies AGDC has targeted follow a prescribed schedule in the courtship and very rarely back out from a letter of intent. Spokeswoman Rosetta Alcantra wrote in an email that the Tokyo letter sets the basic principles for the two to “collaborate on exploration of potential purchase of LNG from AGDC; and to evaluate other opportunities to advance Alaska LNG.” That includes potential upstream investment. It is a nonbinding agreement. How the letter differs from the joint development agreement signed Nov. 9 with three giant nationalized Chinese companies or memorandums of understanding with PetroVietnam Gas Corp. and Korea Gas Corp. is unclear. Walker and Meyer said in a press call after announcing the China development agreement that it went beyond the significance of a letter of intent because it involves all parties needed to put the project together — Sinopec, the gas buyer; the Bank of China, a project lender; and the China Investment Corp., an equity investor. The joint development agreement, released by Walker’s office, is a nonbinding document that expires Dec. 31, 2018. AGDC has kept the other letters of intent and memorandums of understanding confidential, citing business considerations in the highly competitive LNG industry. The Legislature afforded AGDC the right to keep its deals private in the 2013 legislation that made it a standalone entity. AGDC was originally a branch of the Alaska Housing Finance Corp. Questions on price, dealing with China Legislators’ questions in the Dec. 4 hearing largely focused on Chinese involvement in the Alaska LNG Project should the joint development agreement come to fruition and whether the North Slope producers are on board with the state’s expectations for the project. AGDC’s Meyer has long said Gulf Coast LNG projects are Alaska’s primary competitors in Asian import markets because of the continued low cost of Lower 48 Henry Hub indexed feedstock natural gas and political pressures that have killed LNG export plans in Canada and Oregon. LNG can be produced and delivered to Asia from Texas and Louisiana for about $8 per million British thermal units, or mmBtu, the standard unit measurement in the industry, according to AGDC. That is assuming a generally static Henry Hub price of roughly $3 per thousand cubic feet, or mcf, of raw gas. One mmBtu of LNG is roughly equivalent to 1 mcf of unprocessed natural gas. Meyer said liquefaction, shipping and other costs total about $5 per mmBtu to deliver Gulf LNG for a minimum customer cost of $8 per unit. While Alaska’s proximity to East Asia makes LNG shipping costs from the state about one-third of that from the Gulf Coast and colder temperatures improve liquefaction efficiency — meaning less gas must be burned to produce the LNG — the cost of the 800-mile pipeline off the Slope is the big cost snag. AGDC estimates the 42-inch pipeline will cost about $8 billion in the larger $43 billion project. As a result, the bundled costs to deliver Slope-sourced LNG to any of AGDC’s prospective customers is about $7 per mmBtu, leaving a $1 netback to the producers for their gas if the project is to compete, Meyer described. He acknowledged the $1 per mcf price is what’s “left over” after accounting for other costs if trying to meet the $8 delivered price threshold, but added the method to arrive at the wholesale gas price is more common in the industry than not. The Lower 48, where gas exported as LNG is priced based on a market index, is the exception, he added. “All these producers deal with a netback throughout the world,” Meyer said. “It’s the standard.” Anchorage Republican Rep. Lance Pruitt asked whether BP, ConocoPhillips and ExxonMobil were on board with the $1 per mcf for gas. Meyer said the producers have not committed to the plan but haven’t rejected it either in preliminary discussions. The $1 per thousand cubic feet price equates to about $1 billion per year for gas, given the project would process about 1 trillion cubic feet per year at full production. “I think we’re going to find that $1 billion a year upstream, compared to nothing, looks pretty good,” Meyer commented. LNG contracts have historically been linked to the price of oil and he said Alaska LNG deals could as well if both sides are comfortable with market volatility. Pruitt and other legislators also noted the state would get about 25 percent of each $1 through its royalty and presumed taxes on the gas. ConocoPhillips still supports the Alaska LNG Project and is in negotiations with AGDC but pricing and numerous other terms have yet to be finalized, according spokeswoman Natalie Lowman. ConocoPhillips Alaska leaders have said the company would prefer to sell its North Slope gas reserves into the Alaska LNG infrastructure and not take a larger role in the state-led project. Similarly, BP spokeswoman Dawn Patience said via email that the company looks forward to better understanding the role of gas owners, such as BP, in AGDC’s customer agreements. Also, AGDC and BP have extended an agreement for the producer to assist the state corporation in developing the project, she added. That agreement, signed about a year ago, is set to expire Dec. 31. Rep. Dan Saddler, R-Eagle River, questioned China’s possible involvement beyond financing and buying LNG, asking if Sinopec would get construction jobs on the project. Meyer said the oil and gas giant won’t have majority involvement, noting some labor will have to come from outside of Alaska simply because the state does not have the workforce to fill the 10,000-plus jobs that will be available. A large construction management firm will oversee the 800 miles of work but smaller Alaska subcontractors will certainly get a lot of work, he said. “I would expect Alaska contractors to have a degree of priority,” he added. Saddler and Palmer Republican Rep. DeLena Johnson also wanted to know if the administration is comfortable working with a communist regime with a long history of human rights violations. “On a moral basis, does it bother you to be dealing with China?” Saddler asked. For his part, Meyer reminded legislators that the country is already the state’s largest export customer; it bought 27 percent of Alaska’s $4.4 billion of exports last year. About half of it was seafood. “This is an extension of that relationship,” he said. Meyer has emphasized the LNG would help China move off of coal as well. He also said the LNG trade could be a tool to improve the country’s geopolitical position because it’s a critical commodity. Pruitt said he’s not concerned about partnering with China but is worried about “what seems like China coming in and letting them own our state.” Meyer stressed that there is no scenario under which the Chinese will have majority ownership in the project; AGDC is looking for up to 25 percent equity investment. “They’ll be a good customer, a good partner, but they’re not going to have a controlling interest,” he said. Pruitt and Saddler sit on the House Finance Committee but were invited to participate in the Resources meeting. Elwood Brehmer can be reached at [email protected]

ANWR clears Senate, Young named to conference panel

The northern edge of the Arctic National Wildlife Refuge is almost open for business after some late maneuvering by Sen. Lisa Murkowski. With the inclusion of Murkowski’s provision to open the ANWR coastal plain to oil exploration in the Senate’s tax reform bill, the Alaska congressional delegation is as close as it has ever been to what would be a landmark victory for the Republicans. In statements following the Senate’s Dec. 2 early morning vote, they described it as a way to jumpstart Alaska’s economy and improve national security by producing more oil domestically. However, it took some last-minute technical adjustments to specific language in the ANWR legislation to keep it viable, which also led to Murkowski having to do an about-face on a longstanding policy stance. The issue arose during initial Senate floor debate on the tax bill Nov. 30, when the Senate parliamentarian deemed the language relating to the regulatory steps needed before holding an ANWR lease sale required consideration from the Environment and Public Works Committee and not just the Energy and Natural Resources Committee chaired by Murkowski. Specifically, the original language directed the Interior Secretary to manage ANWR lease sales under the 1976 Naval Petroleum Reserves Production Act — the law that transferred what is now the 23 million-acre National Petroleum Reserve-Alaska from the Navy to Interior — and follow the requisite regulations. Because an environmental impact statement is required to put together a management plan and hold lease sales in the NPR-A, the decision to lease the coastal plain should’ve also gone through Environment and Public Works, the parliamentarian concluded. Murkowski’s Energy and Natural Resources Committee had been the only non-Budget committee tasked with reviewing her proposal to generate at least $1 billion in deficit-reducing revenue over the next 10 years. The Budget Committee’s directive to find the $1 billion was a nod to Murkowski to introduce the ANWR option as part of the tax bill that needed only a simply majority vote and not meet the filibuster-proof, 60-vote threshold standard for non-budget legislation. The revised language broadened the ANWR management guidelines away from the indirect National Environmental Policy Act reference to “a manner similar to” how NPR-A sales are managed, but Sen. Dan Sullivan said in Dec. 1 press briefing that the technical correction doesn’t eliminate the NEPA process prior to holding ANWR lease sales. In floor debate, Murkowski said the extensive oil production on nearby state lands is proof that Arctic oil development can be done with minimal environmental impact, a point proponents of opening the coastal plain have often made. “Environment and local wildlife will always be a concern, that’s why we didn’t waive NEPA,” she said. Democrats argued that Murkowski’s legislation ostensibly renders environmental reviews of ANWR leasing meaningless because it states the Interior secretary “shall” hold two lease sales, each offering at least 400,000 acres of the 1.5 million-acre coastal plain, regardless of what the reviews conclude. The technical wording change did, though, create uncertainty over what exactly the regulatory process would entail and whether the lease sales would still generate the $1 billion. To offset that, a 5 million-barrel sale from the Strategic Petroleum Reserve authorized in the Energy Committee rider was upped to 7 million barrels on the Senate floor. A Strategic Petroleum Reserve oil sale — something Murkowski had previously been steadfastly against — was first approved in the Energy Committee Nov. 15 as an add-on amendment by Louisiana Republican Sen. Bill Cassidy. He asked for the oil sale amendment to offset his proposal to appropriate $300 million more to Gulf states through the Land and Water Conservation Fund in 2020 and 2021. Murkowski voted for the amendment, which passed out of her committee on a party-line vote, saying the increased revenue to states would help them mitigate the impacts of offshore oil and gas activity. The Land and Water Conservation money is derived from offshore lease revenue and Cassidy said the extra $300 million would go back into restoring damaged coastline. His amendment capped the oil sale at either 5 million barrels or no more than $325 million in revenue. When the Senate voted on the tax bill, the sale limits had been increased to 7 million barrels or up to $600 million to the Treasury; however, Cassidy’s Land and Water Conservation Fund appropriation did not grow. In 2015 Murkowski opposed a Strategic Reserve sale to help pay for a federal highway bill. A Senate Energy Committee press release at the time stated: “Murkowski has long cautioned against calls to sell crude oil from the reserve to pay for unrelated legislative initiatives” because she considers it a “vital national security asset.” Spokeswomen for Murkowski did not respond to questions regarding her stance on the oil sales from the SPR. The ANWR provision isn’t home free quite yet, as it was not in the House version of the tax bill. Therefore it must be approved in a conference committee, which is expected to resolve the differences in the House and Senate bills before the holiday break. Rep. Don Young, picked by House Speaker Paul Ryan Dec. 4 to sit on the tax bill conference committee, said in a statement that there is still a lot of work left for the delegation in its effort to maximize Alaska’s energy resources but he is looking forward to securing a final victory on ANWR. “It’s been over 40 years since this battle began — a generations-long battle that is finally coming to a head,” Young commented. “I thank Speaker Ryan and the House leadership for recognizing my role in this important debate and for entrusting me to be part of the effort to craft an agreement that will positively improve the lives of Alaskans and Americans for generations to come.” While Republicans hold a 240-194 majority in the House, 12 of them sent a letter on Nov. 30 to Ryan and Senate Majority Leader Mitch McConnell pleading for the refuge’s protection. They cite legacy bipartisan support for leaving ANWR intact since Republican President Dwight Eisenhower established its predecessor area in 1960. The Republicans further note the oil under the coastal plain is not worth the troubles likely to accompany it. The U.S. Geological Survey’s mean estimate for oil in the coastal plain is about 7 billion barrels of technically recoverable reserves. In May, Interior Secretary Ryan Zinke ordered the USGS to update the rough 1998 estimate. “If proven, the estimated reserves in this region would represent a small percentage of the oil produced worldwide,” the House Republicans wrote. “Moreover, the likelihood that lawsuits would accompany any development is high. Business-savvy oil companies are more likely to turn to the National Petroleum Reserve, a 23.5 million (acre) area in northwest Alaska specifically allocated for energy development, which is closer to infrastructure and significantly less controversial.” The letter concludes with the representatives stating that on behalf of their constituents they “look forward to working with (Ryan and McConnell) to maintain this longstanding balance that protects and preserves the refuge’s incredible natural resources and wildlife habitat and allows for responsible American energy development elsewhere.” Native corporations, CDQ provisions The final Senate tax bill would also included a deduction for Alaska Native corporations, but an amendment for Western Alaska fishing groups did not make it. Under the bill, Alaska Native corporations would be allowed to deduct either cash payments made into settlement trusts or the market value amount of land contributed to such a trust in the year the contribution was made. The legal and financial implications of putting Native lands into trusts have generally not been an issue until recently as it hasn’t been a common practice. Over the last couple years the Alaska Department of Law in Gov. Bill Walker’s administration has worked to clarify the process for putting Tribal lands in the state into trust status to provide an avenue for Alaska Native Tribes wishing to do so. Nonprofit Bering Sea fishing groups, on the other hand, did not get the clarification they were looking for in the tax overhaul. The six Community Development Quota groups established in 1992 by the North Pacific Fishery Management Council were hopeful the Alaska delegation would be able to add a provision noting the income received from their subsidiary companies is tax-exempt. The CDQ program was intended to be a way to increase local ownership in Bering Sea fisheries. Collectively, the six nonprofit CDQ groups representing 65 communities within 50 miles of the Bering Sea coast receive 10 percent of the annual total allowable catch in most of the fisheries. The profits derived from the harvest quota the groups own is supposed to be invested into economic development programs in their regions. Norm Van Vactor, CEO of Bristol Bay Economic Development Corp., said he is disappointed the tax-exempt language didn’t make the Senate bill, but added that the delegation has assured the groups it is a priority they will keep working. “Everything we do flows back to our communities, so we stressed to (Murkowski) that this provision would be very helpful towards securing our future,” Van Vactor said. The Aleutian Pribilof Island Community Development Association got a private letter ruling from the Internal Revenue Service in 2014 stating subsidiary income derived from fish harvests is not taxable, but BBEDC has taken a more conservative stance and thus has led the push to get the clarification in law, according to Van Vactor. Being on solid tax ground would make it easier for the groups to purchase additional shares of quota from individual quota holders getting out of fishing and turn that into more community investment without the worry about tax implications, he said. “We just want real clarity that our understanding is in fact what the IRS intends because we don’t want to do anything at all that at a later date might come under scrutiny or jeopardize the investments that we might otherwise make,” Van Vactor described. Elwood Brehmer can be reached at [email protected]

Ahtna subsidiary gets reduction in huge fine at Tolsona well

(Editor's note: This story has been updated to include a response by Ahtna Inc.) State regulators substantially reduced the penalty issued to an Ahtna Inc. drilling subsidiary to $92,000 in a final order issued Wednesday morning after company leaders admitted to the gas well violations and rectified them. The Alaska Oil and Gas Conservation Commission initially imposed a fine of $380,000 on Tolsona Oil and Gas Exploration LLC in late May for the company’s prolonged failures to install pressure gauges on its natural gas exploration well, monitor the well casing pressure and to even respond to repeated demands by the commission to do so. The wholly-owned Ahtna subsidiary spudded the Tolsona-1 well near Glennallen in September 2016, but technical challenges with the 5,500-foot well led the drilling to take about 54 days, according to Ahtna, about twice as long as originally expected. By mid-December, the company was preparing to suspend the well when pressure began to build between inner well casings. Tolsona notified the AOGCC of the issue, bled the pressure and the commission required the company to monitor the pressure for four weeks, according to the order. In January, the commission further required Tolsona to install a pressure gauge on an outer well casing and similarly report monthly pressure readings. The company said in February it would meet the requirement. However, Tolsona officials did not follow through with the pressure reports or return subsequent emails and phone calls from the commission. That led the AOGCC to issue a proposed enforcement action in mid-April, to which the company again didn’t respond. As a result, the AOGCC issued the $380,000 proposed penalty May 24. The Alaska Oil and Gas Conservation Commission is a technical state regulatory body responsible for oversight of subsurface oil and gas activity. Ahtna did not dispute the commission’s timeline of events during a Sept. 12 hearing on the matter. Tom Maloney, CEO of Ahtna and Tolsona, said at the time that the company manager responsible for the project never relayed issues to him, despite the fact that the two communicated daily. According to the documents, Maloney called the commission May 25 and said the company had not received the enforcement notice and the commission sent copies to him. Tolsona installed the outer pressure gauge June 1. Maloney apologized to the three-member commission at the Sept. 12 hearing for the company’s errors and said an internal investigation revealed problems in its communication chain, which have been rectified. Brewster Jamieson, an attorney for Ahtna, also said at the hearing that because the company was not “simply blowing the commission off” and leaders didn’t know about the problems the fines were excessive also not in line with similar previous cases. The original fines were $10,000 for not installing the pressure gauge and another $10,000 for not submitting the first pressure report in March. Additional fines of $5,000 per day were levied for each of the 50 days the gauge wasn’t in place before the April enforcement notice and $5,000 per day for each day the pressure report was past due. The final $92,000 penalty includes both the $10,000 fines for the initial violations but the accumulating daily penalties were reduced from $5,000 to $1,000 per day. “Tolsona’s demonstrable disregard for regulatory compliance precludes any finding that it acted in good faith,” the final order states. “The unmonitored over-pressured annulus is deemed a serious violation which poses a serious and significant risk to public health. Although there was no injury to the public, the seriousness of the violation, the absence of any effort by Tolsona to correct the violation and the need to deter such behavior weigh strongly in the penalty imposed. “However, the steps Tolsona has taken to ensure compliance with AOGCC regulations on future work, and Tolsona’s statement that it plans to plug and abandon the Tolsona-1 well, warrant reduction of the proposed civil penalties.” The company has 30 days to appeal the ruling to the Alaska Superior Court but issued a statement Thursday morning saying it "appreciates the substanital reduction in penalties from the AOGCC and does not plan to appeal the penalty." "We are proud that the Tolsona project delivered a perfect safety record, provided a boost to the local and statewide economy, created new employement opportunities for Ahtna shareholders and Alaskans, and that we were able to reach and evaluate the targeted zone," the Ahtna statement continues. "We are actively pursuing additional gas exploraiotn opportunities with operators on Ahtna lands in the Copper River basin." Elwood Brehmer can be reached at [email protected]

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

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

Walker touts trade relations with China after gasline talks

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

Murkowski adds Tongass timber, Roadless rule repeal to budget bill

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

Effort to open ANWR clears one more hurdle

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

Report shows Medicaid savings largely from travel cost-shifting

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

Hilcorp boost Inlet output; Eni preps long well

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

Pages

Subscribe to RSS - Elwood Brehmer