Elwood Brehmer

LNG tank construction a sign of progress for Interior gas project

Backhoes are back digging in south Fairbanks as construction work is again underway on the Interior Energy Project. Ground-turning work on the effort to expand the natural gas supply to the region had been on hold since the summer of 2015 as IEP leaders looked revise the scope of the project in the face of challenging economics brought on by lower oil prices. The last physical work on the project involved laying gas distribution lines in North Pole and Fairbanks. Contractors for Pentex Alaska Natural Gas Co., which owns Fairbanks Natural Gas, began foundation work in the final days of December for a $48-million, 5.25 million-gallon LNG storage tank. As of March 1, excavation for the tank foundation has been completed, which meant removal of up to 15 feet of silt and ice-laden material at the site near the Tanana River. In place of the topsoil, a series of conduit loops and three feet of insulation have been laid. They’ll be buried under a new bed of gravel that will support the tank, according to Pentex CEO Dan Britton. The conduit will support a passive cooling system known as a “thermosyphon” to keep the permafrost under the foundation frozen and stable if Fairbanks’ climate warms significantly over the next 75 years, which is the planned life of the tank. The insulation and a separate heating loop will act as a barrier between the LNG tank, its super-cold contents and the ground below. Natural gas turns to LNG at about 260 degrees Fahrenheit below zero. Britton noted that while it is counterintuitive to refrigerate the ground beneath a facility that is as cold as the dark side of the moon, the whole system needs to be monitored and controllable. “The concern from the geotechnical engineers is that if we didn’t have an ability to create a thermal break, the LNG could make the ground too cold. It could take it from our desired temperature of about 28 to 30 degrees (Fahrenheit) down to zero, -10, -15 and then it will become a wick for water,” Britton explained during the March 1 Alaska Industrial Development and Export Authority board meeting. “They don’t want us to be wicking water from outside the foundation into the foundation and creating ice lenses and jacking the tank.” He added that if the thick layer of insulation works as intended, the glycol heating loop would be an idle insurance policy. AIDEA purchased Pentex and Fairbanks Natural Gas in early 2015 and is in the process of transferring it to the borough-owned Interior Gas Utility as part of a $331 million plan to integrate the utilities and expand natural gas availability in Fairbanks and North Pole. The tank itself will be a double-walled, fully contained facility with plenty of redundancy. Britton said the request for proposals Pentex issued last summer was for a single-wall tank because the large size of the site and its isolated location meant a single-wall design with an outer containment system would be adequate. However, when Boston-based Preload Cryogenics submitted a comparably priced bid for a double-wall tank, there was no reason not to go with the more robust protections, according to Britton. The outer wall of the roughly 100-foot diameter tank will be 10-inch thick reinforced concrete. The primary inner tank will be made of roughly one half-inch thick welded steel plates The steel comprising the tank will also be about 9 percent nickel to keep it from becoming overly brittle when in contact with the super-cold LNG. “If the inner tank were to breach for some reason the outer tank is designed to contain the full capacity of the LNG. It’s also designed to handle cryogenic temps,” Britton said. Between the walls will be about 3 feet of insulation — largely perlite similar to the white grains found in potting soil. Many important facilities have backups for key parts installed. Fairbanks LNG tank will be no different, other than the fact that it will have backups for the backups. Britton said the tank would have three pump wells, each fully capable of keeping the system operating on its own. Likewise, there will be double redundancy in its vaporizers. They system is also designed to accept LNG from the truck tankers if need be. “In the event we have a problem with the line from the tank feeding the vaporizers we can take LNG directly out of the trailers straight into the vaporizers and into they (distribution) system,” Britton said. “(We’re) trying to put as much redundancy in the system as we can.” More than just a visible indicator for area residents that the long-delayed Interior Energy Project is closer to reality, AIDEA board member Gary Wilken of Fairbanks has called the LNG tank the heart “of the Interior Energy Project.” That’s due in large part to the fact that just the storage tank will allow Fairbanks Natural Gas to nearly double the amount of gas it can provide customers even without additional gas supply. When the tank is finished in late 2019 — in time to capture a $15 million LNG storage tax credit from the state before it sunsets — it will allow Pentex to run its Titan LNG plant in the Mat-Su Borough full-bore nearly all year because it will now have a place to hold the LNG. That means LNG produced during the low-demand summer months can be stored and drawn down during the winter. Currently, with just several small portable storage tanks, the Titan plant, capable of processing about 1.5 billion cubic feet of gas, or bcf, per year, must be run to match immediate gas demand from end users. In recent years that demand has been for between 750 and 900 million cubic feet of gas per year, according to Britton. The 5.25 million gallon LNG tank will allow Pentex to run the Titan plant to process up to 1.4 bcf of gas, he said, allowing for a few weeks of maintenance downtime each year, he said. Britton described the tank as providing a “direct line of sight” to when more natural gas will reach Fairbanks customers. Finally, while the overarching contract for the tank went to an Outside firm, there is no shortage local contribution to the construction. “We have a lot of work that’s being completed by Alaskan contractors and Alaskans,” Britton emphasized. He listed 10 Alaska companies that are subcontractors for Preload Cryogenics on the project. Great Northwest Inc., a Fairbanks-area general contractor handled all of the site preparation and gravel fill. Anchorage Sand and Gravel is casting the outer tank panels, which will be trucked north to Fairbanks. Three of the 85-foot long concrete test panels will be started later this month and the first will head to the site in early June when spring weight restrictions on the highways are lifted, according to Britton. Elwood Brehmer can be reached at [email protected]

Walker puts out call to join trade mission to China

Who wants to take a trip with the governor? At a March 5 press conference in Anchorage, Gov. Bill Walker said his office is looking for business leaders interested in participating in a trade mission to China this spring. The weeklong business trip, scheduled for May 19-26, is the governor’s attempt to continue building off of a stop in Anchorage last April by China President Xi Jinping and Chinese cabinet officials. “The discussions that took place at that dinner at the Captain Cook (hotel) were very fruitful in many ways since then,” Walker said of Xi’s visit to Alaska. The Chinese government leaders were on their way home and made an extended refueling stop after meeting with President Donald Trump. Walker said plans are for the Alaska trade delegation to be primarily made up of people from the state’s private sector joined by state Commerce Commissioner Mike Navarre, International Trade Director Shelley James and the governor. It’s not yet known if any other state officials will participate. Those interested in participating in the administration’s trade mission to China should contact the state Office of International Trade. Attendees will be required to pay a $3,000 participation fee for meeting arrangements, interpretation, logistics, in-country transportation and other services, according to the governor’s office. Airfare and lodging are not included in that cost. China is already Alaska’s largest trade customer, buying up nearly 30 percent of the state’s exports in recent years. Last year China imported $1.32 billion worth of Alaska products, a 7 percent increase from 2016, according to the state Office of International Trade. Seafood, Alaska’s top export, has accounted for about half of the exports from Alaska to China in recent years, followed by minerals and timber. Despite being tops locally, Walker cited statistics that Alaska is among the bottom three states nationwide in terms of business activity with China. “We have a long ways to go but we have a tremendous opportunity,” he said. The biggest fruit borne so far from Xi’s visit is the framework agreement Walker and Alaska Gasline Development Corp. President Keith Meyer signed in Beijing last November with three state-owned Chinese mega-corporations to possibly buy from and invest in the $43 billion Alaska LNG Project. While the deal with oil and gas giant Sinopec, the Bank of China and China Investment Corp., which manages the country’s sovereign wealth fund, is nonbinding, Meyer has said AGDC hopes to have firm agreements in place by early summer that would be the foundation for a final investment decision on the project early in 2019. Meyer said Trump’s talk of tariffs on imported steel and aluminum — met with bipartisan opposition — and other tough talk on trade with China is due to the massive trade imbalance with the U.S. That creates an opportunity for Alaska, Meyer said. “Really, the pushback (on China) is a message to buy more stuff from the United States and that’s where I think Alaska has the stuff that China wants, so I see this message of ‘buy more stuff’ really being a call to ‘hey, buy more stuff from Alaska,’ so we can do our part there,” Meyer commented. “I think the message is really harmonious with our mission.” A partnership to bring the long-sought Alaska LNG Project to fruition would be an iconic achievement but the project still has many hurdles to clear, the most recent to arise being the state’s permit application declared to be incomplete by the Federal Energy Regulatory Commission. More immediately, Walker said the impact of one sentence uttered by Xi on-camera while he was here is already being felt by Alaska businesses. The Chinese president referred to Alaska as “a Shangri La of China” and subsequently predicted what the result would be, according to Walker. “The cameras were off — as he walked away he smiled a bit and said, ‘You will see an uptick in tourism as a result of my saying that,’” Walker recalled. “And he certainly was correct.” Visit Anchorage CEO Julie Saupe, invited by the governor’s office to participate in the press briefing, said tour operators, travel agents and others in the industry have anecdotally confirmed Xi’s prediction. She noted hard data on tourism growth for the country won’t be available for some time as international tourist travel is usually planned many months or years in advance. “We are seeing a tremendous increase in inquiries from China visitors and also in products available both in Anchorage and also in Fairbanks to serve Chinese visitors, so we do see a lot of potential in this market as do other destinations,” Saupe said. “It’s a very competitive environment that we’re working in for the Chinese visitor because they are going to really have a lot of increased visitation throughout the U.S.” Tied to the interest in tourism, Ted Stevens Anchorage International Airport Manager Jim Szczesniak said his team is trying to make the airport again a major hub for international passenger flights. The Anchorage airport is consistently among the top five airports worldwide for cargo plane activity mostly due to its prime location as a midpoint refueling stop between East Asia and the Lower 48. Szczesniak said airport officials are promoting a similar model for passenger flights as a means for airlines dealing with worldwide shortages of pilots and commercial aircraft as well as high demand for gate space at the largest domestic hubs. “We’re looking to offer airlines the opportunity to come directly into Anchorage, be able to transfer passengers in Anchorage — some of them like in Icelandair’s model will be able to get off here and be able to tour; do five, six, 10 days in Alaska — and then get back on a plane and continue on to their further destinations,” Szczesniak described. Anchorage was a hub for international passenger traffic for many years until the early 1990s when the fall of the Soviet Union reopened airspace over the former communist country and popularization of the Boeing 747 made nonstop trans-Pacific flights feasible between more locations. Szczesniak said today a daily eight- to nine-hour flight between Anchorage and most East Asia hubs requires just two pilots and one plane, while a similar schedule going direct to the Lower 48 would require two planes and six pilots per day due to flight-time constraints. “Now that there’s a constraint back on the system we’re offering an opportunity for Anchorage to mitigate that constraint,” he added. Szczesniak noted the airport waives some landing fees for airlines offering new or expanded direct passenger service to or from Anchorage depending on the frequency of flights and length of service. Elwood Brehmer can be reached at [email protected]

House budget slashes credits, inflation-proofing, adds $19M for UA

The House is getting ready to vote on the operating budget and three perennially contentious issues were addressed in Finance Committee amendments to Gov. Bill Walker’s budget proposal. The House Finance Committee spent much of Feb. 26 and Feb. 27 debating amendments to Walker’s $4.5 billion 2019 fiscal year operating budget proposal. Finance co-chair Rep. Paul Seaton, R-Homer, said public testimony on the House version of the budget would be taken March 1-3 and the budget would move to the floor for a vote by the middle of the month. The governor’s budget is generally on par with the current year budget, which has been a source of discontent for Republicans who insist further substantial cuts are needed before taxes proposed by the administration and the Democrat-led House Majority are considered. Tax credit payments slashed While much of the debate was over small monetary or technical changes as is often the case, an amendment by Seaton would change how the state calculates the required minimum annual payment of oil and gas tax credits. Seaton, one of three House Republicans to caucus with the mostly Democrat majority coalition, pushed to appropriate $49 million to the Oil and Gas Tax Credit Fund instead of the $206 million statutory minimum payment calculated by the Department of Revenue. Seaton’s amendment passed 6-5 with House Majority member Rep. Jason Grenn, I-Anchorage, voting with the minority against it. Seaton’s amendment also removed $27 million from the governor’s budget intended to make the state’s first yearly payment on a 10-year bond package to pay off nearly $1 billion in outstanding and expected tax credit certificates. The administration’s bonding proposal is separate legislation that the governor’s budget assumes will pass. Legislation passed over the previous two years effectively ended the tax credit program but unpaid credits from 2015 to 2017 remain on the state’s books. Until Walker vetoed $200 million worth of the credits in 2015, the state had always paid the year’s balance of credits in full. The sticking point is over when state officials calculate producers’ oil production tax liability for the purposes of generating the statutory minimum payment amount for the tax credits. By law, the state is obligated to appropriate back to the Tax Credit Fund 15 percent of production taxes when oil prices are forecast to average less than $60 per barrel or 10 percent of the taxes when oil is more than $60 per barrel. The Walker administration arrives at the minimum credit payment by determining the 35 percent net profits tax and then arriving at the minimum payment amount before factoring tax credits, including the key per barrel tax credit, which drastically lowers the effective tax rate. Seaton and some, but not all, members of the House Majority members of the Finance Committee, contend the minimum tax credit payment should not be figured until after the credits are applied, thus lowering the minimum payment because the state does not actually receive the production tax amount the administration calculates. Seaton said the intent of the Legislature and former Gov. Sean Parnell’s administration was to base the minimum payment formula on the “net” taxes received and not the “gross” tax amount before other credit deductions when the legislation was passed. Rep. Tammie Wilson, R-North Pole, argued that while she has been one of the few Republicans in the Legislature comfortable with paying the formulaic minimum credit amount because that’s what has been in law all along, changing the formula now would appear as if the Legislature is trying to bend its own laws whenever it can to benefit the state and further damage the state’s reputation as a reliable business partner. Anchorage Republican Rep. Lance Pruitt noted the administration has used the gross minimum tax credit formula for several years and the Legislature agreed to pay the Tax Credit Fund $77 million last year based on the administration’s formula. Revenue Commissioner Sheldon Fisher said the administration has consistently applied the gross formula and Tax Director Ken Alper noted that in prior years the delta between the two calculations was only $10 million to $20 million. This year it’s more than $150 million based on slightly higher oil prices and reduced company spending that results in a much greater pre-credit profits tax calculation. “It is the same calculation that got us to $30 million in fiscal year ‘17 that got us to $206 million in fiscal year ’19,” Alper testified. Permanent Fund Amendments by Seaton also passed to remove language from the governor’s budget to move nearly $2.4 billion from the Earnings Reserve Account of the Permanent Fund into the corpus of the Fund. Legislators have declined to inflation-proof the corpus the previous three years to maximize the value of the Earnings Reserve in preparation for utilizing the Earnings Reserve for government services via a percent of market value, or POMV, draw — which is likely to happen this year because other state savings accounts aren’t sufficient to cover the projected deficit. “The one thing we can’t do is we can’t devalue the corpus; we have to protect it,” Pruitt said. The Alaska Permanent Fund Corp. Board of Trustees passed a resolution last fall urging the administration and the Legislature to pass a law that would automatically inflation-proof the Fund without needing direct appropriations. While a bill to that effect did not materialize, the governor’s budget would backfill the corpus with a $1.45 billion transfer to cover 2016-18 inflation-proofing payments and another $943 million for fiscal year 2019, the upcoming budget year being debated. However, another amendment forwarded by Seaton reduced the POMV draw on the Fund from 5.25 percent in the governor’s budget to a more conservative 4.75 percent, which the House Majority has advocated. Walker included the POMV-style calculation in his budget bill in order to propose a fully funded budget, which he is required to do, in the event legislation formalizing the POMV draw is not passed. The administration and the Republican Senate Majority have pushed the higher draw to reduce deficits in the near-term, with the plan to lower it to a five-year rolling average 5 percent draw after three years at 5.25 percent. Legislative Finance Director David Teal said 5 percent is “aggressive but not out of line,” while the 4.75 POMV draw “is sustainable and should keep pace with inflation.” UA increase There was bipartisan support for increasing the University of Alaska budget by $19 million; an increase arrived at by the University of Alaska Budget Subcommittee. State fiscal support for the UA System has fallen from $378 million in 2014 to $317 million currently. Walker proposed holding it flat at $317 million. UA President Jim Johnsen said in a speech Feb. 20 that the system offers 50 fewer programs and has 5,000 fewer students and nearly 1,200 fewer employees today than it did three years ago as a result of the cuts. Johnsen and the Board of Regents have said over that time that they expect the university budget to be cut but asked for smaller cuts to better manage internal reforms that would save money over the long-term. Rep. Steve Thompson, R-Fairbanks, said the $19 million increase is a compromise between what the regents requested and what the governor proposed when also considering the peak budget amounts. “Our future’s in our young people that are graduating from our university,” Thompson said Feb. 26. Elwood Brehmer can be reached at [email protected]

Cost estimate drops for Ambler mining prospect

The company that has led exploration in the Ambler mining district is now shifting to develop its primary prospect after many years of work. Trilogy Metals released a pre-feasibility study for its project at the Arctic prospect in Northwest Alaska with a higher initial capital estimates cost but a lower overall cost Feb. 20. Formerly NovaCopper Inc., Vancouver-based Trilogy Metals changed its name in 2016 to reflect the multi-metal deposits the company holds. Located in the middle of the large Ambler mining district that stretches along the southern face of the Brooks Range in Northwest Alaska, Trilogy leaders project the high-grade Arctic deposit to be the first of several mines in the area. The Arctic prospect holds an estimated 2.4 billion pounds of indicated copper resources at a 3.07 percent grade; 3.3 billion pounds of indicated zinc at 4.23 percent; and precious metal resources estimated at 55 million ounces of indicated silver and 730,000 ounces of gold, according to the Feb. 20 report. Estimated costs to develop Arctic have grown 9 percent since a 2013 preliminary economic assessment and are now pegged at $780 million. However, a 60 percent drop in expected annual operating and 20 percent decrease in closure and reclamation costs — to about $65 million each — cut the all-in cost for the mine by 5.5 percent from $964 million in 2013 to $911 million today. Trilogy executives said during a call with investors that the drastic drop in operating costs is due to changes in the plan for waste rock and tailings management, fuel and federal tax reform. The original high-level Arctic design called for potentially acid-generating waste rock to be comingled with mine tailings, which resulted in the need for a larger tailings facility and dam, according to Trilogy CEO Rick Van Nieuwenhuyse. The current revised design has mine tailings and wastewater behind a dam with waste rock and an associated collection pond directly in front of and below the tailings dam at the head of the Subarctic Creek valley that will hold the mine waste. Additionally, switching from diesel to LNG as a fuel source to power the mine facilities equates to a 41 percent reduction in the cost of power at Arctic, according to the pre-feasibility study. “We’ve worked hard over the last several years to confirm that we can use LNG that’s available in Alaska — and they’re trucking it up to Fairbanks now,” Van Nieuwenhuyse said, referencing Fairbanks Natural Gas’ use of LNG trucked north from Point MacKenzie in the Mat-Su Borough to supply its customers. “We can haul LNG just as easily as diesel.” Utilizing LNG should also make obtaining an air quality permit for the project from the state Department of Environmental Conservation much easier, he noted. The natural gas could be sourced from Cook Inlet as the Fairbanks utility currently does or from a large gasline off the North Slope if the state’s Alaska LNG Project materializes. Van Nieuwenhuyse also said Trilogy has settled on using enclosed cubed containers for trucking metal concentrates from the mine — with a higher upfront cost than open trailers — that should eventually pay for themselves through no lost concentrates during transport. “I think more importantly by not losing concentrate as fugitive dust you’re not contaminating the environment. This is a win-win for the overall project,” he said. Developing the Arctic mine — or any project in the Ambler district — is predicated on the state-owned Alaska Industrial Development and Export Authority being successful with its effort to permit, finance and construct a 220-mile road west from the Dalton Highway to access the region. The federal Bureau of Land Management is currently drafting the first version of the environmental impact statement for the $300 million-plus road. Van Nieuwenhuyse said Trilogy has tried with its work at Arctic to keep pace with AIDEA’s work on the Ambler access road. A permit decision on the road is expected in early 2020, according to AIDEA, with two subsequent years of construction. The state’s plan is to pay for the road through tolls from the companies mining and exploring the Ambler region. Accordingly, Trilogy hopes to start applying for its environmental permits in 2019 and embark on a full feasibility study in 2020, Van Nieuwenhuyse said in an interview. Ideally, it would all lead to a completed road and the start of Arctic construction in about five years, he said. This summer Trilogy will be doing $4 million to $5 million worth of water management studies and geotechnical evaluations of the tailings dam site. The company is also preparing for another $10 million exploration program at its Bornite prospect to the south of Arctic. Overall, Van Nieuwenhuyse said the company will be employing about 80 people at its projects during the summer work season as it has in recent years. Trilogy’s financials at Arctic are based on a minimum 12-year mine life. It’s a small but very prospective deposit. The company is estimating it can recover pre-tax development costs within two years of operations based on an average market price of copper at $3 per pound. Even at $2 per pound copper, Trilogy estimates after-tax payback within three years. Copper has traded in the $3 per pound range of late. Annual production from the mine is planned at about 160 million pounds of copper, 200 million pounds of zinc, 33 million pounds of lead, 30,600 ounces of gold and 3.3 million ounces of silver over its life. While Arctic holds and is expected to produce more zinc, copper generally sells for significantly more than zinc, which has traded between $1.20 and $1.60 per pound over the past year. Total costs for mine development, operations and access road tolls are pegged at 63 cents per pound of payable copper, according to Trilogy. “At current prices your cash flow is well over $500 million of free cash flow so this thing is really crunching out a lot of cash,” Van Nieuwenhuyse commented. As a result, Trilogy leaders aren’t nearly as worried about metal prices as the proponents of other remote mines— with extremely high costs — in Alaska. “If we’ve got the kinds of commodity prices that would shut down this mine we’ve got other things to worry about,” Van Nieuwenhuyse said in an interview. “We certainly envision here for the future a central milling facility at Arctic that is conveniently located smack dab in the middle of this 100-mile long (Ambler) belt.” Elwood Brehmer can be reached at [email protected]

Senate committee takes up Walker’s bill to retire oil tax credits

Gov. Bill Walker’s plan to clear the state’s books of nearly $1 billion in oil industry tax credits is generating a lot of interest but also plenty of “what ifs.” The Senate Resources Committee took up Senate Bill 176, which would have the state sell bonds to pay off the credits, for the first time Feb. 21. Administration officials characterized the proposal as a cost-neutral way to pay off the credits immediately while hopefully spurring industry activity and at least partially restoring the state’s business credibility. Under the proposal, the Department of Revenue would issue a series of 10-year bonds equal to the total outstanding tax credit obligation. The money generated from the bond sales would then be paid out to the primarily exploration and small producing companies holding credit certificates. Central to the plan is getting the companies to agree to take a discount of up to 10 percent off the face-value of the credit certificates in order to be paid immediately — in essence take a haircut to end the prolonged tax credit saga and get on with life. Revenue Commissioner Sheldon Fisher called it a “unique opportunity” for the state. “It’s almost free money, if you will, to be able to accelerate the payment into the current time period, pay off these debts, result in a stimulus, but moving forward the cost of that borrowing will be borne by the credit holders themselves,” Fisher testified to the Senate committee. Walker vetoed a total of $630 million from budget bills in 2015 and 2016 while the state was running annual deficits in excess of $3 billion. The actions drew sharp and continued ire from the industry and Republican legislators who argued the governor was not keeping the state’s commitment to fully pay off the credits each year as companies claimed them. Those annual tax credit bills reached $700 million, which Walker said was unsustainable as the state was cutting other services and facing such large budget shortfalls. Prior to the 2016 veto the Walker administration proposed legislation to phase out the credits and appropriate $1 billion to pay off the obligation then — if the Legislature would pass the fiscal reforms needed to resolve the deficits. Subsequent legislation in 2016 and 2017 effectively ended the cashable tax credit program in Cook Inlet and then on the North Slope, respectively, but the previously earned obligations remain. Current law requires the state to pay only a portion of the credit certificates each year based on a percentage of the year’s expected oil production tax, which some Democrats have stressed as proof that the state has actually kept up its end of the bargain. However, Fisher said the state bears some responsibility in creating an atmosphere that the credits would be fully paid off each year. Walker’s veto was the first time the full balance of credits earned in a year was not paid. Fisher characterized paying off the obligation as a “matter of ethics” that would also help restore the state’s business credibility. In 2017 the Legislature appropriated the statutory minimum payment of $77 million to the Oil and Gas Tax Credit Fund amid larger battles over spending cuts and taxes to solve the state’s fiscal problems. The tax credit bill was $806 million at the start of the year, according to the Revenue Department. Tax Division Director Ken Alper said officials anticipate about $100 million of the existing credits will be sold to large producers that can’t receive cash for them but can use the certificates to pay down their own production tax obligations. Another roughly $200 million in credits that have not yet been claimed or will be earned through ongoing refinery and LNG storage credits that were not killed with the legislation last year but will sunset in a couple years is likely to be added to the obligation before the issue is finally settled, according to Alper. Further complicating the matter is the fact that credit holders — particularly small operators with little cash flow — have borrowed against the credit certificates and banks lent money on the presumption the credits would always be paid at the end of each fiscal year. As a result, not funding the credit payments has led to companies defaulting on those loans. In turn, planned oil and gas work has been delayed for lack of cash and banks working in the industry are now generally hesitant to lend for work in Alaska. “While this money may be pledged and go to pay off debt we are confident that (companies) are going to be able to access additional sources of capital and bring it into the economy,” Fisher said. Numerous field operators working in both Cook Inlet and on the North Slope such as Caelus, Blue Crest and Furie Operating Alaska have cited unpaid tax credits as a reason they have deferred or cancelled work plans in recent years. Southeast Republican Sen. Bert Stedman said bankers he’s talked to regarding the credit issue have said they simply missed the “subject to appropriation” language in the tax credit program statute during their due diligence and assumed the certificates would always be paid. “I think (banks) are going to be a lot more cautious and do a much tighter review of their underwriting as they go forward,” Stedman commented. Details of the discount To the intricacies of the bill, of which there are several, Fisher said the administration settled on the 10 percent discount rate as a general midpoint between what the state can borrow for and the interest rates in the 15 percent range that oil industry borrowers often face. “They need the money now and even though 10 percent is well above the state’s cost of capital we believe it’s well below their cost of capital,” Fisher explained. At the 10 percent discount rate a company or bank holding $100 million of certificates would be paid $87.2 million, according to Fisher, because under the status quo that $100 million would be spread over several years and the per annum discount is applied starting in the second year. A second option would give credit holders the option of taking a smaller discount of 5.1 percent, but that would come contingent on negotiating with the Department of Natural Resources on an overriding royalty interest on future oil and gas production or commitments to further invest in projects in Alaska. A small number of companies holding seismic exploration credits could also agree to waive the 10-year confidentiality provision in state law and make the data gathered with the expected credit funds public immediately. The first round of bonds would likely be sold in August, giving credit holders until about late July to decide if they want to participate, according to Fisher. He said the administration is doing its best with the bill to balance several competing interests. Paying the credits in-full using savings is politically unlikely and at this point might not be fiscally advisable given the state is expected to have less about $2.3 billion in savings when the current fiscal year ends June 30. Administration and legislative budget managers insist the state needs at least $1 billion on-hand at all times for cash flow management and responding to unforeseen emergencies. Fisher also noted that if the legislation does not pass, the Legislature would have to add about $180 million to the governor’s budget proposal — an unsavory thought with dwindling savings — because the minimum payment for fiscal year 2019 is $206 million, up significantly from prior years. The governor’s budget appropriates $27 million to make the first interest-only payment on the bonds but presumes SB 176 or its mirror version in the House will pass and as such does not include the traditional tax credit appropriation. Industry interest The administration is still feeling out what companies might want to participate, but none of the roughly dozen banks and oil industry companies holding credit certificates have wholly dismissed the idea. “So far I haven’t met anyone who has said they don’t want to participate,” Fisher said. Casey Sullivan, a spokesman for Caelus Energy said the company is happy the administration is taking on the issue and is trying to find new ways to solve the credit problem but wants to see what happens to the bill as it moves through the Legislature. Caelus operates the small Oooguruk oil field on the North Slope and has been forced to delay its adjacent Nuna oil project for several years because it hasn’t been paid the credits it is owed in addition to the sharp drop in oil prices since 2014. Caelus has also put off further evaluation of its large Smith Bay oil prospect discovered in 2016 due to the credit issue and prices, according to company leaders. Ahtna Inc., the regional Native corporation for the Copper River area, said in a statement to the Journal that the company is in favor of the state trying to find a solution to pay the owed money sooner. “While it’s good that the state is working to pay obligations, it’s unfortunate that payments won’t be made at 100 percent,” spokeswoman Shannon Blue wrote. “Ahtna has paid our vendors at 100 percent and the lack of tax credit payments has slowed business investment when it’s needed most to get out of a severe recession.” Ahtna and Interior Native regional corporation Doyon Ltd. have drilled exploration wells near Glennallen and Nenana, respectively. A spokeswoman for Doyon said the company is still reviewing the bonding proposal and couldn’t comment on it yet. House Bill 111, which passed last year and largely ended the refundable tax credit experiment, included a provision allowing the Native corporations owed money to apply the production tax certificates against their state corporate tax payments. Other oil industry representatives said they are amenable to the concept of SB 176 but need to know more about how it would impact their specific situation and what happens if they don’t opt in if the bill passes. Fisher said the Legislature would have to appropriate additional funds for companies that decide not to participate in the bonding program. Senate Republicans on the committee were generally receptive to the idea as well, but questioned why the administration wants to start with interest-only payments and backload the bond payments over 10 years. Fisher responded that putting off the lion’s share of the bond payments to future years gives the state some time to get on better fiscal footing and noted the largest annual payments would be $115 million from fiscal years 2024 to 2028, with final payments of $82 million and $65 million in 2029 and 2030. The statutory minimum payment schedule has the state paying out at least $119 million each year until 2024 under the current formula. “Central to this proposal is a desire to produce a savings to the state budget in the near term,” Fisher added. Anchorage Sen. Bill Wielechowski, the lone Democrat on the Resources Committee, emphasized that the state has done all it is obligated to by paying the annual minimum and questioned the constitutionality of the subject to appropriation bonds. Article IX of the Alaska Constitution generally prohibits the state from taking on debt outside of voter-approved bonds for capital projects and revenue bonds issued by a state corporation. State Debt Manager Deven Mitchell said the Revenue Department would form a public corporation for the purposes of selling the bonds; and the situation would be similar to how the state financed the Goose Creek Correctional Facility in the Matanuska-Susitna Borough. In that case the borough issued revenue bonds on the state’s commitment to pay through its lease of borough lands. “This would be what I’ve heard lawyers refer to as lowercase ‘d’ debt,” Mitchell said. “There’s a commitment to pay,” he continued. “It’s pledge to third parties; it’s the basis of the rating on those bonds and the basis of the investors’ risk weighting.” Elwood Brehmer can be reached at [email protected]

Modular processing facilities aimed at small Slope fields

North Slope oil has historically been a game of making big discoveries needed to justify big development costs, but a team of NANA WorleyParsons engineers is trying to rewrite that playbook. Kairos LLC, a subsidiary of NANA WorleyParsons, has developed what company leaders believe could turn small or otherwise marginal North Slope oil finds into productive members of the state economy. Kairos is a Greek term for “a time when conditions are right for the accomplishment of a crucial action,” according to Merriam-Webster. The time was early 2015; oil prices had just fallen to less than $50 per barrel and the industry was coming to grips with the fact that the downturn was the result of fundamental changes in global oil markets and not a recession-induced blip like 2008-09. The crucial action, for NANA WorleyParsons, was finding a way to help its industry partners be profitable in Alaska, particularly during periods of lower prices. And the accomplishment turned out to be Kairos’ Mobile Arctic Production System. The recently patented MAPS, as it is conveniently referred to, is a scaled-down and modular oil processing facility. Engineers of the system compare it to a “very small portable version of a flow station or gathering center.” NANA WorleyParsons General Manager Daniel Formoso described it as a “plug and play” system that could preclude operators from having to spend upwards of $200 million or more on traditional processing facilities. “This allows production of smaller fields that could otherwise be uneconomic to develop,” Formoso said. The basic processing system consists of four modules: one each for power generation, natural gas handling, electrical controls and a 5,000 barrels per day liquids production module. It can be leased for $13 million per year, according to company officials. Storage tanks and a truck loading facility are also part of the standard package. Additional modules for handling sand, water, production heating and processing to sales-quality oil are available as well. The system is scalable in 5,000 barrels per day increments by adding additional production modules, but company officials acknowledge that traditional, large facilities would probably be warranted for production above roughly 15,000 barrels per day. It’s intended for developments with less than about 10 wells. While produced natural gas is intended to power the system, if the MAPS is installed on a well pad near accessible power — or a pipeline for that matter — the power generation or liquids storage equipment can be omitted. “We could tailor it to be handling more gas than oil if we needed to,” Formoso added. The flexibility in configuration should make the MAPS a viable option for most any oil-gas-water-sand production mix an operator encounters on the North Slope, according to Kairos. The only thing an operator needs ahead of time is a small gravel pad of at least three acres, which is enough space for a few wells and a handful of the 20-foot by 60-foot truckable modules. The upfront cost to an operator would then be in the $20 million range, Kairos engineers estimate, as opposed to the cost of a more traditional 10- to 12-acre gravel pad to hold a suite of wells and large, permanent production facilities. The MAPS could be applicable not only for small oil fields — of which there are several the company has identified that have been found and dismissed by producers because of traditional production costs — but it could also provide a revenue stream for a small producer while long-term full development of a larger field is ongoing. Kairos estimates it could lower the all-important breakeven production cost on a new field from $55 per barrel of oil to $37 per barrel. The modular production facility concept is not new; it’s widely used across the shale fields of the Lower 48. Kairos’ MAPS is similar to the systems employed down south but with Arctic-specific additions. Company engineers note the small production systems popular in the North Dakota and Texas shale oil fields are built on open-air skids with no fire and gas detection or suppression systems and very little insulation on piping and other equipment. Down south, where power connections are easy to find, gas is generally flared. The MAPS not only uses gas for self-sustaining power, thereby minimizing the need for diesel and its risks, but any gas flaring that needs to be done is enclosed as well, according to the designers. “It’s made for our environment,” Formoso said. NANA WorleyParsons officials said the first systems will likely require 12 to 18 months of lead time, during which a company could develop the requisite gravel pad infrastructure. The company, which is a contractor for numerous Slope operators, has received interest from several producers, according to Formoso. Not to be discounted is the fact that the MAPS is intended to be a fairly autonomous system with truck drivers transporting liquids being the primary on-site personnel during operations. A single person could monitor a handful of MAPS remotely, thereby reducing safety risks in the event of an accident on the production pad. Finally, decommissioning — whether because of a field being exhausted or full-scale facilitates being completed — is as simple as calling NANA WorleyParsons and telling them to “come get your stuff” company leaders described. That cost is rolled into the lease. Elwood Brehmer can be reached at [email protected]

Young, Murkowski talk immigration, infrastructure, Tongass and pot

The Presidents’ Day recess in Congress gave the Journal an opportunity to sit down with two-thirds of Alaska’s congressional delegation. Rep. Don Young stressed the need to update the nation’s infrastructure, from bridges to icebreakers, and the means to pay for it during a Feb. 19 interview at the Journal office. Sen. Lisa Murkowski highlighted her ongoing efforts to repeal the Roadless Rule in the state as a way to provide Southeast communities with more economic options. Both discussed a similar desire to permanently resolve the in-limbo status of immigrants known as “Dreamers” — children brought to the U.S. at a young age by illegal immigrant parents or relatives — but with differing views on how the issue will play out in the coming weeks. Sen. Dan Sullivan met with the Journal in late December. Young said he wants to see a way for the immigrants to obtain expedited citizenship for those without criminal records and those who are employable or on their way to be if they are still too young to be in the workforce. He added that he doesn’t like referring to them as “illegal” immigrants given the unique nature of their situation. “Some people say that’s amnesty. I’m saying no; if they were born here or came across (the border) unbeknownst to them and they’re living here they ought to have the opportunity just like anybody else,” Young said of the dreamers (so dubbed for a failed immigration bill known as the DREAM Act that would have addressed their status), many of whom are now adults. Law enforcement agencies should focus on stopping illegal immigration, which undermines the efforts of those who attempt to move to the U.S. legally, according to Young. President Donald Trump said last fall that he would end the Deferred Action for Childhood Arrivals, or DACA, program established via executive order by President Barack Obama after six months — on March 5 — if Congress does not reach a deal to settle their status. Murkowski said the current situation does not allow Dreamers to better their situation through education or formal job training because they are technically illegal immigrants, and that helps no one. Young contended the DACA issue wouldn’t be resolved because Democrats in Congress do not want to solve what they can blame Republicans in Congress and Trump for not fixing. He noted that despite Republicans holding majorities in both chambers of Congress, Democrat support for legislation is needed to reach the filibuster-proof 60-vote threshold in the Senate. Murkowski, on the other hand, said, “It’s not dead, I refuse to believe that,” in a Feb. 20 interview. Four bills, including one Murkowski worked on with 25 other Senators, failed last week in the Senate. Murkowski’s bill received 54 votes of the 60 needed to advance. On the budget, Alaska’s senior senator said she is desperate for Congress to get away from passing more continuing resolutions, or CRs, just to keep the government open now that an overall spending deal for the next two years has been reached. The current continuing resolution is good through March 22. On Feb. 8, Congress agreed on a budget deal to raise current spending caps by about $300 billion over the next two fiscal years. The increased spending limits gives appropriations subcommittee leaders more flexibility in drafting agency budgets, Murkowski said, so the new numbers are being worked into prior spending plans that will hopefully result in an omnibus budget package. “If we’re not successful with this (budget) and we need to do a short-term CR I think that would either be six or seven. It’s horrifying; it’s embarrassing; it’s wrong; it shouldn’t be done,” Murkowski emphasized. “Now that we got the budget deal and the caps have been set it’s ‘alright gang, everybody get to work.’” The Tongass Murkowski chairs the Appropriations subcommittee that covers the Interior Department, the Environmental Protection Agency and the Forest Service budgets. In November she released a $32.6 billion discretionary 2018 budget for those agencies with language that would have the Forest Service temporarily stop its transition to exclusively young-growth timber harvest in the Tongass National Forest and permanently exempt Alaska from the Roadless Rule. 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 started in 2013 by the Obama administration — took effect last December and directs forest managers to fully transition to only young-growth timber harvests in the Tongass within 16 years. Murkowski supports eventually moving to young-growth harvests in the nation’s largest national forest but has sided with Southeast loggers who contend the management plan is not based on accurate timber inventories and does not provide adequate harvest volumes to keep what’s left of the region’s timber industry alive. “We need to make sure in the Tongass we have a multiple use management policy. I set out on a strategy — there was no secret to it — I said, ‘within the Tongass we need to have some forest management reforms. If we’re going to have an inventory it needs to be an honest inventory,’” she said. Murkowski couldn’t say whether or not the Tongass and Roadless Rule language would stay in the Forest Service budget bill when the full budget is debated but noted the state is petitioning the Forest Service for an exemption to the Roadless Rule as well. Several attempts by the State of Alaska to secure an exemption to the Roadless Rule through the federal courts or have it thrown out entirely have been unsuccessful. The petition route to a Roadless exemption is lengthy, but Murkowski said the administration is aware of the challenges the Clinton-era order presents and other western states such as Idaho have managed to negotiate exemptions that have benefitted their economies. She added that the Roadless Rule doesn’t only hamper timber harvests, but it also impedes small communities in the Tongass from advancing generally supported infrastructure projects. “In certain parts of Southeast — even though you have so much hydropower — there are certain communities that are not tied into one another and the (energy) costs that they’re facing are just sky high and yet you can’t have some kind of access road to build transmission (lines), to build your renewable energy resource,” Murkowski said. “If nothing happens those villages will die on the vine.” Opponents to the Tongass management changes stress the region’s economy has shifted from timber and fishing to tourism and fishing since the peak logging days of the 1980s and early 1990s. Attempting to revive a marginally economic timber industry will just deter visitors who do not come to Alaska to see logging — not to mention the potential for damage to salmon habitat — they argue. Infrastructure, icebreakers The Trump administration’s scaled-back $200 billion federal infrastructure spending proposal is too small for Young’s liking because it is the federal government’s responsibility to provide a reliable brick and mortar foundation for the country, he said. “We need a universal (transportation) system for economic purposes,” Young said. A $1 trillion infrastructure package was one of Trump’s primary campaign pledges. But adding spending in roads, bridges and airports should not grow the deficit, either, he said. Young supports the president’s 25 cents-per-gallon increase to the federal gas tax as a means to pay for the upgrades. “It seems high; it looks high; I know Alaskans won’t like it but if you want a transportation system someone has to pay for it and we’re $23 trillion in debt. You’re not going to borrow to do that,” he said. The problem with the current gasoline tax of 18.4 cents per gallon is that when it passed in 1993 it was not indexed to inflation and therefore the effectiveness of the tax to support the Highway Trust Fund has dwindled, according to Young. He has long supported other types of highway user fees based on miles driven or other options as well to capture revenue from drivers of electric cars and more fuel-efficient vehicles that use roads but pay less or no fuel taxes. Young said despite broad rhetorical support in Congress he does not foresee a direct appropriation for roughly $1 billion to the U.S. Coast Guard to build a new heavy icebreaker. Instead, he supports providing the Coast Guard an avenue to lease icebreakers long-term, which would also get around a federal statute that requires the Coast Guard to maintain its vessels with the cheapest parts possible, regardless of quality. It’s that mandate that has led to the degradation of the nation’s current small fleet of three icebreakers — one of which, the Polar Sea, has been inactive since a 2010 engine failure. “The ship (would be) maintained by the owner of the vessel and you sign a 25-year contract or a 30-year contract or a 10-year contract, that’s up to the owners. And when you get done as the Coast Guard you decide to release it, then the ship is still in good shape and the owner of the vessel can lease it to another agency,” Young described. Federal cannabis conflict Murkowski and Young reiterated their opposition to legalized recreational marijuana in their state but also held firm on their joint stance that they will support the will of the majority Alaska voters who legalized it and try to remove federal roadblocks to operating a safe cannabis industry in the state. Both said federal laws prohibiting banks from entering the state-legal cannabis trade continue to be a problem. “I don’t like it; I don’t use it but it’s a states’ rights issue to me,” said Young, who is vice chairman of the House Cannabis Caucus made of representatives from states with legalized marijuana use. “I got interested because if you want to cause problems, have too much cash laying around. What I want (cannabis business) to be able to do as a business is work with the banks.” Being unable to use banks has forced cannabis growers and sellers to operate on a cash-only basis, which has made them targets for robberies. Young and Murkowski agreed that a bill changing the marijuana banking restrictions is not likely to make it through the Senate despite the fact that medical or medicinal use is permitted in a 29 states and polls show a majority of Americans support some form of legalization. More states are expected to have marijuana initiatives on 2018 election ballots. “I think you have some resistance from members (of the Senate) who are just so opposed to marijuana legalization in any way, shape or form that regardless of what has happened in their states they’re not willing to move on that,” Murkowski commented. “We are setting up law abiding citizens to be (robbery) victims and that is just wrong,” she continued. “We have got to be able to reconcile this.” Young said he expects Congress to prohibit the Justice Department from spending any money to enforce federal marijuana laws in states where recreational use is legal after Attorney General Jeff Sessions on Jan. 4 issued a memo nullifying the 2013 Cole memo, which said the Justice Department would defer to state laws regarding marijuana. Sessions is a staunch opponent to legalized marijuana and the spending prohibition for recreational use would expand what Congress’ similar directive related to medical marijuana operations. While preventing spending as a means to control agency actions is far from ideal, as both indicated, it’s the best option for the time being, they said. Murkowski added that she found Sessions’ marijuana memo “troubling” because it caught her off-guard. She said to her knowledge no senators were given a heads-up that it was coming, though it could have been different in the House. “(Marijuana enforcement) has almost been kind of left to the U.S. attorney in the respective states for determination as to where they’re going to go,” she said. “That’s not very good policy either. I think it lends to further inconsistencies in application of the laws that are out there.” The Alaska U.S. attorney has indicated enforcing federal marijuana laws is not currently a priority of federal prosecutors in the state. ^ Elwood Brehmer can be reached at [email protected]

State gets incomplete grade from FERC

While Alaska Gasline Development Corp. officials often tout the reams-worth of documents they’ve submitted to federal regulators for the Alaska LNG Project, those regulators responded with a letter Feb. 15 contending the state agency has refused to send information imperative to analyzing the $43 billion megaproject. In a three-page letter to corporation executives — followed by 168 pages detailing AGDC’s alleged shortfalls to provide information for analysis and requests for additional data — regulators wrote that they have repeatedly requested study data from the state-owned corporation during the pre-filing review phase for the project’s environmental impact statement but “an adequate response has not yet been received.” The Federal Energy Regulatory Commission, or FERC, is an agency of the Energy Department that leads LNG export project permitting. It also expects further data on the project’s safety, reliability and engineering plans will be requested, according to the letter. AGDC filed its EIS application for the Alaska LNG Project with the agency last 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 for large projects nearly 50 years ago. According to FERC, AGDC has said it will not provide certain study information because the studies are not required by the state or other entities at this point, the Feb. 15 letter states. Future responses by the gasline corporation that such information won’t be passed along because the state and other federal agencies don’t require it will be deemed incomplete and the requests will be made again. “Certain requests ask for studies to be completed and provided, or information on the specific avoidance and mitigation measures that may be implemented by AGDC for the various proposed construction-related activities. “Rather than providing specific avoidance and mitigation measures to be adopted or describing potential considerations if the construction schedule cannot be maintained, AGDC has deferred providing information to future plans or the permitting phase (e.g., through Alaska Department of Fish &Game Fish habitat permit application or other processes),” the FERC letter states. “It is imperative that the information provided in AGDC’s responses include definitive commitments to implement specific avoidance, minimization, and mitigation measures. Incomplete information or ill-defined commitments by AGDC may compromise our ability to adequately assess and disclose the full impact of the project.” The agency asked for a complete response within 20 days, adding that the information is necessary to continue drafting the EIS. AGDC spokesman Jesse Carlstrom said the corporation’s regulatory experts are drafting a schedule to provide to FERC within the 20-day window as to when the specific requests will be responded to but some of the agency’s questions will require additional field work. “This is a talented team and we’re working fast but to knock all this out in 20 days would be a stretch,” Carlstrom said. He added that FERC wants all of the information it will need to write the EIS up front while AGDC has been operating on the presumption that specific mitigation measures and other detailed, site-specific environmental data would be provided as other state and federal agencies need it for their permit reviews. That’s how the Army Corps of Engineers, which is preparing to release a final supplemental EIS for the smaller Alaska Standalone Pipeline, or ASAP project, has allowed AGDC to operate, according to Carlstrom. “We’ll get FERC what they need,” he said. Leaders of the state corporation have been pushing for FERC to issue its schedule for the project since late last year and have said they hope the significant detail in the many volumes of studies filed in the application would help the agency finish the final EIS by the end of 2018. In a Jan. 22 press release, AGDC announced had responded to all of FERC’s 801 original data requests that were generated from the April filing. Carlstrom and AGDC leaders characterized the latest round of 570 questions as a positive indication that the Alaska LNG Project is at the forefront of the agency’s work. AGDC President Keith Meyer has said the preferred timeline, which he acknowledges is aggressive, is needed to keep the project on track to be in production by 2024-25. That would allow the project to meet a demand window in a global LNG market that has been flooded with supply and driven prices down in recent years. Carlstrom said AGDC leaders are still hopeful FERC will be able to publish a draft EIS by the end of the year, but that would push their ideal timeline back by several months at a minimum. After a draft EIS is published a public comment period of at least 45 days — on very large or contentious projects it is often longer — and associated public meetings are required. The final EIS is then issued once the appropriate comments are considered and incorporated into the draft documents. Ports of consideration Of particular note among FERC’s specific requests attached to the letter are directives to study rerouting the roughly 800-mile gas pipeline to Valdez and ending it at Port MacKenzie — across Knik Arm from Anchorage — instead of AGDC’s preferred pipeline terminus and LNG plant site in Nikiski. Meyer has said repeatedly the plan is to end in Nikiski, noting the state, BP, ConocoPhillips and ExxonMobil spent more than $600 million over the past five years evaluating the Nikiski route and changing to Valdez could take years of additional study time. AGDC officials note the state was a minority partner in the project when Nikiski was selected, owning just 25 percent share of the LNG plant at the time. AGDC took control of the Alaska LNG Project in early 2017. The corporation announced Feb. 8 that it would be opening a one-person office in Nikiski to better interface with area residents who will be directly impacted by the project. The producers have also purchased about 650 acres of land in Nikiski to site the massive natural gas liquefaction plant and marine export terminal at the end of the 800-mile gas pipeline. AGDC is in negotiations to purchase or gain access to the property. The state is also planning to reroute the Kenai Spur Highway, which currently bisects the planned LNG plant site. Previous efforts to export North Slope gas have evaluated a route to Valdez; the final EIS for the Trans-Alaska Gas System released in 1988 determined Valdez to be preferable over Cook Inlet, according to FERC. “AGDC indicated that the difference between the Valdez delivery option evaluated in 1988 and the current alternative alignment is that the Delta and Gulkana Rivers were designated as Wild and Scenic Rivers on December 2, 1980, subsequent to the issuance of the 1988 final EIS, and that the approvals necessary to cross these rivers are an excluding factor,” FERC asserted in its attachment to the Feb. 15 letter. “However, the TAGS final EIS evaluated the Delta and Gulkana Wild and Scenic Rivers along the Valdez delivery option and concluded that ‘there would be no direct impacts to the Gulkana and Delta Wild and Scenic River areas since the route would not cross the designated portions of these rivers.’” The Alaska Gasline Port Authority, comprised of the City of Valdez and the Fairbanks North Star Borough, urged FERC about a year ago to consider routing the Alaska LNG Project to Valdez as it would provide natural gas along the Richardson Highway corridor and save the Fairbanks Borough up to $100 million to build the 30-mile spur line needed to get gas from the large line under the current alignment, local officials said at the time. More recently Matanuska-Susitna Borough officials asked FERC to consider Port MacKenzie on Jan. 9. According to a Feb. 16 borough press release, AGDC dismissed a Port MacKenzie alternative, but according to the borough, it mistakenly studied a shallow-water site about 4 miles north of the actual port. Mat-Su officials contend ending at their port could save the project up to $3 billion because the pipeline — about 50 miles shorter — would not have to cross the bottom of Cook Inlet and as such would be environmentally safer as well. “The Mat-Su Borough fully supports this worthy (gasline) effort and simply requests that our deep draft port be considered, as promised,” Mayor Vern Halter said in a formal statement. Mat-Su Borough spokeswoman Patty Sullivan said in an interview that borough officials learned of the site discrepancy after the EIS application was filed. Carlstrom said Port MacKenzie was removed from consideration when the project was led by the producers’ joint venture because it is classified as a multi-use port and a 20 million tons per year LNG plant spreading over hundreds of acres would preclude other activities. According to Sullivan, the area examined north of the port is referred to as “Point MacKenzie” by AGDC when the actual Point MacKenzie, classified by the U.S. Coast Guard, is a short distance south of the port. The discrepancy has not been explained, she said. Additionally, the borough has long touted Port MacKenzie for its naturally deep water — up to 60 feet at low tide — and the thousands of acres of developable land in the area. “We really are the large industrial port with the least amount of neighbors,” Sullivan said. She emphasized the Mat-Su Borough supports the gasline project, but that officials simply want their proposals vetted appropriately. AGDC officials that have worked on the project since its inception said they were informed of the producers’ choice of Nikiski in 2013 but specifics as to why were not offered and additional examination beyond what the producers — highly experienced in this type of work — had done would have added substantially to costs and potentially delayed the project for years. ExxonMobil project leaders said in October 2013 that Nikiski was the preferred choice out of 20 possible locations because it allows the gasline to feed the state’s largest population centers with a long-term supply of natural gas. The Nikiski site also offers more flat land that is easier to develop along with better access and weather that allows for year-round construction, the producers said in 2013. Carlstrom said avoiding crossing the Chugach Mountains on the route to Valdez was also a factor in choosing Nikiski. “Mountain ranges for pipelines, though not insurmountable obstacles, they’re best avoided and by following the corridor paralleling TAPS from Prudhoe Bay to just north of Fairbanks and then connecting with the Parks Highway corridor we completely avoid that mountain range,” he said. ^ Elwood Brehmer can be reached at [email protected]

FERC says gasline filings still incomplete

While Alaska Gasline Development Corp. officials often tout the reams-worth of study documents they’ve submitted to federal regulators on the Alaska LNG Project, those regulators responded with a letter Thursday contending the state agency has refused to send information imperative to analyzing the $43 billion megaproject. In a three-page letter to corporation executives — followed by 168 pages detailing AGDC’s alleged shortfalls to provide information for analysis and requests for additional data — FERC officials wrote the agency repeatedly requested study data from the state-owned corporation during the pre-filing review phase for the project’s environmental impact statement but “an adequate response has not yet been received.” FERC also expects further data on the project’s safety, reliability and engineering plans will be requested, according to the letter. FERC, an Energy Department agency, is the lead body responsible for permitting LNG exports projects in the country. AGDC filed its EIS application for the Alaska LNG Project with the agency last 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 for large projects nearly 50 years ago. According to FERC, AGDC has said it will not provide certain study information because the studies are not required by the state or other entities, the letter states. Future responses by the gasline corporation that such information won’t be passed along because the state and other federal agencies don’t require it will be deemed incomplete and the requests will be made again. “Certain requests ask for studies to be completed and provided, or information on the specific avoidance and mitigation measures that may be implemented by AGDC for the various proposed construction-related activities. Rather than providing specific avoidance and mitigation measures to be adopted or describing potential considerations if the construction schedule cannot be maintained, AGDC has deferred providing information to future plans or the permitting phase (e.g., through Alaska Department of Fish & Game Fish Habitat permit application or other processes),” the FERC letter states. “It is imperative that the information provided in AGDC’s responses include definitive commitments to implement specific avoidance, minimization, and mitigation measures. Incomplete information or ill-defined commitments by AGDC may compromise our ability to adequately assess and disclose the full impact of the project.” The agency asked for a complete response within 20 days, adding that the information is necessary to continue drafting the EIS. Spokespersons for AGDC could not be reached Friday. Leaders of the state corporation have been pushing for FERC to issue its schedule for the project since late last year and have said they hope the significant detail in the many volumes of studies filed in the application would help the agency finish the final EIS by the end of 2018. In a Jan. 22 press release AGDC announced had responded to all of FERC’s 801 original data requests that were generated from the April filing. AGDC President Keith Meyer has said the timeline, which he acknowledges is aggressive, is needed to keep the project on track to be in production in 2024-2025. That would allow the project to meet a demand window in a global LNG market that has been flooded with supply in recent years. Of particular note among FERC’s specific requests attached to the letter are directives to study rerouting the roughly 800-mile gas pipeline to Valdez and ending it at Port MacKenzie — across Knik Arm from Anchorage — instead of AGDC’s preferred pipeline terminus and LNG plant site of Nikiski. Meyer has said repeatedly the plan is to end in Nikiski, noting the state, BP, ConocoPhillips and ExxonMobil spent more than $600 million over the past five years evaluating the Nikiski route and changing to Valdez could take years of additional study time. The corporation announced Feb. 8 that it would be opening a one-person office in Nikiski to better interface with area residents who will be directly impacted by the project. The producers have also purchased about 650 acres of land in Nikiski to site the massive natural gas liquefaction plant and marine export terminal at the end of the 800-mile gas pipeline. AGDC is in negotiations to purchase or gain access to the property. The state is also planning to reroute the Kenai Spur Highway, which currently bisects the planned LNG plant site. Previous efforts to export North Slope gas have evaluated a route to Valdez; the final EIS for the Trans-Alaska Gas System released in 1988 determined Valdez to be preferable over Cook Inlet, according to FERC. “AGDC indicated that the difference between the Valdez delivery option evaluated in 1988 and the current alternative alignment is that the Delta and Gulkana Rivers were designated as Wild and Scenic Rivers on December 2, 1980, subsequent to the issuance of the 1988 final EIS, and that the approvals necessary to cross these rivers are an excluding factor,” FERC asserted in its attachment to the Thursday letter. “However, the TAGS final EIS evaluated the Delta and Gulkana Wild and Scenic Rivers along the Valdez delivery option and concluded that ‘there would be no direct impacts to the Gulkana and Delta Wild and Scenic River areas since the route would not cross the designated portions of these rivers.’” The Alaska Gasline Port Authority, comprised of the City of Valdez and the Fairbanks North Star Borough, urged FERC about a year ago to consider routing the Alaska LNG Project to Valdez as it would provide natural gas along the Richardson Highway corridor and save the Fairbanks Borough up to $100 million to build the 30-mile spur line needed to get gas from the large line under the current alignment, local officials said at the time. More recently Mat-Su Borough officials asked FERC to consider Port MacKenzie Jan. 9. According to a Friday borough press release AGDC dismissed a Port MacKenzie alternative but incorrectly identified a shallow-water site in its filings about 4 miles north of the actual port, which has naturally deep water. Mat-Su officials contend ending at their port could save the project up to $3 billion because the pipeline — about 50 miles shorter — would not have to cross the bottom Cook Inlet and as such would be environmentally safer as well. “The Mat-Su Borough fully supports this worthy (gasline) effort and simply requests that our deep draft port be considered, as promised,” Mayor Vern Halter said in a formal statement.   Elwood Brehmer can be reached at [email protected]

Optimism for 90-day session begins to fade

The optimism that this year would be different than the previous three is starting to wear off just four weeks into the legislative session. Most legislators are still saying, at least publicly, that they are confident this year’s work can be done in 90 days and not drag into June or July as has become the norm during the continuous political battle over how to fix the state’s multibillion-dollar deficits. However, Democrat House Speaker Rep. Bryce Edgmon said he is predicting more of the same ahead given unwavering opposition from Senate Republicans to his caucus’ proposed budget fixes. “I see more gridlock and I see more stalemate coming up,” Edgmon said during a Feb. 13 press briefing. While he said he also started the session with optimism that the Legislature would reach a long-term fiscal plan in its allotted time, his pessimistic comment was in response to what came out of a Senate Majority press conference a day earlier. Republican Senate President Pete Kelly said Feb. 12 that he would like to see the House Majority’s tax proposals “in the garbage can.” During a January talk in Anchorage with Edgmon about their respective priorities before the start of the session Kelly said the talk of a broad-based tax would be met with “mocking laughter” from Senate leaders. For his part, Edgmon said the House Majority is willing to compromise and discuss the appropriate amount of future Permanent Fund dividends, government service levels and a draw from the Permanent Fund earnings to pay for government. He said well before the session that the House coalition would not again push for an income tax this year after the Senate wasted little time voting down the tax the House passed last session. “I think to draw those sharp lines sand this early in the session does not lend to compromise,” Edgmon added. Other prominent officials in the capitol have said they do not see a quick resolution to the session as each side’s stance on how to resolve the deficit has not materially changed. Republicans have continued stressing that further budget cuts and maximizing a sustainable draw from the Earnings Reserve of the Permanent Fund could balance the state’s finances without the need for a personal income tax. According to Kelly, lawmakers need to start changing their rhetoric away from emphasizing a fiscal crisis because the state now has enough revenue to close the budget gap in a few years. “Now with oil prices and production we’re in the grasp of a balanced budget,” he said. Republican Majority Leader Sen. Peter Micciche said based on Gov. Bill Walker’s budget proposal for a roughly $4.6 billion unrestricted General Fund budget, the Legislature could get within $300 million of balancing the budget this year based on higher than projected oil prices and production that is inching upwards as well. “With just a buck or two (of higher oil prices) in the next couple years we’ll be balanced,” Micciche said. His assertions also presume the Senate-passed version of Senate Bill 26, which would set a 5.25 percent of market value, or POMV, draw from the Earnings Reserve for three years and drop the draw to 5 percent thereafter. However, the governor’s budget does not include funding for the state’s annual oil and gas tax credit obligation because his administration is proposing to sell bonds to fully pay off the credits in an $800 million lump sum now that the program has ended. Without passing the credit-bonding legislation or finding some other resolution, the Legislature will likely be forced to add at least $206 million — the statutory minimum formula payment — to the budget. Micciche has also said the Department of Health and Social Services needs to focus on Medicaid utilization as a means to substantively curb the state’s ever-growing health care bill. Homer Rep. Paul Seaton, Finance co-chair and one of three Republicans caucusing with the Democrat-led House Majority, acknowledged Feb. 13 that there is going to be a draw from the Earnings Reserve this year, as the $2.4 billion in the state’s savings accounts are not likely to cover the deficit alone. Additionally, administration and nonpartisan Legislative Finance officials insist the Constitutional Budget Reserve, which will have approximately $2.1 billion at the start of next fiscal year, should always hold at least $1 billion, ideally more, to cover expenses in an emergency and for cash flow management. Democrats have noted future budgets would have to increase by more than $100 million per year to keep up with inflation at current service levels while Senate leaders insist the Legislature can beat inflation with further cuts. Rep. Les Gara, D-Anchorage, introduced legislation to increase the key base student allocation formula by $100 per student Feb. 9. He contends K-12 education has lost $90 million of funding since 2015 through cuts and the impacts of inflation.

House committee approves increase in spill penalties

Legislation to increase penalties for fuel and oil spills is on the move in the House. The House Resources Committee sent House Bill 322 to the Finance Committee Feb. 12 for consideration. The bill, drafted primarily by Resources co-chair Rep. Andy Josephson, D-Anchorage, would double most penalties the Department of Environmental Conservation can levy against spillers of oil, fuels and other hazardous substances including vessel waste water. Josephson stressed throughout the Resource Committee’s series of lengthy meetings on it that the primary impetus behind HB 322 is bringing spill penalty amounts into the 21st century. In some cases the fines haven’t been changed since they were implemented in the late 1970s. “If we don’t update the law we’re stuck in 1977 forever and the cost of cleanup exceeds the amount the (Spill Prevention and Response Division) takes in,” Josephson said before voting to advance the bill Feb. 12. HB 322 moved on a 5-4 party line vote with Democrat support and Republican opposition. Reps. George Rauscher, R-Wasilla, and Dave Talerico, R-Healy, objected to increasing the fines on the fear that upping the penalties could discourage individuals or companies from reporting spills to DEC, regardless of the fact that notifying the state of such an accident is currently required by law. That in turn could lead to unnecessary environmental damage from unreported spills not being adequately cleaned up, they argued. Rep. Chris Birch, R-Anchorage, questioned the subjectivity of how DEC officials determine when and at what amount to levy fines against spillers. Spill Prevention and Response Director Kristin Ryan said she doesn’t feel the issuance of penalties for spills is subjective because the department decides whether or not to impose a civil fine based on a list of criteria set in law by the Legislature, including if the spill was caused or prolonged by a decision that the economic benefit of not complying with prevention requirements led to the spill or pushed a company or individual to delay cleanup. Ryan added that she could not think of a time when a homeowner had been fined for a spill — of fuel oil, for example — based on the economic benefit consideration under her watch. For private individuals, she said the cleanup cost usually amounts to “a penalty in itself.” However, the current penalty schedule is outdated and doesn’t allow DEC to recover its costs as the Legislature says it should, according to Ryan, particularly in the case of large spills. “The amount that we’re restricted to charge for a penalty is very low,” she said. “For those few instance where we have a substantial release we really would be limited in recovering and penalizing, frankly, the company for the release that harmed the environment.” HB 322 would double the per-gallon penalties for non-crude oil spills greater than 18,000 gallons on state lands or in state waters. Those penalties have not been adjusted since 1977. The penalty for a large spill into an anadromous water body would go from $10 per gallon to $20 per gallon. That same penalty, if adjusted for inflation would be $39.70 per gallon today, according to Josephson’s office Legislators supporting the bill repeatedly noted the fines from the 1970s would be roughly quadruple the current amount if adjusted for inflation, while the bill just doubles them. Amendments by Rep. Justin Parish, D-Juneau, to increase those penalties to match inflation were rejected. The penalties for large crude spills — enacted in 1989, the same year as the Exxon Valdez grounding — would be doubled as well, which would bring them in line with inflation, according to Josephson’s office. The current penalties for large crude spills are $8 per gallon for spills less than 420,000 gallons and $12.50 per gallon for larger releases. DEC collects roughly $150,000 in penalties during an average year with no exceedingly large spills, according to Ryan. The department expects HB 322 would add about $75,000 per year to that figure. Birch characterized the bill as “a solution in search of a problem” given DEC reports a longstanding downward trend in the number of spills reported to the department each year. The number of spills has fallen from an average of about 2,500 per year in the late 1990s and early 2000s to generally less than 2,000 per year since 2010, according to DEC. There were 2,046 spills in 2017 totaling 271,000 gallons; more than 188,000 gallons of which was non-crude oil such as refined fuels. About 1,600 gallons of crude oil were spilled last year. Those figures do not include natural gas released from Hilcorp Energy’s Cook Inlet pipeline leak discovered early last year. DEC did not calculate a gallon amount for the gas leak, according to Ryan. The department also did not issue a penalty against Hilcorp for the leak that lasted more than two months because the company reported it as soon as it was discovered and did what it could to mitigate environmental damage she said. Large sheets of “pan ice” prevented divers from safely reaching the punctured subsea pipeline until the ice cleared in early spring. Alaska Oil and Gas Association CEO Kara Moriarty testified against the bill, noting that crude oil spills accounted for less than 2 percent of the overall volume of spilled substances in the state in the last three years. Oil and gas companies spend between $1.8 million and $8 million per year on spill prevention and response equipment and training and thus DEC is not often required to spend large amounts of its money to respond to industry spills. “The same cannot be said for non-oil industry facilities,” Moriarty said. The bill would also classify water produced from oil wells as crude in the event of a spill as long as the water contains a small amount of oil, which Moriarty also testified against. She said “produced water clearly does not cause the same level of damage as pure crude” and the amount of actual oil in the water can be calculated. Ryan contended that the water produced from North Slope wells — the percentage of water increases as the oil field ages — is saltwater that has been found to be as toxic as crude when spilled, is difficult to clean up and therefore should be considered in the total spill volume for determining a penalty. The Resources Committee did remove a provision of HB 322 that would have required trucking companies hauling crude to have a DEC-approved spill prevention and response contingency, or C-plan, before transporting oil. The state requires oil and gas producers, Alyeska Pipeline Service Co., which oversees the Trans-Alaska Pipeline System and oil tanker activities out of Valdez, and other tanker vessel operators to have a C-plan. There currently is no similar state requirement for trucking companies hauling crude, however. Alaska Trucking Association Executive Director Aves Thompson said federal Department of Transportation regulators mandate C-plans for crude haulers and state approval would be unnecessarily duplicative. The committee ultimately cut out the state approval of C-plans, but HB 322 would now require the companies to submit the federal C-plans to DEC so the state has them on file for reference in the event of a spill. Home spills On the flipside of the spill penalty debate around HB 322, Gov. Bill Walker’s administration introduced a bill to remove DEC’s requirement to recover all of its costs from homeowners in the event of a heating oil spill. House Bill 305 would specifically remove the requirement for DEC to bill homeowners seeking technical assistance for a spill of home heating fuel presuming the homeowner does what they can to clean up the spill as quickly and completely as possible. Ryan said currently the department is mandated by law to recover its costs in the event a DEC technician visits a home heating oil spill site to provide technical assistance, for example, but does not actually take part in the cleanup. The homeowner is still responsible for the cleanup costs, she added, and homeowner’s insurance does not usually cover spill cleanup. “The cost recover, in our opinion, is somewhat duplicative in this scenario,” Ryan testified Feb. 9. HB 305 remains in the House Resources Committee. Its mirror, Senate Bill 158, was scheduled to be heard in Senate Resources Feb. 14 at the time of this writing. Elwood Brehmer can be reached at [email protected]

88 Energy adds to winter exploration program

A small Australian company will soon be adding to what is turning out to be a robust exploration season on the North Slope. 88 Energy received regulatory approval from the Division of Oil and Gas Feb. 5 to drill two exploration wells in a remote portion of the southern North Slope near the upper Kuparuk River. Working under its operating subsidiary Accumulate Energy Alaska Inc., the company plans to drill and test the Bravo-1 and Charlie-1 oil exploration wells by April 30, according to its exploration plan submitted to Oil and Gas. The wells will each be drilled to a depth of 11,000 feet and target the Seebee geologic formation, which has been found in nearby prior exploration wells drilled by other companies and that ConocoPhillips is producing from in the Kuparuk River Unit to the north, the company says. Accumulate’s work plan includes building 32 miles of ice road west from its Franklin Bluffs drilling pad adjacent to the Dalton Highway and about 35 miles south of Deadhorse. The company has drilled two wells on the Franklin Bluffs pad since late 2015, Icewine-1 and -2, targeting the unconventional HRZ shale play, which 88 Energy describes as “a prolific source rock” in the Brookian geologic formation. The Brookian sequence of formations contains the shallow Nanushuk formation and the Torok sands, which have been the source of multiple large oil discoveries by Armstrong Energy, ConocoPhillips and Caelus Energy in recent years. The belief is the HRZ shale holds similar potential to the Nanushuk and Torok plays if it can be effectively fracked. Icewine-2 was drilled last spring and production tests are ongoing. The Bravo and Charlie wells are in addition to five exploration and appraisal wells ConocoPhillips is drilling this winter on its acreage in the National Petroleum Reserve-Alaska and around the Colville River Unit, as well as an exploration well by Glacier Oil and Gas in the eastern Slope Badami field and two more long wells drilled by Italian major Eni into federal territory from its manmade Spy Island drill site in the state-controlled Nikaitchuq Unit. Accumulate plans to use Doyon Drilling’s Arctic Fox rig, which it also contracted to drill the Icewine wells. 88 Energy also began a nearly 180 square-mile 3D seismic program Feb. 7 on its large swath of acreage west of the Dalton and in the general area of the Bravo and Charlie wells, according to a Feb. 14 press release. The seismic shoot, expected to about 45 days, is intended to further evaluate the conventional oil potential and could lead to further exploration drilling in early 2019, 88 Energy Director David Wall states. 88 Energy, through its partnership with Houston-based independent Burgundy Xploration, holds rights to roughly 475,000 acres of contiguous state leases south of the developed area of the North Slope. 88 Energy also holds a 100 percent interest in about 15,500 acres south of the Point Thomson gas field and adjacent to the western edge of the Arctic National Wildlife Refuge. BP drilled the Yukon Gold-1 well in the area in 1994 and hit oil at several depths of the 12,800-foot well but did not develop it, according to 88 Energy. Elwood Brehmer can be reached at [email protected]

ISER: recession hitting downstream industries

A pair of new reports from the University of Alaska Anchorage indicate job losses are slowing but Alaska’s recession might not be over and current state spending levels might not be out of line when other factors are considered. Alaska’s recession didn’t officially start until sometime in the latter half of 2015, but economic contraction in the state seemed almost inevitable when oil prices began falling about a year earlier in August 2014. The lag was simply the time it took for oil companies and the State of Alaska to change spending habits and start budgeting for the new circumstances. Alaska’s workforce peaked at about 353,100 workers in June 2015 and in the two subsequent years lost 9,250 jobs, or 2.6 percent of total employment, according to the UAA Institute of Social and Economic Research, or ISER. More specifically, statewide employment declined by more than 6,800 jobs between June 2015 and June 2016 and again fell by more than 2,400 jobs in the following year to June 2017. The June-to-June tracking helps reflect the impact of state budgets on the economy, as the state fiscal year and its corresponding budget appropriations start July 1. The state Labor Department estimates Alaska lost about 3,600 jobs overall in 2017. Unsurprisingly, the initial job losses were predominantly in the closely tied oil and gas, construction and professional and business service sectors. Alaska’s construction and professional service industries rely heavily on spending by North Slope oil companies to generate their work. According to ISER, the natural resource and mining sector — oil and gas — lost 3,260 jobs from June 2015 to June 2016. The following year the industry lost 1,280 jobs. Overall oil and gas employment was down 26 percent from 2014 to 2017. Similarly, Alaska contractors shed about 1,650 jobs in the 12 months following June 2015 and another nearly 1,200 jobs the following year. Professional and business service companies — largely engineering, architecture, law and other consulting firms — shrunk by 1,660 jobs in 2015-16 and 600 in 2016-17, ISER estimates. The construction and professional service have been hit doubly hard during the recession as state capital spending mirrored the oil price decline. Alaska’s oil revenue-driven capital spending boom peaked in fiscal year 2013 at nearly $2.1 billion in unrestricted General Fund revenue. The litany of projects that money supported also led to ample work for small construction and design firms. By 2016 state-funded capital projects had dried up with an unrestricted General Fund capital budget of just $127 million that year. And though it takes several years for capital appropriations to flow to the projects and through the economy, construction industry analysts say the state spending downturn is now being felt. The job losses have been sharp, but are moderating, as ISER notes in the pragmatically titled study published Feb. 5, “What Do We Know to Date About the Alaska Recession and the Fiscal Crunch?” However, study author, ISER Economist and Assistant UAA Professor Mouhcine Guettabi wrote that the relative health of other industries provides evidence the recession is maturing rather than outright ending. “(The) accommodation and food services, leisure and hospitality and information (sectors) were still positive in 2016 but lost jobs in 2017, while retail trade lost twice as many jobs in 2017 as it did in 2016,” Guettabi wrote. “The fact that these few last sectors have lost jobs in 2017 means that as expected, the recession has spread to the sectors most sensitive to a household’s finances which have been affected due to the initial round of losses and the uncertainty of what is to come.” The only sectors to add jobs both years were health care and local government. Health care jobs grew by 2,350 over the two-year period tracked by ISER. Local government employment could represent “considerable future downside” if state community assistance and pass-through funding programs are targeted in additional state budget cuts, according to Guettabi. The Anchorage Economic Development Corp. is projecting the consumer spending contraction will result in 2018 job losses in the leisure and hospitality and retail sectors worse than they were in 2017 for Anchorage. At the same time, AEDC is forecasting oil and gas employment in the city to be flat this year, with construction and professional and business services losing about 200 jobs each — far fewer than recent years. AEDC expects the recession at least in Anchorage, which is a bellwether for the state, will peter out late this year or early in 2019 provided a solution to the state’s budget deficits is reached this year. AEDC and numerous other Alaska economists have attributed the recession in large part to the state’s ongoing multibillion-dollar budget deficits. Budget cuts have led to a loss of about 1,700 state government jobs in the period measured by ISER, in addition to the private industry impacts of the capital budget reductions. Lawmakers’ inability to reach agreement on how to close the last roughly $2.5 billion of the deficit has curtailed private investment as well because business leaders don’t want to take risks until they know what state taxes and other aspects of Alaska’s financial lands will look like for years to come, AEDC CEO Bill Popp and others insist. To that end, Guettabi concludes that based on other studies and previous recessions the uncertainty surrounding the state government’s long-term budget situation is costing Alaska somewhere between $200 million and $600 million per year in private investment. “The decline in spending due to policy uncertainty would indicate that waiting is not a costless option. In fact, the losses due to uncertainty are important and similar in magnitude to the ones the economy would experience due to a tax or further government cuts,” Guettabi wrote. Government spending comparison Critics of Alaska’s government spending routinely argue the state’s budget is way higher on a per-capita basis than the rest of the country. Budget defenders rebut that the critics are ignoring Alaska’s uniquely high cost of living, to which government is not immune, and providing services to more than 200 communities not accessible by road justifies most of the state’s expenses. Which is it? ISER’s brief report titled, “How Does Alaska’s Spending Compare?” published Feb. 9, concludes the answer is somewhere in between. According to ISER, the state and local governments spent $19,946 per person in 2015. The national average at the time was $8,811. Without the unusual expenses of Permanent Fund dividends and oil tax credits — each unique to Alaska — the spending dropped to $16,363 per Alaskan. However, when adjusted for cost of living differences, Alaska was down to $12,733 per person. That $12,733 is still well above the national average but seems to fall in line with other oil producing states with small, rural populations; Wyoming spent $14,564 and North Dakota was at $10,845 per resident on an adjusted basis. The report notes that the state and local spending figures include federal grant money, which Alaska gets at twice the rate of the rest of the country, and is very difficult to parse out. In 2016, Alaska received federal grants totaling $4,374 per person, compared to the national average of $2,067 per person. Federal money accounted for $3.4 billion of the state’s total $10.3 billion 2018 fiscal year budget. ^ Elwood Brehmer can be reached at [email protected]

Senate Republicans reject Walker pick for District E seat

It’s back to square one in the process to replace former Mat-Su Sen. Mike Dunleavy. Senate Republicans announced early Feb. 14 that they rejected Gov. Bill Walker’s appointment of Matanuska-Susitna Borough Assemblyman Randall Kowalke, a Republican from Willow, to fill the Senate District E seat. Walker stirred the political pot Feb. 9 when he picked Kowalke because he was not one of the three individuals local Republican Party representatives selected for the governor to pick Dunleavy’s replacement from. Dunleavy resigned from the Senate in early January to focus on his campaign for governor. “We believe the people of District E should be given an opportunity to fill the seat with a candidate they support through the traditional process, which is designed to respect the will of the voters,” Senate Majority Leader Peter Micciche, R-Soldotna, said in a Feb. 14 Senate Majority release. “The seat does not belong to us in the Senate, or the governor. The seat belongs to the people of District E.” Walker said when made the pick that Kowalke “is the best person to represent this district” because of his background in local government, his work in Alaska’s resource development industry through former leadership positions of the Resource Development Council and the Alaska Support Industry Alliance and volunteer work. The pick was met with disdain by Republican leaders in the Legislature who questioned why he would go outside the party’s wishes. Republican legislators have emphasized they do not have any objections to Kowalke’s qualifications, but rather wanted Walker to stick with tradition when making the pick. “The Mat-Su held a very public process to come up with those names and the governor ignored them,” Senate President Kelly said during a Feb. 12 press briefing. Other than being from the same political party, the governor is not obligated to pick any particular individual when filling a vacant seat, but the selection must be confirmed by a majority of the given party in the body. Dunleavy, who was kicked out of the Majority caucus last year for voting against the operating budget, praised the Senate decision. “I recognize and congratulate my former colleagues in the Senate that are standing in firm support of the long established process by which individuals selected to replace open senate seats represent the wishes of the people of that district,” Dunleavy said. “This isn’t a question of what is statutorily allowable, but rather what is right.” Kowalke was one of 11 people who applied with the party to fill the seat after Dunleavy resigned but the Republicans chose Todd Smoldon of Willow, Tim Braund of Sutton and Rep. George Rauscher, who currently serves in the House. Rauscher congratulated Kowalke on the appointment when the announcement was made and said he’s interested in hearing about Kowalke’s vision for the district. Kelly and Micciche sent a letter to Walker Feb. 13 asking him to rethink his pick. “We believe that the people who elected Senator Dunleavy should be given an opportunity to temporarily fill the seat with a candidate they support by providing you with a new list unless you decide one of the original three choices will suffice,” they wrote. “In our view, this is about process and not a partisan issue,” Kelly and Micciche continued. Walker doubled down on his choice in a quick response letter, noting that the state Constitution does not require the governor to choose from a party’s preferred list and the tradition of selecting names from a list is only in the bylaws of the Democrat and Republican parties. “While I appreciate your concern for the Republican Party’s selection process, I am a non-partisan governor and my decisions are not based on the wishes or demands of any one party,” Walker wrote to the Senate Republicans. “Rather, my appointment of Mr. Kowalke was based solely on my sincere desire to make the best decisions for all Alaskans, including the residents of Senate District E. Mr. Kowalke is a respected leader in his community and an elected member of the Matanuska-Susitna Borough Assembly with broad support.” According to Walker, he received more support for Kowalke from Mat-Su residents and elected officials than for all the other applicants combined. Recommendations for Kowalke came from Senate Majority members as well, which Walker said he took “very seriously.” “I have no intention of delaying the selection process by requesting additional names from the Republican party while my current appointment is still pending,” he concluded. “Should the Senate Republicans choose to reject Mr. Kowalke’s appointment, I will forward another name for consideration pursuant to requirements in the Alaska Constitution and state law.” Walker did not choose from the list individuals recommended by Democrats in House District 40 to replace Dean Westlake who resigned before the session because of multiple sexual harassment allegations. He instead chose NANA Regional Corp. executive John Lincoln to replace Westlake, who was confirmed by House Democrats. Elwood Brehmer can be reached at [email protected]

BP bounces back from 2016 with $3.4B profit in 2017

While BP Alaska leaders are celebrating the success of stemming production decline from the aging Prudhoe Bay oil field despite belt-tightening in the industry, the company’s global executives on Feb. 6 celebrated the announcement of a $3.4 billion profit in 2017. The $3.4 billion in earnings last year comes after the London-based oil super major managed to net just $115 million in 2016. The entire industry was boosted by a gradual return to oil prices of about $70 per barrel by the end of the year, but the fact that BP’s settlement payments related to the 2010 Deepwater Horizon oil spill have started to shrink also helped the company. It paid out $6.9 billion in spill payments in 2016 and $5.2 billion in 2017, according to the fourth quarter earnings report released Feb. 6. “2017 was one of the strongest years in BP’s recent memory,” CEO Bob Dudley said in a formal statement. “We delivered operationally and financially, with very strong earnings in the downstream; upstream production was up 12 percent; and our finances rebalanced. And we did all this while maintaining safe and reliable operations.” However, the company netted just $27 million in the fourth quarter after a $1.7 billion profit in the third quarter. That was primarily due to non-operating expenses accounted for in the quarter, according to the report. Operating cash flow — excluding the Deepwater Horizon payments — was up substantially from $17.6 billion in 2016 to $24.1 billion last year. Operating cash flow for the quarter was $6.4 billion, up 42 percent year-over-year. In Alaska, the year was more mixed for BP. The company held Prudhoe oil production at roughly 280,000 barrels per day for the third straight year, which Chief Upstream Executive Bernard Looney called “a fantastic example” of the BP’s ability to optimize work while cutting drilling during a time of low prices during a conference call with investors. Looney further noted the progress the Alaska Gasline Development Corp. has made on the $43 billion Alaska LNG project, which would begin selling the roughly 35 trillion cubic feet of natural gas combined at Prudhoe Bay and Point Thomson. BP executives have said the North Slope gas reserves are the company’s largest non-producing asset in its portfolio. “In Alaska, the fiscal changes potentially around what has been achieved with the Trump administration around gas, which many people might have thought of as a big stranded asset, may actually come to light in terms of commerciality,” Looney said. In November, AGDC and Gov. Bill Walker signed a nonbinding agreement with three large Chinese companies to advance the gas project in front of President Donald Trump and China President Xi Jinping in Beijing. BP has also assisted AGDC in a behind-the-scenes role on the Alaska LNG Project since the state-owned corporation took it over at the start of 2017. While Dudley touted the BP’s safe operations in 2017, the company allegedly had near misses in Alaska during the year that pushed its state leaders to call for a “reset” of its safety culture in the state. Buzzfeed reported in October, based on leaked internal BP Alaska emails, that the company had at least five incidents during the year that put employees at significant risk and resulted in workers being sent to unscheduled safety training. Also, in April, a BP oil well failed at Prudhoe due to permafrost melting around the well, spraying about 100 gallons of oil onto the drilling pad. The incident caused the company to review all of its wells for a similar design — a few were found and shut in — and pushed state regulators to require all Slope operators to perform a similar review late in the year. BP’s Alaska-specific financials are reported each year in the company’s annual report, which is expected to be published in late March. Elwood Brehmer can be reached at [email protected]

AEDC: recession fading despite ongoing state financial issues

Anchorage is pegged to lose about another 1,000 jobs this year, but the analysts that track the numbers closely believe it could be the last year of a shrinking economy in the city. Anchorage Economic Development Corp. CEO Bill Popp said during the group’s annual forecast luncheon Jan. 31 that the job losses this year will continue to be widespread amongst the various sectors of the city’s economy. However, the workforce reductions are expected to be smaller in almost every industry than what has been endured in the past two years of recession. Losing 1,000 more jobs in 2018 would equate to a 0.7 percent decline in the city’s overall workforce of about 151,000. For context, Anchorage lost about 2,100 jobs last year and more than 2,900 in 2016, the first year of the recession. Popp said the city’s ever-burgeoning health care industry was the outlier in 2017; it added roughly 800 jobs. The transportation sector was flat, aided by a busy Ted Stevens Anchorage International Airport, which was aided by tourists and cargo from a strong Lower 48 economy. “Who lost, last year? Everybody else; that’s the simple way to put it,” Popp commented. But the major job losses seen in 2016 in the linked oil and gas, construction and professional and business services — engineers, architects, lawyers, accountants, administrators and the like — sectors have moderated. In 2016 those three industries shed 3,100 jobs in Anchorage. In 2017 they lost a combined 1,400 workers. Overall, AEDC is projecting the recession will fizzle out sometime late this year or early next. Oil prices have stabilized of late and a batch of prospective developments on the North Slope should help revitalize Alaska’s central industry, which is largely headquartered in Anchorage. Aside from that, the tourism and transportation sectors are expected to remain strong. The job losses haven’t equated to a ballooning unemployment rate, however. Anchorage averaged 5.7 percent unemployment in 2017, which is still near full employment as economists calculate it. And Alaska as a whole was at 6.9 percent, which is the highest in the nation, but close to historical trends. The city is losing jobs but not adding much to unemployment rolls because many without work are packing up and heading south instead of collecting unemployment assistance, according to Popp. “People are leaving town for the Lower 48, some are for better opportunities,” he said. The national unemployment rate, at 4.4 percent, is as low as it’s been in more than a decade. As a result, AEDC expects Anchorage to lose another 1,500 residents this year and end 2018 with a population of 296,000. Anchorage’s population peaked in 2013 with 300,880 residents, according to the state Labor Department. This year, AEDC is predicting the interrelated oil and gas, construction and professional service industries will lose a total of 400 jobs — 200 each from construction and business services with oil and gas hopefully holding flat. Anchorage retailers are expected to shed about 400 jobs this year, the biggest projected loss in the sectors AEDC tracks, but Popp noted that estimate was reached before the January announcements that Sears and Sam’s Club would collectively close three large stores in the city. He added, though, that the Alaska Sears and Sam’s Club closings were part of larger, national trends for the iconic retailers and not wholly a result of Alaska’s economy or reductions to the Permanent Fund Dividend. There simply aren’t numbers to support the theory that cuts to the PFD by Gov. Bill Walker and the Legislature the past two years have translated to massive declines in consumer spending as some like to purport, Popp stressed. “The Permanent Fund (dividend) is an important part of our economy; it adds $600 million to our state’s economy. A lot of that Permanent Fund is spent on paying off bills, going into savings, paying for education; a chunk of it goes to paying for stuff but it is not the driver of our $1 billion-plus retail economy here in Anchorage,” he said, noting past formulaic declines in the PFD amount to not correlate to retail losses. Popp also said he’s hearing rumors that the Sears and Sam’s Club buildings could have new tenants shortly after the stores close — and possible reemployment opportunities for at least some of the workers losing jobs. “In Alaska we still love us some retail,” he quipped. “We like to get out and shop.” The leisure and hospitality industry, despite being buoyed in the summer by record numbers of tourists in recent years, is expected to lose about 200 jobs mostly due to locals’ belt tightening, literally and figuratively, a classic recession symptom. Restaurants are having a hard time drumming up business when tourists aren’t around, according to AEDC. “If you’ve been holding back on going out to eat at one of your favorite restaurants, I’d suggest maybe it’s time to go out and have a meal because we need to support this industry,” Popp encouraged the forecast attendees. On the flipside, the transportation and health care sectors should break the recession trend again, adding 100 and 600 jobs respectively in 2018, AEDC projects. Transportation will continue to benefit from strong economies elsewhere resulting in strong cargo trade and passenger numbers at the airport, while Alaska’s highest-in-the-nation health care costs continue to support growth in the sector. On health care, Popp emphasized that more jobs are always good, but he also said that if the state can manage to get its health care costs under control the industry’s workforce might take a hit in the coming years. Anchorage’s health care sector has added nearly 7,000 jobs since 2006, an increase of more than 40 percent. “As we start to address those (cost) issues it could impact the job base in health care,” Popp said. “So there’s issues we have to balance there as we try to come up with the solutions that are going to be necessary to make this less of a problem for businesses.” Health costs hurt business confidence AEDC found in its annual Anchorage Business Confidence Report that business leaders feel the cost of health insurance is one of the biggest impediments to growing their businesses. An interesting revelation from the business survey was that employers still feel a lack of professional and technical workers is an impediment to growth, even during a recession. It was fourth behind Alaska’s near-omnipresent issue of high energy prices. Popp said the skilled worker shortage is likely attributable to qualified candidates moving to the Lower 48 where jobs are readily available and the cost of living is lower. The biggest issue facing Anchorage businesses, according to the survey, is the state economy, and specifically what lawmakers will or won’t do to try and stabilize it. “Business needs certainty and state government is not giving that to the business community and until businesses can pencil out what their taxes are going to be, no one can say what they’re going to be — the Legislature and the governor can’t seem to come together to an answer — this uncertainty continues to keep money on the sidelines, hence the reason it’s the number one issue,” Popp emphasized. AEDC is one of many business organizations across Alaska that for several years has been advocating for the Legislature to pass a fiscal plan centered on using a portion of the earnings of the Permanent Fund to pay down the state’s ongoing multibillion-dollar annual budget deficits. Despite the challenges, Anchorage business leaders overall have changed their tune from markedly negative in 2017 to “kind of ambivalent” in 2018, as they see more positive economic indicators aside from the state’s issues. GCI co-founder and CEO Ron Duncan reiterated Popp’s sentiment on the state budget in a speech following the economic forecast. He characterized the state’s budget problems and resulting economic hesitance as “purely a self-inflicted problem” because political leaders in both parties have chosen to hold out for what they see as the perfect solution instead of employing the one tool a large majority of lawmakers already feel is necessary to solve the vast majority of the problem — earnings from the Permanent Fund. State economists generally consider the current recession in Alaska has primarily been caused by a sharp retraction in government and a lack of public confidence that the deficits will be resolved soon and for the long-term. “It’s hard to feel comfortable investing more in Alaska until we can see a path to fiscal stability,” Duncan said. “If we start using the earnings in a sustainable way before we drain away all of our savings then we have a chance to restore business confidence.” ^ Elwood Brehmer can be reached at [email protected]

Mallott, Sullivan meet with top Canadians on transboundary issues

Lt. Gov. Byron Mallott and Sen. Dan Sullivan watched Super Bowl LII together in Ottawa and spent time strategizing on their approach to the next day’s meetings. They were there to discuss issues as far-reaching as ocean debris, missile defense and the North American Free Trade Agreement with Canadian federal officials as well as provincial and First Nations leaders, according to Sullivan, but the priority topic brought up in every discussion was that of Canadian mines at the headwaters of rivers that terminate in Alaska. The state officials reviewed the meetings in a Feb. 5 call with Alaska press. From the outset, Sullivan said the fact that Mallott, a longtime Democrat leader in the state, and himself, a staunch conservative, were in lockstep on the transboundary rivers issue sent a “powerful message of unity and that this is a very important issue of concern for the people we represent.” At the heart of the matter are 10 mines in British Columbia that are either in operation or stages of exploration and development. Those mines or mineral prospects are mostly open pit projects focused on copper and gold recovery. The mine locations within the watersheds of the large Taku, Stikine and Unuk rivers that support large salmon fisheries are the primary cause for concern among Southeast Alaska commercial fishing and conservation groups that fear problems at the mines could damage or destroy the rivers’ fisheries. Mallott and Sullivan said they pushed four priorities they are seeking action on from Canadian officials — either at the federal or provincial levels. The Alaskans requested increased transparency in the permitting process for the mines and opportunities for Alaskan stakeholders to provide input when mine plans are being reviewed. They also asked for additional financial assurances or bonding requirements for the mine operating companies to protect Alaska fishing and tourism businesses that rely on robust fisheries in the rivers “if, God forbid, we had a Mt. Polley-type disaster that went into our waters,” Sullivan described. The 2014 Mt. Polley mine tailings dam breach spilled more than 6 billion gallons of wastewater into the upper Fraser River system in British Columbia. Mt. Polley mine operator Vancouver-based Imperial Metals Corp. opened the Red Chris copper-gold mine in the upper Stikine River watershed in 2015. Sullivan added that they also asked the Canadian government to join in funding baseline water quality studies and ongoing monitoring to track if the mines are impacting the rivers, a program which Congress started funding last year. Lastly, they insisted on immediate reclamation of the Tulsequah Chief mine that has been leaching acid rock drainage into the Taku River near Juneau since the mine was abandoned in 1957. A temporary water treatment plant was built in 2011 to deal with the leaching but it was quickly shut down in 2012, according to the Alaska Department of Natural Resources. Chieftain Metals Corp. is now proposing an underground mine at the Tulsequah site that is about 10 miles upriver from the Alaska border. The project received regulatory approval from British Columbia in 2012 but is awaiting financing. Sullivan said he thought the meetings were constructive but the transboundary issue is far from solved. “We put forward some specific requests and we’re going to press on those,” he said Feb. 5. “I think they’re legitimate requests; I think they’re reasonable requests but they’re requests for specific actions and we certainly hope our Canadian friends will work with us to follow up on it.” Mallott said the talks furthered the progress made by the Walker administration on the issue. In 2015, Gov. Bill Walker and British Columbia Premier Christy Clark signed a memorandum of understanding to promote economic development in concert with environmental protection. That led to a statement of cooperation signed by Mallott and British Columbia Environment and Mines ministers in Oct. 2016, which established a working group of state and provincial officials to discuss transboundary issues. Mallott said the meetings were important because the sides were able to discuss important policies that are outside of the nonbinding statement of cooperation. A possible referral of the issue to the International Joint Commission — strongly advocated for by Alaska Native and conservation groups — was not discussed in detail during the meetings but will be part of talks between the governments in the spring, according to Mallott. “The process involved for an IJC referral will continue to be discussed by the (federal) governments and we have asked them to do so,” he said. The International Joint Commission consists of five commissioners, two from Canada and three from the U.S., who review transboundary watershed issues. It was established after the 1909 Boundary Water Treaty, which at the time settled a battle between Montana and Alberta farmers who had dug competing canals to divert water from area rivers to their farms. According to its website, the commission has since settled more than 100 matters raised by the governments. An arbiter body, IJC can only get involved when called upon by both governments. In the U.S., the State Department makes that call. In November, Walker, Mallott and three members of the Alaska congressional delegation sent a joint letter to Secretary of State Rex Tillerson, urging him to help protect Alaska’s economic interests of fishing and tourism in Southeast by raising the transboundary mine issue in talks with his Canadian counterparts. Charles Faulkner, of the State Department’s Bureau of Legislative Affairs, responded with a letter Dec. 14, writing that the State Department and the Environmental Protection Agency have established a workgroup to coordinate actions and communicate concerns to Canadian officials. State Department officials in October also got a commitment from Global Affairs Canada to take up a bilateral review of potential gaps or shortcomings in cooperative agreements between the countries that deal with transboundary issues. “The Department of State will lead this review process with interagency and stakeholder input, with the goal of sharing its findings with Global Affairs Canada at the April 2018 IJC meetings,” Faulkner wrote. “We value your assistance and input in this effort. As Canadian support would be required for a joint IJC reference, we will continue to raise this issue in upcoming bilateral meetings.” The issue of mines in British Columbia potentially impacting fisheries in Alaska waters has been one Alaska officials have tried to tread lightly on despite calls for a much tougher stance by some Southeast groups. That’s because, for one, they do not want to strain what has historically been a strong relationship with British Columbia and Canada in general, as well as the facts that the state has little actual leverage in addition to a long history if mining and support for the industry. To the latter point, Sullivan said he emphasized that Alaska supports resource development in the meetings, but he believes the state has valid concerns given what could happen downriver from the mines. He and Mallott also said the issue of oil exploration in the Arctic National Wildlife Refuge coastal plain — one Canadian Embassy officials actively lobbied against in Congress during the tax reform debate — came up in the transboundary river meetings. Sullivan described it as “probably one of the more contentious issues of our meetings.” “There was a bit of an analogy between the Porcupine caribou herd and transboundary mining and I, at least in my response, said I rejected that completely,” Sullivan recalled. Canadian officials have opposed oil development in ANWR for the fear that it would impact the calving grounds of the caribou herd that migrates into the Yukon Territory and is relied on by there by First Nations people as it is by some Alaska Natives. In a December interview with the Journal, Sullivan contended that the only reason Canada opposes development in ANWR is because the country didn’t find any oil on its side of the border when exploratory drilling was done in the Yukon Arctic decades ago. In that interview, Sullivan said he told the Canadian ambassador to the U.S. to “stand down” or he was going to “do everything I can to screw your country.” The delegation in an October letter to the Canadian ambassador to the U.S. said British Columbia to that point had done “remarkably little” to consider their transboundary concerns and pointed to the Mt. Polley and the Tulsequah Chief mine as demonstrable indicators that “Canadian mining is not always carried out to the same safety standards as in the U.S.” Mallott said the state will follow through with consultation that is required under a 1987 treaty with Canada meant to ensure a healthy Porcupine caribou herd. The state is also working to develop an accord with the Yukon Territory to address climate change and economic development matters, according to Mallott. “We were very clear to say we’re supportive of the exploration that is now authorized in the 1002 area of ANWR but that we also wanted to work closely with particularly the indigenous people on both sides of the border as we proceed ahead,” Mallott said. Elwood Brehmer can be reached at [email protected]

Permanent Fund value hits $64B at fiscal year midpoint

It was a good news-bad news kind of day for Alaska Permanent Fund managers. While the Alaska Permanent Fund Corp. reported strong returns of 8.45 percent and a total Fund value of $64 billion in the first half of the 2018 fiscal year on Monday, domestic markets were also down sharply for the second consecutive trading day. The Dow Jones Industrial Average closed Monday at 24,345, down more than 7 percent from the start of Friday trading. However, from July 1, 2017, to Jan. 1 the public equities portion of the Fund’s investments produced an 11.9 percent return and outperformed the corporation’s investment benchmark. Roughly $28 billion, or 44 percent of the Fund’s total assets are allocated to public equities, according to the latest APFC financial report. The $64 billion highlighted in the report was comprised of $48.7 billion in the principal portion of the Fund and $15.3 billion in the Earnings Reserve income account. CEO Angela Rodell said in a release that she was particularly “pleased to see the quality and diversity of the portfolio’s investment returns across all asset classes. Double-digit performance returns have been achieved not only in public equities, but in APFC’s private equity and infrastructure holdings as well.” The private equity investments totaling $7.6 billion generated 13.9 percent returns in the first six months of fiscal 2018. Infrastructure and private credit allocations of $3.5 billion netted a 12.4 percent return for the period. Fixed income investments totaling $13.6 billion as of Dec. 31 generated a 2.6 percent return, the smallest performance return among the Fund’s major asset classes, according to the performance report. Overall, the 8.45 percent six-month return surpassed the corporation’s blended performance benchmark by nearly 1.3 percent and outperformed the APFC Board of Trustees return objective of inflation plus 5 percent by 3.1 percent. As of Friday, the Permanent Fund had an unaudited value of $65.2 billion. The Permanent Fund has more than doubled in overall asset value since ending the 2009 fiscal year at $29.9 billion following the market crash that spurred the Great Recession in the Lower 48. The Permanent Fund principal is protected from being spent by the amendment to the Alaska Constitution that established the Fund. Spending from the Earnings Reserve, however, requires a simple majority vote from both bodies of the state Legislature. To date, the only spending from the Earnings Reserve has been to pay out annual Permanent Fund dividends to residents based on a percentage of the Fund’s previous five-year performance. Gov. Bill Walker and House and Senate leaders have pushed to implement a percent of market value, or POMV, appropriation structure from the Earnings Reserve to pay down up to nearly $2 billion of the state’s ongoing budget deficits in excess of $2.5 billion. While the House and Senate both passed similar versions of the governor’s POMV legislation last session with annual draws in the 5 percent range, contingencies linked to the bill on how the Democrat-led House and Republican-led Senate want to close the rest of the budget gap have stalled reconciliation to this point. Both versions of the legislation would use a portion of the POMV draw to continue paying dividends, but likely at a reduced rate from the current formula. The APFC board of trustees has long supported a sustainable POMV draw to provide stability for the Fund and its managers. With the state’s traditional savings accounts dwindling, legislators will very likely be forced to pull from the Earnings Reserve— via a POMV or a dreaded ad-hoc appropriation — within the next two state budget cycles. Elwood Brehmer can be reached at [email protected]

CP rebounds, buys Anadarko Slope interests for $400M

ConocoPhillips reported its largest quarterly earnings in more than three years Feb. 1 when the company announced a profit of nearly $1.6 billion for the fourth quarter of 2017. In Alaska, ConocoPhillips reported adjusted earnings of $283 million for the quarter and $652 million total for 2017. It also purchased all of Anadarko Petroleum Corp.’s North Slope assets for $400 million. The companies have been joint bidders, with Anadarko in a minority position, on significant lease tracts in the eastern NPR-A and western state Slope leases in the past few years. Many of those areas are not currently unitized. Also on Feb. 1, Andeavor, formerly Tesoro Corp., announced it has agreed to purchase the Kenai LNG plant and marine terminal from ConocoPhillips for an undisclosed amount. ConocoPhillips had been publicly shopping the aging facility since November 2016 and in July said it was taking steps to mothball the facilities. The plant has not exported LNG since 2015, primarily because of global market conditions. ConocoPhillips’ adjusted earnings companywide were $540 million for the quarter, according to the balance sheet. Company executives attributed the roughly $1 billion boost from its adjusted earnings to its overall profitability for the quarter primarily to benefits from the corporate tax reform legislation passed in December and an arbitration settlement in Ecuador. ConocoPhillips was able to recalculate its deferred federal corporate tax obligation at the new, lower 21 percent tax rate compared to the previous 35 percent corporate rate, resulting in $900 million of benefits, a company release states. Regardless, the fourth quarter of 2017 was by far the best quarter ConocoPhillips has had since oil prices began falling in the third quarter of 2014, when it netted $2.7 billion. For the full-year 2017, ConocoPhillips still reported a loss of $855 million, compared to a $3.6 billion loss in 2016. In 2017, its average realized price was $39.09 per barrel of oil equivalent, which includes the price of natural gas, compared with $28.35 per barrel equivalent in 2016. “2017 was a very successful year by all measures,” CEO Ryan Lance said Feb. 1. “We accelerated our disciplined, returns-focused value proposition and delivered on our strategic priorities. We transformed our portfolio, strengthened our balance sheet, returned 61 percent cash flow from operations to shareholders through our dividend and (stock) buyback program, and achieved our operational milestones, including 200 percent organic reserve replacement.” ConocoPhillips paid down $7.9 billion of debt in 2017 to bring its year-end debt to $19.7 billion. This year, the company has already paid down another $2.25 billion of debt, according to Lance. The $1.6 billion in quarterly earnings was on the back of $8.7 billion in total revenues, compared to $7.2 billion in the last months of 2016. For the year, ConocoPhillips generated $32.5 billion in revenue versus $24.3 billion in 2016. The company’s Alaska production was up an average of 4,000 barrels of oil per day in 2017 to 167,000 barrels per day, according to the financial report. ConocoPhillips operates the large Kuparuk and Alpine oil fields and holds a 36 percent stake in Prudhoe Bay. In November, the company began producing from its 1H NEWS (Northeast West Sak) viscous oil project in the Kuparuk field, which has an expected peak production rate of 8,000 barrels per day. It also recently brought additional wells online at its CD-5 development in the Alpine field, which started producing in late 2015 and has significantly exceeded production expectations. Originally expected to produce up to 16,000 barrels per day, CD-5 is currently producing roughly 37,000 barrels per day with the new wells, according to ConocoPhillips. Anadarko buyout Anadarko is a silent partner in much of ConocoPhillips’ work on the North Slope, but much of that partnership appears to be coming to an end. The deal, subject to regulatory approval, has an effective date of Oct. 1, 2017, according to ConocoPhillips. It includes the Alpine oil field assets that produced an average of 63,000 barrels of oil per day in 2017, in which Anadarko holds a 22.45 percent stake, according to the state Division of Oil and Gas. Conoco also reported the deal will give it a 100 percent interest in approximately 1.2 million acres of exploration and development areas; that includes the Willow prospect in the National Petroleum Reserve-Alaska, which the company estimates could produce up to 100,000 barrels of oil per day if fully developed. According to Oil and Gas, Anadarko has a 22 percent stake in the Greater Mooses Tooth Unit in the NPR-A — the site of Willow and the two Greater Mooses Tooth oil projects — and a 24.62 percent interest in the adjacent Bear Tooth Unit, also in the NPR-A. Elwood Brehmer can be reached at [email protected]

Alaska Air Group nets $1B in ’17 as Virgin integration continues

Alaska Air Group Inc. reported profits of just more than $1 billion in 2017 after its first full year owning Virgin America, but is still managing challenges associated with its purchase of the former competitor. The Seattle-based parent company of Alaska Airlines also posted a $367 million profit for the fourth quarter of 2017, which compared to $814 million full-year 2016 and $114 fourth quarter 2016 profits. Alaska Air Group executives announced the quarterly and year-end results in a Jan. 25 conference call with investors. The income came on the back of $7.9 billion in operating revenue for the year, up 34 percent from 2016, and $1.9 billion in revenue for the fourth quarter, a 29 percent increase year-over-year. The profits translated into $118 million in annual performance bonuses, which were paid out Jan. 26 to Air Group’s 23,000 employees. “This is the ninth consecutive year in which we’ve proudly shared profits with our employees at levels that have averaged about one month of additional pay,” CEO Brad Tilden said. “This year’s payout averages 7.3 percent of pay for Air Group frontline employees.” Alaska Air Group stock stayed mostly flat after the earnings call, ending Jan. 25 trading at $62.07 per share. It peaked in early March 2017 at nearly $100 per share. The company repurchased $75 million of stock in 2017 and also announced an increase to its quarterly dividend to 32 cents per share Jan. 25. It’s the fifth time the dividend has been increased since it was started in 2013. While the airline company’s revenue expectedly grew after acquiring Virgin America in the $4 billion deal that closed Dec. 14, 2016, integrating Virgin into Alaska Airlines has not come without significant costs as well. According to a chart provided by Air Group that blends its premerger 2016 numbers with those of Virgin America for comparison against the 2017 financials, operating revenues were up 6 percent in 2017, but pretax income was down 21 percent from the blended 2016 figures at $1.3 billion. Higher oil prices caused fuel costs to rise $323 million, or 29 percent, but other non-fuel operating expenses were also up $426 million, or 9 percent. Tilden said the company’s earnings are under pressure from step function cost increases along with competitors adding capacity in Alaska’s markets — primarily Delta Air Lines out of Seattle. However, he noted that while Air Group has incurred most all of the costs associated with the extremely complex task of integrating working airlines, it is just starting to see the benefits. “Of the $300 million original synergy target, we expect to realize $65 million in 2018, consistent with our prior forecast. We continue to believe the revenue potential of the new Alaska network is substantial, and we expect synergies to reach $200 million in 2019,” Tilden said. “More important than the synergies, however, is the incredible platform that we’ll have to grow revenue and profit in the years ahead and create value for our owners, our customers and our employees, just as we have in the last couple decades.” Alaska Air Group plans to move to a single passenger service system on April 25, which will blend the Virgin America shopping, flight scheduling and airport check-in systems with Alaska Airlines, according to Tilden. The company received a single operating certificate for Virgin and Alaska from the Federal Aviation Administration Jan. 11. Tilden also noted that the airlines’ operations had been co-located at 22 of the 31 airports needing consolidation and the rest of that would be done in April. “We’ve made all aircraft delivery and interior decisions, and our first Airbus airplane came out of the paint shop yesterday with new Alaska colors,” Tilden added Jan. 25. Alaska Airlines for years had flown only Boeing 737s, of which it has 154, but it is now also flying 67 Airbus A320s, which company leaders have said it will continue to fly at least through 2021 when some of the Airbus leases begin expiring. On the financial front, the company lowered its debt-to-capitalization ratio from 59 percent to 51 percent during 2017. Chief Financial Officer Brandon Pedersen said the company is committed to having a debt-to-cap ratio in the mid-40 percent range by 2020, noting it is well-positioned if interest rates continue to rise because half of the company’s debt is fixed. Alaska Air Group’s debt-to-cap was down to 27 percent at the end of 2015 shortly before buying Virgin America. The company ended 2017 with $1.6 billion in cash after generating $1.7 billion in operating cash flow and spending roughly $1 billion on capital projects, which left Air Group with $670 million in free cash flow, minus integration costs, according to Pedersen. Operationally, Tilden said the company is focused on continuing on-time performance improvements made in the fourth quarter. Alaska Airlines had long been the top domestic carrier in on-time performance, the fundamental operational metric. However — even including Virgin America’s 2016 on-time figures for comparison’s sake — Alaska’s on-time performance fell from 87.3 percent in 2016 to 82.6 percent last year. As Tilden mentioned, there was significant year-over-year improvement in the fourth quarter, with 83.4 percent of Alaska flights arriving on time compared to just 76.1 percent in the latter portion of 2016. For Virgin America, the trends were similar but the numbers were worse. Overall, just 70 percent of Virgin flights arrived on time in 2017, but the airline managed an improvement to 82.5 percent in the fourth quarter. Finally, Air Group has reached joint collective bargaining agreements with Alaska and Virgin pilots and customer service agents and Tilden said management believes it is close to similar agreements with the flight attendant and maintenance technician unions. In early January the Seattle Times published a lengthy story detailing employee discontent at Alaska Airlines due to cost-cutting and merger-related actions. Elwood Brehmer can be reached at [email protected]


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