Elwood Brehmer

State, feds agree to revise roadless in Tongass

State and federal officials inked an agreement Aug. 2 that could lead to scaling back the U.S. Forest Service’s long-debated Roadless Rule in Alaska. The memorandum of understanding signed by Department of Natural Resources Commissioner Andy Mack and Interim Forest Service Chief Victoria Christensen lays the foundation for the agencies to reopen the Roadless Rule on the prospect of working towards an Alaska-specific rule that could allow for more access to large swaths of federal lands that have ostensibly been off-limits to logging or other developments and activities since the early 2000s. Approved in early 2001 by former President Bill Clinton, the Roadless Rule prohibited new road construction on roughly 58 million acres of undisturbed national forest lands across the country. The “no new roads” edict has since been continuously challenged in court, particularly by western states that contend it has arbitrarily curbed logging and other activities on Forest Service territory and conflicts with the agency’s multiple-use land planning mission. In 2015, the U.S. 9th Circuit Court of Appeals upheld an Alaska U.S. District Court decision to overturn a 2003 exemption to the Roadless Rule for the Tongass National Forest put in place by George W. Bush’s administration. Alaska Division of Forestry Director Chris Maisch said the MOU to examine revising the rule was borne out of Gov. Bill Walker’s petition to Agriculture Secretary Sonny Purdue for a full, statewide exemption to the Roadless Rule. The MOU is focused in the 17 million-acre Tongass National Forest, according to Forest Service spokeswoman Dru Fenster, which encompasses the vast majority of Southeast Alaska and is by far the largest national forest in the country. At 5.4 million acres, the Chugach National Forest in Southcentral is the second-largest national forest, but its timber is much less suitable for large-scale commercial logging. The members of Alaska’s congressional delegation lauded the MOU in formal statements, insisting it is a big step towards getting “forest management and the economy of Southeast Alaska back on track,” as Sen. Dan Sullivan put it. “As I have said many times before, the Roadless Rule has never made sense in Alaska,” Sen. Lisa Murkowski said Aug 2. “I welcome today’s announcement, which will help put us on a path to ensure the Tongass is once again a working forest and a multiple-use forest for all who live in Southeast. “I thank Secretary Purdue for recognizing the need for economic relief in these communities and look forward to continuing to work with the administration, state officials, Sen. Sullivan and Congressman Young to see this process through to the finish line.” Murkowski chairs the Senate Appropriations subcommittee that covers the Forest Service budget and has inserted language to exempt Alaska from the Roadless Rule into recent budget bills for the agency. Those provisions have ultimately been stripped from the spending bills the president has signed. Specifically, the MOU directs DNR and the Forest Service to establish a State-Forest Service Executive Steering Committee to carry out the agreement. The Forest Service will lead development of an environmental impact statement to analyze the effects of prospective management changes to the Tongass, while the state will form a public advisory group of representatives from Southeast tribes and Alaska Native corporations as well as conservation groups and the timber, mining, tourism and commercial fishing industries. Colorado and Idaho are the only other states to have their own Roadless rules, but those came only after years of study and court challenges. Forest Service officials said they plan to have the Alaska EIS complete within 18 months, in part to keep stakeholders engaged in the process. Forest and fishing advocates criticized the agreement, claiming it will put some of Southeast’s largest industries at risk. Trout Unlimited, which has pushed for permanent protections for dozens of critical salmon-bearing watersheds in the Tongass — its Tongass 77 campaign — contends the fishing and tourism industries rely on unspoiled wilderness in the region provided by the Roadless Rule and currently support 26 percent of all the jobs in Southeast Alaska in addition to contributing about $2 billion per year to the region’s economy. TU Alaska Policy Director Austin Williams stressed in a formal statement that revising the Roadless Rule in the state would mean throwing out the 2016 Tongass Management Plan, which took more than four years to finalize. The Tongass Plan calls for a transition to strictly young-growth timber harvest in the forest over 16 years, a period Murkowski and timber industry leaders argue is much too short to provide an adequate timber supply for Southeast’s few remaining sawmills. “The current Tongass Forest Plan, which includes protections for roadless areas, was monumental and was perhaps the first time a diverse set of stakeholders successfully came together around a common vision for how to move forward on the Tongass and leave the timber wars behind,” TU Alaska’s Williams said. “The overwhelming majority of Alaskans that participated in that process voiced a desire for increased protections for important fish and wildlife habitat. Rather than flushing that hard work down the drain, we should look for lasting solutions that protect the remaining roadless areas.” Forest Service Associate Deputy Chief of Forest Systems Chris French acknowledged in an interview that any substantive changes in how the Roadless Rule is applied to the Tongass at the end of the EIS process will likely require another EIS to at least amend the Tongass Management Plan accordingly. French said the MOU provides “a wide open space” for forest managers to consider changes in how the rule is used. “It basically allows us a lot more flexibility in how we approach apply the protections of roadless that you see in the 2001 Roadless Rule,” he said. Any rule changes could apply to the 57 percent of the Tongass that was designated as roadless in 2001. About 35 percent of the Tongass has been granted “wilderness” protection by Congress and as such will not be impacted by any changes to the rule. The remaining roughly eight percent is set aside for other opportunities, according to Forest Service officials. “We don’t know what we’re going to propose yet. We don’t know what we’re going to hear at this point. We really want to start from the space of allowing folks to speak their mind; allowing folds to contribute their ideas — come to maybe some solutions — give us some proposals and all that will be considered as we go forward,” French said. Alaska Forest Association Executive Director Owen Graham said in an interview that the organization had been pleading with the Forest Service to revise the rule, but also lamented the fact that easing the land-use restrictions likely won’t change on-the-ground work for several years. “Just removing the Roadless Rule won’t let us cut one more tree because the Roadless Rule is in the forest plan,” Graham said. He has been critical of the 16-year transition to young-growth-only harvests in the current Tongass Management Plan, insisting most young-growth areas in the forest are at least 30 years from maturity. Graham said prematurely harvesting young-growth stands can necessitate cutting over twice the acreage to achieve similar harvest volumes, as stands of smaller trees simply do not offer the same amount of usable timber as mature or old-growth stands. “You have to have this economy of scale,” he said. Graham also noted that old-growth trees provide opportunities for Alaska mills to produce specialty and value-added products while lower-grade, young-growth logs from the Tongass are almost always exported to Asian markets for processing. State Forester Maisch said he doesn’t foresee old-growth harvests from the Tongass going away anytime soon, but also noted new technologies such as cross-laminated timber could open up new value-added opportunities around young-growth for Southeast mills. Maisch also stressed flexibility in management as a driving interest for the state to revise the Roadless Rule, saying the rule’s impacts go beyond traditional forest uses. “It’s about community access; it’s about energy; it’s about have the ability to be adaptable and flexible so we can make changes as technology changes,” Maisch said. “For example, cell towers and the need for cell towers in locations that are not so easy to do that in around communities right now. Hydro (power) is another good example. It’s difficult to build some of those types of utility infrastructures without having roads to support it for both construction and maintenance.” Additionally, French said Purdue’s vision of the Tongass as “a working forest” — as the USDA secretary said during a July trip to Prince of Wales Island with Murkowski — is not strictly limited to logging. “We also understand that industry is changing and the values that Alaskans hold for these lands is something that is changing as well and we recognize the importance that folks see with roadless. We also recognize the needs that other user groups and industry have for these lands. We want to be able to consider all of that,” French said. Elwood Brehmer can be reached at [email protected]

Gov, Meyer unfazed by China’s tariff threat on LNG

Gov. Bill Walker and Alaska gasline officials insist China’s immediate threat to slap an import tariff on U.S. liquefied natural gas should not impact the long-term viability of the $43 billion Alaska LNG Project. On Friday, the Chinese government announced a proposal to put a 25 percent tariff on roughly $60 billion of U.S. goods the country imports, including U.S. oil and natural gas. The potential tariffs are the latest move in a tit-for-tat trade dispute initiated by President Donald Trump earlier this year that has slowly been escalating through the summer. The face-off between the economic superpowers is in sharp contrast to the trade-focused trip Trump and Commerce Secretary Wilbur Ross made to Beijing last November. That trip culminated in a ceremony in which some of the largest companies from each country signed trade deals before Trump and China President Xi Jinping. Among those at the Nov. 8 deal-signing event were Walker and Alaska Gasline Development Corp. President Keith Meyer, who signed a nonbinding joint development agreement with Chinese oil and gas giant Sinopec, the Bank of China and China Investment Corp. to advance the prospect of the three state-owned Chinese companies buying from and investing in the Alaska LNG Project. Specifically, the agreement, or JDA, contemplates Sinopec buying up to 75 percent of the LNG produced from the project in exchange for the Bank of China and China Investment Corp. financing up to 75 percent of the project’s development costs. AGDC officials have said the Trump administration’s prior tariffs on Chinese steel would at worst have a nominal effect on the project. Exactly how a 25 percent tariff on U.S. LNG would impact the economics of Alaska LNG is unclear — it certainly wouldn’t be good — but the policy battle of today doesn’t upend the fundamental benefits of the project, according to Walker. “Alaska’s vast reserves of natural gas can satisfy market demand for nearly a century, and short-term trade tensions do not change this long-term value proposition. Alaska LNG would be the largest job-creating infrastructure project in the country, and would generate billions of dollars in revenue,” Walker said in a statement from his office. “My team and I will continue to work with the Trump administration to ensure that Chinese and U.S. officials strike a fair compromise so that Alaska’s natural gas reaches the market.” China is in the midst of a major transition away from coal to cleaner burning natural gas for electric generation. The country is expected to become the world’s largest importer of LNG next year. AGDC officials said in a corporate response to questions from the Journal about the potential impact of the LNG tariff that the project “will continue to present a win-win opportunity for both countries.” Meyer has often noted that exporting LNG to China would be a big step towards resetting the trade imbalance with China that Trump is focused on. “The Alaska Gasline Development Corp. believes the current trade tensions between the United States and China will be resolved well in advance of Alaska LNG exports to China. The Alaska LNG Project represents a multigenerational project that matches China’s 100 years of natural gas demand with Alaska’s 100 years of supply on the North Slope,” the AGDC statement reads. AGDC also notes it is progressing definitive purchase agreements with other prospective LNG buyers across the Asia-Pacific region. Though the Alaska LNG Project and the Prudhoe Bay and Point Thomson gas resources that would fuel it are currently planned for 25 years of exports, it is believed the project will spur subsequent gas exploration and development because there would finally be an avenue to get North Slope gas to market. Walker and Meyer met with Jinping in April 2017 when the Chinese president stopped in Anchorage on his way home from a meeting with Trump in Florida. It was that evening-long dinner and discussion that spurred the eventual framework deal around Alaska LNG, the governor has said. Elwood Brehmer can be reached at [email protected]

Sinopec drops interest in managing AK LNG construction

A Chinese oil giant is still in line to be a major buyer from, but not builder of, the $43 billion Alaska LNG Project. Alaska Gasline Development Corp. President Keith Meyer said Sinopec Corp. is still interested in 75 percent of the LNG produced from the project, but is no longer being considered as a construction manager for Alaska LNG. Gov. Bill Walker and Meyer signed a non-binding joint development agreement, or JDA, with Sinopec, the Bank of China and China Investment Corp. Nov. 8, 2017, in Beijing in front of President Donald Trump and China President Xi Jinping. The framework agreement set the foundation for further negotiations over LNG purchases, project financing and possible construction involvement by the government-owned Chinese companies. Sinopec is generally considered the world’s largest oil and gas company. The JDA also set a soft May 31 deadline for setting the parameters of involvement in the project by the Chinese consortium with advanced negotiations leading to a Dec. 31 deadline for final agreements. Meyer said Sinopec officials originally expressed interest in being a major participant in the four-year-plus Alaska LNG construction effort through its engineering and construction subsidiary, but that possibility was mostly nixed after a Chinese delegation spent a week in Alaska reviewing technical documents and examining the 807-mile pipeline route from the North Slope to Nikiski both from ground and the air. Meyer and other AGDC officials met with the Journal and Anchorage Daily News in a July 26 editorial board meeting. “(Sinopec) has never built an LNG plant and they do not have any Arctic pipeline (experience) — they’ve got a pipeline they built that is longer than ours; it’s got a higher altitude than ours, but it’s not this permafrost stuff,” Meyer said. Sinopec officials have since indicated they would be open to a subcontractor role in final design and construction, according to Meyer. “We said that’s fine because quite frankly it probably would have been a little more of a problem to fit them in than to not fit them in,” he added. Numerous legislators have expressed concerns over the prospect of Sinopec being a major player in Alaska LNG construction if the project moves forward, fearing the company could bring its own workforce and displace Alaskans wanting to work on the project. Some legislators have said they would be hesitant to partner with companies backed by a government with a litany of human rights violations but they would be comfortable with simply selling LNG into China — issues also raised by members of the public during recent AGDC board of directors meetings. The Bank of China and China Investment Corp., which manages the country’s sovereign wealth fund, are also potential Alaska LNG debt financiers and equity investors, respectively. From now until the end of the year the focus with will be on hashing out terms for the definitive, bankable LNG sale and purchase agreements. Meyer said though unlikely, he could see a scenario in which Sinopec agrees to buy LNG from the project without China Investment Corp., or CIC, participating, but investment without LNG is very unlikely. “The way it was originally contemplated CIC was really brought in as the equity investor and they’re supposed to be just like the Permanent Fund, completely independent of (Sinopec’s) decision and isn’t tied to the off-take. We were looking at Sinopec as just the off-take. It’s only been recently that Sinopec is sort of saying well, wait a minute, maybe we should be the investor, not CIC,” Meyer said. “We would be indifferent to that. Our focus is more on the total amount they might own or control.” Meyer and other project officials have long stressed AGDC will retain a majority ownership in the project regardless of its equity partners. The Bank of China’s lending to the project has been envisioned as a share of project financing equal to Sinopec’s capacity purchase amount. The Bank of China or other lenders would loan to a project company set up by AGDC under non-recourse project loans. Customers would then pay into the project company’s escrow account, which would pay operations and maintenance costs first and then the senior project lenders. The banks would lend based on the “sanctity of the commercial contracts,” according to Meyer. “If the customer stops paying the bank can step into those contracts, but we’re keeping the bank short of stepping into those underlying assets,” he said. “We want Bank of China to look at their sister company, if you will, they’re both owned by the state, as the credit support.” ^ Elwood Brehmer can be reached at [email protected]

Alaska remains potential source for critical rare earth elements

Rare earth elements really aren’t that rare; they’re just rarely mined. Many in Washington, D.C., particularly those in the Defense Department, see this as a major looming issue. That’s because the Mountain Pass mine just on the California side of the border with Nevada southwest of Las Vegas closed in 2015 when its operator went bankrupt. It was the last producing rare earths mine in the country. The nation’s supply of these 17 often hard-to-pronounce metals now comes from France, Estonia, Japan and China, according to the U.S. Geological Survey. Most troubling for some is the fact that China dominates the world’s rare earth elements supply. Sen. Lisa Murkowski remarked during a Senate Energy and Natural Resources Committee hearing she held July 17 on domestic mineral security that China has leveraged its dominance in rare earth production in the past and could do it again at a time when the country is in a tit-for-tat trade dispute with the U.S. “My concern, among many concerns, is if China ultimately responds to tariffs by restricting our supply of rare earths, or any number of other minerals, the U.S. could be in serious trouble. We’ve heard testimony in the past about the dangers of the concentration of supply from a handful of countries that control the supply chain,” said Murkowski, who chairs the Energy and Natural Resources Committee. “I’m hopeful that we aren’t about to experience those dangers firsthand and will continue to urge action to reduce this significant vulnerability.” In 2010, China placed an embargo on all rare earths the country was exporting to Japan in retaliation for actions against the crew of a Chinese trawler Japanese officials contended was fishing illegally in the country’s waters. China’s dominance in rare earth markets can make pricing and production data hard to obtain, but it is generally believed the country currently produces roughly 90 percent or more of the world’s rare earths. Murkowski also noted her state could go a long way towards alleviating the country’s dependence on imported rare earth elements, and there is still movement toward development in Ketchikan by Nova Scotia-based Ucore. In December President Donald Trump issued an executive order directing federal agencies to prioritize strategies to reduce U.S. dependence on imports of critical minerals. In May the Interior Department responded with a list of 35 minerals deemed “critical” for their economic importance which also have domestic supply vulnerabilities. The entire rare earths group made the list along with other more common metals such as aluminum, tungsten, cobalt and others. Rare earths are essential in the production of cell phones, hard drives, automobile catalytic converters and medical and military technologies. USGS Alaska Research Geologist Doug Kreiner said in an interview that rare earths are so vital to modern-day products because there are no known substitutes. Heavy rare earths — such as europium, terbium, and ytterbium with a greater atomic weight — are used in products that rely on high-temperature magnets. More common lighter rare earths are used in a plethora of applications including LED displays, according to Kreiner. And demand for them will continue to grow as the world moves towards more hybrid and electric vehicles with high-performance lithium-ion batteries that also contain rare earths, he said. Rare earths in Last Frontier As seems to be the case with most mineral commodities, Alaska holds its own rare earth resources. The most notable deposit is the Bokan Mountain prospect that Nova Scotia-based Ucore Rare Metals Inc. explored until 2015. The prospect on southern Prince of Wales Island is approximately 40 percent heavy rare earths, according to Ucore, which are the hardest to come by. Overall, it holds roughly 5 million tons of ore with rare earth concentrations of 0.65 percent, according to the company. Kreiner said rare earths occur across the state but the viability of mining them other places is largely unknown simply because they haven’t been explored. “Bokan Mountain is the only quote-unquote deposit in Alaska. So whether it’s a deposit or an occurrence is really an economic definition. Basically, it becomes a deposit when it’s concentrated to the point that it can be extracted,” he said. Ucore also holds rights to the Ruby rare earths prospect just north of the Yukon River in the Interior region along the Dalton Highway. Kreiner said concentrations of rare earths aren’t often related to deposits of other commonly mined metals, but they can at times be detected in precious metal ores. The Ruby batholith is in the Ray Mountains, which has large sheets of loose sediments up to 325 feet thick that contain rare earths. Heavy minerals are more concentrated in lower terrain between the Ray Mountains and the Fort Hamlin Hills to the east, according to Ucore. There are other potential rare earth belts extending from near Nome on the southern Seward Peninsula north and east to the southern flank of the Brooks Range as well as in the Porcupine River drainage of Northeast Alaska, Kreiner said. Another large rare earth belt runs from the upper Tanana River west and south through the Alaska Range to the Kuskokwim River basin in Western Alaska. “The hot spots that were identified in our analysis, whether or not they’re prospective we really don’t know because there just hasn’t been a lot of work done out there,” he said. “Geologically speaking I think there are a lot of areas that are prospective for rare earths in the U.S. I think it’s a matter of the geology and finding the systems that are economically exploitable.” Kreiner added that he attributes the lack of domestic rare earths production simply to the recent nature of their demand. “Rare earth elements are a relatively new focus given the applications, particularly high-end technologies and medical science, defense mechanisms and the sort,” he said. Focus shifts for Ucore A 2015 collapse in rare earth prices put Bokan Mountain exploration and development on hold, Ucore Vice President Randy MacGillivray said in an interview, but that hasn’t stopped the company’s work in Alaska. Ucore has shifted its focus to developing a rare earths separation plant that the company plans to locate in Ketchikan. “We know there’s a qualified workforce in Ketchikan and we have a lot of Alaskan support, both from the state and federally, so honestly Ketchikan is a great choice for us on multiple levels,” MacGillivray said. Ucore’s plan is to construct the metal refinement plant, estimated at $25 million, over the next couple years and get it up and running sometime in 2020. Ketchikan’s coastal location allows for easy transport of feedstock via shipping containers and further makes sense given its proximity to Bokan Mountain, according to MacGillivray. “(The plant) will be a significant step forward to being able to ultimately build the mine on Prince of Wales Island because a segment of that construction would have already been financed and constructed; so it’s an enhancement to the project for sure,” he said. In 2014 the Legislature authorized the Alaska Industrial Development and Export Authority to finance up to $145 million of the development costs at Bokan, which Ucore has pegged at about $220 million overall. MacGillivray said AIDEA could be involved in financing the plant, which the company is calling its “specialty metals complex.” Ucore also has a pilot rare earths separation facility just outside of Salt Lake City. The company initially plans to start processing 1,000 to 2,000 tons of ore concentrate per year — eventually ramping up to double the processing quantities. MacGillivray said the concentrate would likely be re-leached in Ketchikan before being subjected to molecular recognition separation technology at the facility. “We would then produce individual oxides and we are currently looking at the potential to produce individual rare earth metals at the facility, which would be a value-added product,” he said. The plant is likely to start with about 10 employees and the workforce could grow to about 25 as production grows. Ucore leaders are currently in early-stage discussions with officials at mines that have byproduct ore containing rare earths but are focused on other metals as well as looking at direct sourcing options, he said.

Permanent Fund Corp. earns $5.1B in 2018 fiscal year

The Permanent Fund continued its rapid growth during the 2018 state fiscal year by gaining $5.1 billion, or 10.7 percent, and nearly reaching $65 billion in value. The state fiscal year ended June 30. Alaska Permanent Fund Corp. CEO Angela Rodell said Alaskans could take pride in the returns the corporation is achieving for the Fund — even if many are at the same time frustrated with how it is being used. This spring the Legislature and Gov. Bill Walker approved Senate Bill 26, which called for the state to make a draw of 5.25 percent of market value, or POMV, on the Fund’s Earnings Reserve Account to drastically pay down the state’s ongoing budget deficits and pay dividends while at least temporarily ending their three-year debate over how to best employ the Fund’s earning power. The 2019 draw approved in SB 26 was calculated to a roughly $2.7 billion deposit from the Earnings Reserve to the General Fund that was split for the dual purposes. About $1 billion will go toward paying dividends of $1,600 per eligible resident with the remainder to the state budget. “As the state begins a program of relying on the Fund in new ways, APFC’s ability to add value and secure compelling investment opportunities while diversifying and controlling risks has never been more important,” Rodell said in a formal statement. The Permanent Fund Board of Trustees had long advocated for instituting a POMV approach to using the Fund’s earnings because it is a proven way for the state to generate revenue for government services while providing key predictability for Fund managers. Strong market returns have bolstered the Fund the past couple years; it gained 12.6 percent in 2017. Its 8.9 percent five-year return is 2.1 percent above the corporation’s passive benchmark return goal of 6.8 percent for the period and about 2.4 percent above the APFC Board of Trustee’s return objective of 6.5 percent. Specifically, the Fund ended the 2018 fiscal year with a total value of $64.9 billion with $46.1 billion in principal — $40.2 billion of constitutionally protected deposits and $5.9 billion in unrealized income — and another $16.4 billion of net income in the Earnings Reserve Account. The ERA also held $2.4 billion in unrealized gains, according to APFC. The Fund’s $7.3 billion private equity portfolio led the strong performance with a 32.7 percent return for the year. Public equities, the largest portion of the Fund’s investments at $26.9 billion, returned 11.7 percent in 2018 and have averaged 9.5 percent returns over the past five years. This story has been corrected to accurately reflect the growth in the Permanent Fund. The original version incorrectly stated the Fund grew by $6.3 billion in fiscal year 2018. Statutory net income, which flows to the Earnings Reserve Account, was $6.3 billion, while the overall value of the Fund grew by $5.1 billion. Elwood Brehmer can be reached at [email protected]

Alaska Air Group earnings rebound in second quarter

Alaska Air Group rebounded from a relatively tough start to the year by turning a $193 million profit in the second quarter amid escalating operating costs. Leaders of the parent company to Alaska Airlines and regional carrier Horizon Air are finishing up work to rebalance the company’s operations and finances after purchasing former West Coast competitor Virgin America for roughly $4 billion in a deal that closed in December 2016. While Alaska Air Group was still in the black in the first quarter, the $4 million profit was its smallest quarterly return in more than six years. The $193 million netted in the second quarter — adjusted upward to $206 million when ongoing merger-related costs, fuel hedging and other special items are included — compares to a $293 million net in the second quarter of 2017. The net income translates to $1.56 per share. Alaska Air Group Inc. stock closed trading July 25 at $58.76 per share before the earnings report and rose 10.2 percent to close July 26 at $64.76 per share. The company paid a 32 cents per share dividend in the second quarter and has repurchased $25 million worth of shares this year. CEO Brad Tilden said during a July 26 call with investors that about 85 percent of the work to integrate Virgin America into Alaska Airlines is behind the company, which is starting to return its focus to improved margins. “Our team has been resilient and has secured a number of important accomplishments that have laid the foundation for our long-term growth and success. As we sit here today, we believe we’ve now passed through the inflection point of the merger,” Tilden said. “And while we have a lot of work ahead of us to lean out our cost structure and river revenues higher, we feel very good about the plan we’re putting in place, and I’m optimistic about our future.” He highlighted the company’s smooth April 24 transition to a single passenger service system for Alaska and Virgin, which handles bookings and other customer services, as well as a June agreement to bring the airlines’ dispatchers under a single collective bargaining agreement. Tilden said Air Group now has 93 percent of its unionized payroll under single union contracts. “This is extremely important for any airline, but especially at Alaska, where we have such a unique culture that drives our success,” he added. Getting back to the numbers, the second quarter profit was on the back of $2.1 billion of operating revenue, or 3 percent year-over-year growth on 7.8 percent capacity growth. Year-to-date revenue was up 4 percent to just shy of $4 billion, while operating expenses up 17 percent for the quarter and 15 percent for the year cut the company’s operating roughly in half versus the first half of 2017. The company’s labor costs are up 17 percent year-to-date and the company has paid out $77 million in incentive and performance pay, compared to $58 million in the first six months of last year. The company’s workforce is also up nearly 12 percent for the year to more than 21,400 full-time equivalent employees, according to the earnings report. Fuel costs — a fundamental cost for any airline — have increased $201 million, or 29 percent so far in 2018, despite the company’s continual fuel hedging. Tilden said the group’s airlines are currently paying about $1 more per gallon over what they were paying in February 2016 when oil prices bottomed out at less than $30 per barrel. “It may be that the early 2016 prices were unusually low, but it’s clear that we have higher costs and we need to be focused on actions that help us recover these higher costs,” Tilden said July 26. According to Chief Financial Officer Brandon Pedersen, Alaska Air Group has hedges on half of its planned fuel consumption for the rest of 2018, at an average “strike price” of $67 per barrel of oil. Overall, the company has generated $375 million in free cash flow while spending $425 million on capital investments so far this year, Pedersen said. Alaska Air Group held $1.6 billion in cash on June 30. Looking ahead, Pedersen said company executives expect third quarter nonfuel costs to grow another 5 percent on 6 percent capacity growth. However, the company is scaling back its growth plans for 2019 from 4 percent to 2 percent added capacity because of fuel costs and current industry capacity levels in Alaska’s markets, he said further. “We’re solidly in returns improve mode, and 2 percent growth helps us get there because it will improve our ability to manage fares in a way that will help cover the cost increases we’ve seen,” Pedersen said during the investor call. “Like our 4 percent plan before it, the 2 percent plan lets us leverage the considerable growth that we’ve had over the last five years but demonstrates, once again, that Alaska is willing to right-size capacity when needed.” Alaska Airlines and Horizon have also largely overcome on-time performance challenges experienced during the merger — and in Horizon’s case due to a pilot shortage — with 83.4 percent of the airlines’ flights arriving on time so far this year. That is a 7.4 percent year-over-year improvement, according to its June operational report. “At Horizon, our on-time performance is the best in the regional industry and our pilot staffing pipeline is full,” Tilden said. He also noted that J.D. Power ranked Alaska Airlines as the “Highest in Customer Satisfaction Among Traditional Carriers” for the 11th straight year during the quarter. Elwood Brehmer can be reached at [email protected]

ConocoPhillips posts biggest quarterly profit since 2014

This spring turned out to be ConocoPhillips’ best quarter in nearly four years as the oil major reported a profit of more than $1.6 billion in its second quarter earnings report released Thursday morning. The $1.6 billion of net income was accomplished on the back of more than $9.2 billion in revenue for the quarter. The last time ConocoPhillips had a higher revenue quarter was the fourth quarter of 2014 when it brought in $11.8 billion but still lost $39 million overall. The last time the company managed better quarter earnings was the third quarter of 2014 when oil prices averaged $97 per barrel and it netted $2.7 billion. In Alaska, ConocoPhillips had a second quarter profit of $418 million, compared to $445 million in the first quarter and a $167 million profit a year ago. The company paid $291 million in taxes and royalties to the State of Alaska during the quarter, according to spokeswoman Natalie Lowman. The companywide profit translates to earnings of $1.40 per share, compared with second quarter 2017 adjusted earnings of 14 cents per share. The company paid a dividend of 28.5 cents per share last quarter, which it announced July 11 it will pay again in the third quarter. The adjusted earnings per share of $1.09 beat Wall Street expectations of $1.08 per share. CEO Ryan Lance said in a formal statement that the company is now positioned for high performance during industry cycles by focusing on free cash flow generation. “We’re benefiting from higher oil prices, but also driving underlying cash flow expansion. In accordance with our priorities, we’ve differentially allocated excess cash towards debt reduction and distributions, while continuing to grown our diversified, low cost of supply resource base,” Lance said. “Since we launched our disciplined strategy almost two years ago we’ve met or exceeded all our key strategic milestones. We achieved our debt target 18 months ahead of plan; we’ve outperformed on our target payout to shareholders; we’re executing or operating plan and remain committed to our disciplined approach to the business.” ConocoPhillips repurchased $600 million worth of stock during the quarter and increased its 2018 repurchase plan by 50 percent to $3 billion. It additionally paid down $2.1 billion of debt and hit a $15 billion debt target mentioned by Lance while ending the quarter with $4.1 billion in cash and short-term investments. BP and ConocoPhillips announced a deal July 3 that ostensibly amounted to a trade, in which ConocoPhillips will acquire BP’s 39 percent stake in the large, North Slope Kuparuk River oil field and BP will add 16 percent ownership in the U.K. Clair field, which it operates. The deal will give ConocoPhillips 93 percent ownership in Kuparuk, which it operates and produces roughly 140,000 barrels of oil per day. It is also expected to be a cash-neutral transaction for both companies, according to a statement from BP. ConocoPhillips also made capital investments totaling $581 million in Alaska out of its worldwide capital spend of nearly $2 billion during the quarter. The company has put $844 million towards its Alaska projects so far this year, according to the earnings report. ConocoPhillips’ crude production in the state averaged 170,000 barrels per day during the quarter, down slightly from 174,000 barrels per day in the first quarter of 2018 but just more than the 169,000 barrels per day it extracted a year ago. It announced July 16 that the six exploration and appraisal wells drilled on the North Slope last winter added up to 1.4 billion barrels of oil and gas to its resource portfolio. ConocoPhillips’ Alaska oil and gas production accounted for 15 percent of its worldwide production for the quarter; its $418 million net income in the state accounted for 25 percent of its overall quarterly profit. Elwood Brehmer can be reached at [email protected]

Christening for Tazlina; funeral for Juneau Access

The Alaska Department of Transportation has pegged Aug. 11 for christening the M/V Tazlina as the newest state ferry. The 280-foot Tazlina and its twin sister ship the M/V Hubbard, known as Alaska class ferries or day boats, are destined to start service in Lynn Canal next May, a mission they were specifically designed for. But it’s in winter when the benefits of the Tazlina and Hubbard will be fully realized, according to DOT spokeswoman Aurah Landau, when smaller ferries that are less costly to operate are currently tasked with making the Lynn Canal runs. “The new Alaska class ferries are bigger boats than some of the small boats running in Lynn Canal. They should be able to run in the kind of weather that sometimes forces ferry trip cancellations. These boats are bigger, they’re longer, deeper, heavier, so they can handle much higher winds and seas,” Landau said. “So bringing those boats online should offer much more reliable service in Lynn Canal. The Tazlina and the Hubbard are not only the largest vessels ever built in Alaska — at Vigor Industrial’s Ketchikan shipyard — they are also the first state ferries built here as well. Vigor Alaska Development Manager Doug Ward said the $101 million contract price agreed to in 2014 still stands, but added there is still a lot of work to do on the Hubbard, which is scheduled for completion next spring. The completion is a few months behind the original target to have both ships done by this October. “This is a big project, but we managed to get through the thing and the Hubbard is coming along really well. A good part of the structural steel work is complete now,” Ward said. Meanwhile, Landau said the Alaska Marine Highway System is still waiting to hear back on its request for a waiver from the Buy America Act for a $222 million, 330-foot ferry to replace the aging Tustumena. The federal law requires steel and other primary components for American vessels be sourced domestically even if no one in the country is producing them. The state has been waiting to hear back from the FHWA on the waiver for more than a year. “We’re just waiting for the Buy America waiver to come back and then we can begin the bid process. (The waiver) will affect if we have to go back and redesign and it will affect construction costs and abilities,” Landau said. Once the vessel, which has been designed, goes out to bid it should be ready for service after a few years of construction, she added. State ferry construction is eligible for federal money similar to highway projects, but accepting the funding means bidding must be open to all shipyards nationwide. The state self-funded the Tazlina and Hubbard in an effort to make sure they could be built in Alaska. Ward said it is too early to say whether or not Vigor, which owns other shipyards in the Pacific Northwest, will bid on the Tustumena replacement project or even if it could be built in Ketchikan at all, given it will be a much larger vessel than the Alaska class ferries. “We’re going to look at (the Tustumena replacement) and of course we won’t know until we see the request for proposal,” Ward said. Feds close out Juneau Access The Federal Highway Administration has closed out the controversial Juneau Access road project as state transportation managers prepare to christen the first of two new ferries that will serve as the primary road link of the future to the capital city. The Alaska Department of Transportation announced July 19 that FHWA Alaska Division Administrator Sandra Garcia-Aline signed a record of decision affirming Gov. Bill Walker’s decision to not have the state extend the Glacier Highway up to 50 miles north of Juneau. In 2016 Walker chose the “no action” alternative from seven options evaluated in the environmental impact statement, or EIS, for the long-running Juneau Access Improvement project, largely in response to the $3 billion-plus budget deficits the state was facing at the time. In May the Legislature moved $21 million left over from other DOT projects to Juneau Access. Landau said the money will sit in the project account at least for the time being. “It can remain in the account until acceptable alternative concepts are proposed and agreed upon by stakeholders, (or) the Legislature can always make a change to the funding status,” Landau said. The annual budget shortfall was reduced to about $700 million this year but Walker said the project still faced several challenges in a prepared statement. “Improving Juneau access continues to be a priority for us. But the practicality of this project — a road extended to a yet-to-be-built ferry terminal through more than 40 avalanche zones, with a history of litigation — that makes it difficult to justify these kinds of expenditures as we focus on a sustainable fiscal future for Alaska.” In 2006 the FHWA identified the 50-mile Glacier Highway extension amongst several other road options up either side of Lynn Canal as its preference for the project. That decision was eventually thrown out in U.S. District Court after a group led by the Juneau-based Southeast Alaska Conservation Council sued the federal agency contending the original Juneau Access EIS did not adequately evaluate other options and environmental impacts of the chosen plan. The State of Alaska appealed the decision and eventually lost the case in the 9th Circuit Court of Appeals, which led to the drafting of a supplemental EIS. Former Gov. Sean Parnell’s administration again selected the 50-mile highway extension in 2014 while the supplemental EIS was in draft form, but Walker reversed the state’s choice during development of the final supplemental EIS. Republican gubernatorial candidate Mike Dunleavy criticized Walker’s decision in a press release from his campaign that alleges not building the road leaves Juneau — the only state capital outside Hawaii inaccessible by land — without a sustainable transportation plan. “Alaska continues to rank at the bottom of the states in economic performance. We need to get our state moving and we need leadership that will work to create jobs and economic prosperity,” Dunleavy said in a formal statement. “Juneau Access is a project which will employ hundreds of Alaskans in the construction phase, and provide lasting economic opportunity.” Landau said all of the alternatives reviewed in the Juneau Access EIS have sufficient capacity to meet current transportation demands in and out of the northern end of the city, but noted every mode of transportation has inherent factors that can limit expressed demand. The Glacier Highway extension was estimated to cost $680 million in the final EIS and record of decision signed in June. That is roughly a $100 million increase in the expected cost from previously published versions of the EIS. Because it is a project eligible for federal funding, FHWA could have funded up to about 90 percent of the construction costs, as is common for highway projects nationwide. However, the project would not actually link Juneau to either Haines or Skagway — the communities at the northern end of Lynn Canal — as the road would dead-end about 20 miles south of Skagway. Shuttle ferry service between Haines, Skagway and a new ferry terminal at the end of the highway would increase daily ferry capacity, but many objected to that plan because it would leave ferry passengers who are traveling without a vehicle more than 50 miles from Juneau at the new terminal. The existing Auke Bay ferry terminal just north of Juneau would have been closed under that plan. ^ Elwood Brehmer can be reached at [email protected]

State officials cite costs, complications of initiative

State agency officials attempted to predict the impacts to the state of a pending fish habitat ballot measure during a July 20 Senate State Affairs Committee hearing. Ballot Measure 1, known as the “Yes for Salmon” initiative, would bolster the Department of Fish and Game’s statutory requirements for approving development activity permits in anadromous fish habitat areas as well as the department’s authority to enforce the stipulations of those permits. Championed by the Anchorage-based nonprofit Stand for Salmon, the initiative is scheduled to be on the general election ballot in November depending on the outcome of an Alaska Supreme Court ruling to determine its constitutionality. Gov. Bill Walker’s administration has argued that the measure is an unconstitutional usurpation of the Legislature’s authority to appropriate resources. The court is expected to rule on the constitutional question by early September to provide the Division of Elections time to prepare accurate materials for voters. On a high level Ballot Measure 1 would establish two tiers of permit application reviews. “Minor” habitat permits could be issued quickly and generally for projects deemed to have an insignificant impact on salmon waters. “Major” permits for larger projects such as mines, dams and anything determined to potentially have a significant impact on salmon-bearing waters would require the project sponsor to prove the project would not damage salmon habitat. Additionally, the project sponsor would have to prove that impacted waters are not salmon habitat during any stage of the fish life cycle if the waters are connected to proven salmon habitat in any way but not yet listed in the state’s Anadromous Waters Catalog. The initiative also states that mitigation measures to offset the impact at the development site may not be done by enhancing or preserving habitat on other waters, which is a practice allowed now and is what’s proposed for the Donlin mine project. On one level, Ballot Measure 1 would cost the state about $3 million per year in the near term to implement its changes, according to estimates in an Office of Management and Budget report. Not surprisingly, much of that would be in Fish and Game’s budget for developing updated regulations and guidance documents. ADFG Commissioner Sam Cotten said it would likely cost the department $1.3 million per year over five years to implement the law changes. The Department of Transportation, which is one of the most frequent applicants for fish habitat permits, would need another roughly $950,000 per year to comply with the more stringent fish habitat requirements, according to department leaders. The departments of Environmental Conservation and Law would each need up to an additional $450,000 per year to possibly broaden water quality standards currently required for discharges in fish spawning areas and enforcing new civil penalties for violating fish habitat permit terms. DOT Environmental Program Manager Ben White said the department would need to add a handful of hydrologists and hydraulic engineers to its current environmental permitting team. “We are committed to environmental stewardship as a department and really work very hard, in this particular instance, to support healthy salmon populations,” DOT Commissioner Marc Luiken said to the committee. While projecting fiscal impacts is an exercise agency staff are accustomed to — it is done for the majority of proposed legislation — the Republicans on the committee in opposition to the initiative posed increasingly speculative scenarios they are concerned about the initiative impacting while questioning administration officials. Walker, who is running for reelection, has expressed his opposition to Ballot Measure 1 as a policy while the Department of Law is challenging its constitutionality. At the same time, Civil Law Division Director Joanne Grace said the Department of Law has advised Walker’s commissioner’s to remain objective on the initiative. Emily Anderson, an attorney for Stand for Salmon, said the discussion in the hearing was premature because agency officials were asked to outline the impacts of the potential law change before the Supreme Court, which could also amend the initiative, has made its decision. Rather than wholly approving or rejecting the initiative, the Supreme Court could strike specific provisions of the proposal it feels are unconstitutional and allow the remainder of it to appear on the ballot if the general intent of the sponsors remains intact. Sen. John Coghill, R-Fairbanks, asked if language in the initiative that would extend fish habitat permit reviews into the riparian area near the shoreline of a water body could be used to preclude development in entire floodplains, such as the one his hometown is built on. Sen. Cathy Giessel, R-Anchorage, questioned whether fire departments could be prevented from filling their tanker trucks from salmon streams and if DOT would not be allowed to use rip-rap when dealing with emergency flood and erosion situations that can occur, particularly along Alaska’s large glacial rivers. Agency officials largely obliged the speculation, acknowledging there is a possibility the circumstances raised could be impacted because of the vague language of the initiative. DOT’s White said the agency could be forced to find alternatives to traditional rock rip-rap for erosion control and that temporary stream diversions — often used in culvert and bridge work — could be challenged. Habitat Division Biologist Ron Benkert said in an interview that Fish and Game already discourages the use of rock rip-rap when other bioengineered solutions such as root wads or other forms of woody vegetation can be used for erosion control, noting that in the most critical areas and emergency situations the department concedes to the use of rip-rap at the request of DOT and others. He also said large, fast rivers such as the Matanuska that regularly cause significant damage are primarily migration corridors for salmon and other species that use headwaters and tributaries for spawning and rearing, so the impact of bank stabilization efforts to critical habitat is limited most times. “Really high velocity — it’s just not a great place for fish to hang out,” Benkert said. Anderson said the initiative makes no changes to the ability for officials to respond to emergencies. She stressed in response to other concerns about the purview of the habitat permits that the initiative is limited to freshwater, as is the case today. Anderson said during an editorial board meeting with the Journal and Anchorage Daily News on July 19 that the initiative is primarily aimed at solidifying scientific best practices and guidelines Fish and Game currently uses in regulation and law to insulate the permitting process from political influence. Initiative sponsor and commercial fishermen Mike Wood has said the objective of the campaign is to fortify the state’s fish protections while the Environmental Protection Agency is scaling back its wetlands protections in the state, for example. Currently, Title 16, the state’s anadromous fish habitat permitting statute, directs the ADFG commissioner to issue a development permit as long as a project provides “proper protection of fish and game.” The initiative sponsors contend that is far too vague and an update is needed to just define what “proper protection” means. In early 2017, Alaska Board of Fisheries chair John Jensen sent a letter to legislative leaders urging them to update Title 16 with opportunities for public involvement in permit application reviews and enforceable development standards. The law now does not allow for public comment nor does it require Fish and Game to issue a public notice indicating the Habitat Division is adjudicating a permit application. The Kenai Peninsula Borough Assembly also unanimously passed a resolution in 2016 supporting an update to Title 16 to further protect fish habitat. DNR Project Management Associate Director Kyle Moselle said in response to questions that the vast majority of the permits DNR and DEC issue for large development projects already require public notice and comment periods, which would be a fundamental addition to the anadromous fish habitat permit process under the proposal. Giessel said in an email that the public should be included in matters involving public resources and that is why the comment periods and notices are required for other land and water use and quality permits. “If the issue surrounding this initiative is one of requiring an opportunity for Alaskans to comment and be involved on fish habitat permits, that is one matter. But proposing an up or down, take it or leave it, wholesale rewrite of our fish laws in November is another thing altogether,” Giessel said. It was also unclear from the hearing when existing developments with fish habitat permits already in hand would be subject to the new permitting system. Benkert said in an interview that while the department feels this is a “gray area” in the law, generally an existing operation would be grandfathered in until additional authorizations are needed for expansion plans or a fish habitat permit renewal. Most fish habitat permits are valid for two- to five-year periods before they need to be renewed. “It’s kind of a check so we can just come back and see if what we had permitted five years ago is still actually being done,” Benkert described. Stand for Salmon’s Anderson said worries about renewing permits for existing facilities “have been blown out of proportion” and re-upping authorizations should not be more difficult under the initiative. “There’s a whole class of facilities that never had a fish habitat permit and won’t require one; (they) are not only not affected by this but never will be affected by this,” she said. “Then there’s a whole class of facilities that did require a fish habitat permit but that habitat is no longer in existence, therefore you don’t need a new fish habitat permit and it never will be contemplated because there is no fish habitat left to get a new permit for.” White also said DOT is concerned the initiative could lead to more National Environmental Policy Act reviews for work now deemed to have a de minimis environmental impact because it prohibits Fish and Game from allowing activities that have a “significant adverse effect” on fish habitat. DOT regularly conducts work that has some impact on fish habitat, according to White. He said in an email that the concern specifically relates to many of the projects the department executes that are at least partially funded with federal money. Anderson and other initiative supporters insist it is not intended to prohibit unavoidable small or temporary impacts as many fear, which is why it calls for “minimizing” impacts if avoiding them is not practical. She also strongly contended that White “is just wrong” in his characterization of how it could lead to more projects being subject to NEPA and DOT is conflating the state and federal permitting systems. “NEPA is triggered by a federal action that would have significant adverse effects. It is not triggered by state laws,” Anderson said. Elwood Brehmer can be reached at [email protected]

State defends claim for $160M in back taxes

State attorneys issued a wholesale rebuttal July 18 in responding to a lawsuit brought by three companies that work on the North Slope against the state Revenue Department over how detailed portions of the state’s oil tax laws are applied. ExxonMobil, Hilcorp Energy and SAE Exploration, a seismic imaging company, sued the Department of Revenue in state Superior Court June 8 alleging Tax Division officials are using an unenforceable guidance document to improperly collect upwards of $160 million in oil production taxes. The state’s 14-page response, signed by Assistant Attorney General Katherine Demarest, admits the advisory bulletin in question issued by Tax Director Ken Alper in March 2017 interprets oil tax law and acknowledges the companies sued in the proper venue, but in line-by-line fashion flatly denies the rest of the complaint. ExxonMobil and Hilcorp contend the state informally adopted the six-page advisory bulletin as a regulation packet and subsequently applied to collectively increase their fiscal year 2018 oil production taxes by about $110 million and to collect another roughly $50 million plus interest in retroactive taxes since 2014. The state’s filing rejects the allegation that tax regulations “incorporate” the advisory bulletin, but rather asserts that it “interprets statutes” as allowed by state law. State attorneys also contend that one or more of the plaintiffs may lack standing in the lawsuit and that the state’s sovereign immunity may by applicable to this case. They request the case be dismissed and the state be compensated for the costs of its defense. SAE, which holds refundable tax credits earned through its seismic shoots, planned to sell those credits to producers, which in turn could use them against their tax liability. Limiting the amount of credits the producers can apply to their production taxes has in turn hampered SAE’s ability to sell its credits and reduced their market value, according to the original complaint. The advisory bulletin explains that use of the sliding scale credit prevents a company from using tax credits to take their production tax liability below the 4 percent gross minimum tax floor. The sliding scale credit, which starts at $8 per barrel when oil prices are less than $80 per barrel and steps down to nothing at extremely high prices, is used as a way to install progressivity into the production tax for oil produced from the state’s large, legacy fields such as Prudhoe Bay and Kuparuk River. However, if a producer were to forgo the per-barrel credit or use a fixed $5 per barrel credit for “new” oil production, the new oil credit and others could reduce a production tax liability to less than the 4 percent floor, according to the bulletin. The companies insist that Revenue’s own regulations allow taxpayers to choose the order in which credits are applied. The state’s filing does concur with that assertion, but additionally “denies that such an option relieves taxpayers of the duty to accurately report and pay tax,” the filing reads. The companies argue further that a 2011 advisory bulletin, issued under former Gov. Sean Parnell’s administration, stated that North Slope producers could reduce their liability below the minimum tax by using new oil or other credits. The Legislature and Parnell administration overhauled the oil and gas production tax system in 2013 with Senate Bill 21, which survived a voter referendum to repeal it in 2014. The current oil production tax law has since been modified twice at the behest of Gov. Bill Walker in 2016 and House Democrats last year. Elwood Brehmer can be reached at [email protected]

AK LNG leaders navigate trade battle with China

The $43 billion Alaska LNG Project is in a rather unique spot when it comes to the United States’ trade relations with China. It was a central piece of a Nov. 9, 2017, meeting between President Donald Trump and China President Xi Jinping in Beijing, a ceremony at which numerous deals totaling roughly $250 billion in potential trade between the countries were announced. That day Gov. Bill Walker and Alaska Gasline Development Corp. President Keith Meyer signed a joint development agreement with the state-owned Chinese companies Sinopec, China Investment Corp. and the Bank of China; it was one of a select group of trade pacts chosen to be signed in front of the two presidents. Although nonbinding, the JDA has been touted as the early stages of a foundational deal to support the gasline as it calls for selling up to 75 percent of the project’s LNG’s production capacity to Sinopec in exchange for a like percentage of the needed financing. It could represent billions of dollars per year of Alaska LNG exports to China, which would be a significant step towards rebalancing trade between the two countries. However, business relations between Beijing and Washington, D.C., have been on a well-publicized downhill path since. AGDC leaders acknowledge the 25 percent tariff the Trump administration levied on Chinese steel imports this spring could impact the viability of sourcing the steel for the project’s 800-mile, 42-inch natural gas pipeline and other components such as pipe racks. Reuters reported July 16 that the Trump administration recently rejected a request for a waiver from the 25 percent tariff on Chinese steel by Plains All American Pipeline LP, despite the fact that the company signed a contract for the steel to be used in a 550-mile Texas oil line last year prior to the tariffs taking effect or even being announced. At the same time, state gasline officials note that prefabricated modules and other constructed units that would make up large portions of the North Slope gas treatment plant, the Nikiski LNG plant and the pipeline compressor stations are exempt from the new tariffs, for now, at least. Many such components will have to be sourced internationally if the Alaska LNG Project is built because there simply are too few, if any, U.S. manufacturers. Additionally, cost savings are often available in world markets versus domestically sourced materials, according to AGDC Vice President Frank Richards. During a July 11 project update to legislators, Richards highlighted that China has not included U.S. LNG in its retaliatory tariff measures as part of the tit-for-tat trade dispute. It seems unlikely that LNG, or any energy form for that matter, would be hit with such a tariff as such a move would ultimately increase prices for Chinese consumers at a time when the government is making a major push away from coal for electric generation to cleaner fuels such as natural gas. “We feel that we have high visibility. China wants clean, efficient natural gas; Alaska has it; the U.S. wants to produce and export it, so we feel that we are in a good position as a project and as Alaska, too, to not hopefully be impacted by that (trade dispute),” Richards said. He added that AGDC learned in early July that there are pipe manufacturers in Arkansas and Illinois capable of rolling 42-inch steel pipe; AGDC previously didn’t know if sourcing the primary gasline steel from the U.S. was even possible. As for Alaska LNG’s end product, AGDC Commercial Vice President Lieza Wilcox told legislators asking about financial risks in the project that if China does puts a tariff on imported LNG, the downstream sales contracts will be structured so the additional tariff cost is borne by the LNG buyer. “Once the contract is concluded the price is not going to be discounted for tariffs,” Wilcox said. She — as other AGDC leaders have since the November announcement — emphasized that the Alaska LNG Project is well regarded in the trade circles of both countries and said it has the opportunity to “continue to be a force for good in the continuing discussions about trade.” Elwood Brehmer can be reached at [email protected]

ConocoPhillips raises reserve totals at Slope discoveries

ConocoPhillips believes its recent winter exploration campaigns on the North Slope have added up to 1.4 billion barrels of oil and gas resources to its portfolio, company officials said in a July 16 presentation to investors. The estimate is largely derived from the results of the six exploration and appraisal wells the company drilled into its western Slope prospects last winter, which built on the work of two wells drilled in the federal National Petroleum Reserve-Alaska in early 2016. The 2016 drilling led to ConocoPhillips’ Willow oil discovery — a shallow, Nanushuk formation-focused prospect — with an early oil estimate of up to 300 million recoverable barrels announced in January 2017. Company leaders said July 16 that four more wells drilled into Willow early this year indicate the field could hold between 500 million and 1.1 billion barrels of gross resources that will cost between $4 billion to $6 billion to fully develop, with first oil potentially in the 2024-25 timeframe. It was also noted that roughly 75 percent of the company’s prospective acreage in the area is yet to be drilled. With a conventional target zone in the 4,000-foot range, ConocoPhillips also believes it can produce from Willow for less than $40 per barrel, according to a release accompanying the presentation. “Alaska provides competitive investment opportunities and will generate profitable growth from diversified investments with significant exploration upside,” CEO Ryan Lance said in the release. “We are proud of the value we create for the State of Alaska through the revenues we generate, the jobs we create and the community investments we make. Our shareholders realize the advantages of (Alaska North Slope)-priced oil, competitive cash and earnings margins from our operations and our years of expertise and sound stewardship. We plan to continue to strive to safely unlock the energy potential of this world-class oil province for years to come and play an active role in Alaska’s economic future.” ConocoPhillips Alaska leaders have previously said Willow could produce at rates up to 120,000 barrels per day with standalone processing facilities, an investment the company is now leaning towards. The Putu and Stony Hill wells the company drilled this year on state leases south of the Nanushuk discovery in the Pikka Unit collectively hold another 100 million to 350 million barrels, according to ConocoPhillips. Production from those prospects has been pegged at up to 20,000 barrels per day each. ConocoPhillips is also expected to bring its roughly $1 billion Greater Mooses Tooth-1 project online sometime late this year. Located just east of Willow in the NPR-A, GMT-1 is expected to produce up to 30,000 barrels per day at its peak. The company is also in permitting with the Bureau of Land Management to develop its Greater Mooses Tooth-2 prospect, which is generally a mirror and just to the south of GMT-1. Elwood Brehmer can be reached at [email protected]

Board rejects emergency petition over pink salmon hatchery production

The Valdez Fisheries Development Association can move ahead with its plan to increase its pink salmon production after the Alaska Board of Fisheries rejected an emergency petition from groups led by the Kenai River Sportfishing Association who oppose the plan. The seven-member board ultimately decided the issue does not constitute an emergency on a 4-3 vote during a Tuesday afternoon meeting in Anchorage. Board members Israel Payton of Wasilla, Reed Morisky of Fairbanks and Orville Huntington of Huslia voted in favor of the petition meeting emergency criteria for consideration. Those voting against were chair John Jensen of Petersburg, Alan Cain of Anchorage, Robert Ruffner of Soldotna and Fritz Johnson of Dillingham. The petition was signed by KRSA Executive Director Ricky Gease and 18 individuals representing Lower Cook Inlet commercial fishing interests, the Chitina Dipnetters Association, the Kenai River Professional Guide Association, the Fairbanks Fish and Game Advisory Committee, among others. It urged the board to reverse a previously approved increase of 20 million pink salmon eggs by the Valdez Fisheries Development Association this year for expanding future hatchery-produced harvests. KRSA first submitted the petition May 1. The first version was signed by nine sport and personal use fishing groups, sans the Lower Cook Inlet commercial representatives. The board subsequently voted to a 3-3 tie on the issue during a May 14 teleconference meeting. The petition alleges that increasing the number of hatchery produced salmon poses a threat to wild salmon stocks as the hatchery fish compete with wild salmon for food while they are collectively rearing in the ocean. It highlights that a sampling study found up to 70 percent of pink salmon returning to some small Lower Cook Inlet streams in 2017 were found to be from Prince William Sound hatchery stocks. “In addition to the straying issues of PWS hatchery-origin pink salmon observed in Lower Cook Inlet, recent scientific publications (building on past published reports and internal Alaska Department of Fish and Game reviews) have provided cause for great concern over the biological impacts associated with continued release of very large numbers of hatchery salmon into the North Pacific Ocean, including the Bering Sea and the Gulf of Alaska,” the petition states. Fish and Game Commissioner Sam Cotten wrote to a letter to Gease June 14 in which he denied the petition via authority delegated to him by the Board of Fisheries, but noted two board members had already requested a special meeting to discuss the matter. Fish and Game officials as well as board chair Jensen said at the Tuesday meeting that emergency findings are rare; there must be an unforeseen event that threatens a resource or an instance where action would lead to a loss of harvest opportunity that couldn’t be had in the future. “I don’t think taking eggs is an emergency,” Jensen said. Gease said in an interview that the state has policies in place that make it illegal to transport salmon between regions, but the department is passively allowing it to happen by approving increased hatchery production when the fish are known to stray. “It seemingly now is OK that there is no standard for hatchery fish straying,” Gease said. Valdez Fisheries Development Association leaders could not immediately be reached for comment in time for this story. Morisky said he feels instances where 70 percent of the fish spawning in a stream have strayed from hatchery stocks constitutes an emergency and allowing an egg take that will lead to more hatchery fish could threaten wild salmon stocks, the health of which Fish and Game is required to prioritize above other salmon. Payton said the potential issue of hatchery fish competing with wild salmon for food in the ocean is of particular concern to him. “I do think there is a potential threat to the wild stock resource here,” Payton said. Fish and Game Commercial Fisheries Division Director Scott Kelley said the Valdez-area hatcheries originally wanted to take an additional 70 million eggs and increase the total egg take to 300 million from 230 million, but the department agreed to a phased approach of increases in 20 million-egg increments in 2016 and 2018. It’s an approach that is commonly used with hatcheries across the state, according to Kelley. “That’s why we ease in — test the waters, literally,” he said. Kelley noted recent wild stock returns of pink salmon to Prince William sound in 2013 and 2015 — pinks typically return in two-year high and low abundance cycles — were among the most prolific on record. Board member Johnson of Dillingham said the egg take is supposed to happen in three days, adding the board is already scheduled to take up hatchery issues during an October 15-16 work session in Anchorage. It was also emphasized at the meeting that the department, in conjunction with hatchery groups, is working on a long-term study to flesh out theories of how hatchery salmon from Prince William Sound and Southeast Alaska do or don’t impact wild fish stocks. Cain, of Anchorage, said the issues of how hatchery salmon interact with wild salmon are very important but the petition didn’t meet the board’s threshold for an emergency. Elwood Brehmer can be reached at [email protected]

King Cove road opponents file motions for summary judgment

The groups suing Interior Secretary Ryan Zinke laid out their final arguments in court documents filed July 11 against a federal land exchange that sets the stage for construction of an emergency access road through the Izembek National Wildlife Refuge. Friends of Alaska Wildlife Refuges, the Alaska Wilderness League, The Wilderness Society, the Sierra Club and five other national conservation organizations filed a motion for summary judgment with U.S. District Court of Alaska Judge Timothy M. Burgess, urging him to void the land swap signed Jan. 22 with King Cove Corp. on the grounds that Zinke violated several major federal laws in a hasty attempt to get the road built. The groups are represented by the Anchorage environmental nonprofit law firm Trustees for Alaska. A 55-page supporting memo accompanying the 4-page motion signed by Trustees attorney Brook Brisson alleges that Zinke, in order to expedite the transfer, ignored provisions in the 1980 Alaska National Interest Lands Conservation Act, which created the Izembek refuge; the National Environmental Policy Act, or NEPA, as the nation’s overarching environmental review law; and the Endangered Species Act. Federal attorneys contended in a May 3 response to the original complaint that the plaintiffs do not have standing to object to the land swap because they have not been harmed by it and their complaints are not ripe for a ruling because the final lands to be traded have not been selected. They further assert that the federal District Court does not have subject matter jurisdiction over the lawsuit. Section 1302 of the milestone 1980 public lands bill commonly known as ANILCA grants the Interior secretary the authority to carry out such a land exchange, but also states that such an action must be done to “carry out the purposes of this act.” Signed by President Jimmy Carter, ANILCA established or expanded many of the national parks, wildlife refuges and other federal conservation areas in the state. “The secretary made no findings that the land exchange would further ANILCA’s general or Izembek’s specific purposes and failed to acknowledge or explain the decades of findings and conclusions by the (U.S. Fish and Wildlife) Service that a land exchange and road were contrary to those purposes,” Brisson wrote. The suit was filed just nine days after the land exchange was announced. The agreement between King Cove Corp. and Interior has the Alaska Native village corporation trading up to 500 acres of its land for an equal-value chunk of a wilderness-designated section of the Izembek Wildlife Refuge, or enough refuge land to build an 11-mile, single-lane gravel road that would complete the connection to Cold Bay. The suit is moving relatively quickly to a judgment because there are few facts to dispute; it is simply a matter of Burgess interpreting the applicable laws and authorities. ANILCA also requires consultation with other federal agency leaders, including the Transportation secretary, on any application to construct a transportation corridor through conservation areas. It also states that Congress must approve any corridor through wilderness-designated areas. Opponents to the King Cove road stress the importance of the unique habitat in and around Izembek lagoon in debating the issue. In their view, it would set an extremely dangerous precedent approving a road through an area once designated as wilderness would set. At various times of the year the 315,000-acre Izembek Refuge is home to nearly the world’s entire population of Pacific black brant geese and other migratory birds that use it as breeding grounds and a resting place on their annual travels, according to the U.S. Fish and Wildlife Service. Alaska’s congressional delegation and state lawmakers insist the road is the only way to provide truly safe access to medical care for the roughly 950 residents of King Cove. Those in need of urgent medical care in King Cove currently must be flown via small plane or boated across the waters of Cold Bay to reach Cold Bay’s airport with its 10,000-foot runway that provides more reliable jet service during bad weather. The plaintiffs further insist that the land exchange deal — announced when it was agreed to with no public notice — is a “major federal action” and therefore requires an environmental assessment or impact statement be conducted before it is approved. Brisson wrote that an exception in ANILCA to that requirement does not apply because it relates to land conveyances to Alaska Native corporations under the Alaska Native Claims Settlement Act, which the January deal is not. “As the courts have stated, the fundamental policies in NEPA should not be discarded absent some clear indication that Congress so intended,” the plaintiffs’ memo states. “Instead, deciding whether to exchange federal lands for a road is the quintessential government decision that NEPA was passed to apply to: to ensure informed decision-making about environmental impacts and to allow public participation in a decision regarding national public lands.” Lastly, they argue Zinke violated the Endangered Species Act by not consulting with the Fish and Wildlife Service on the potential impacts of the land deal before agreeing to it. The ESA requires such coordination for federal actions that could harm species listed as “endangered” or “threatened.” In this case, that applies to the Northern Sea Otter and the Stellar’s eider duck, which breeds on the North Slope and overwinters in Izembek. The Alaska breeding population of the small ducks are listed as threatened, according to Fish and Wildlife. In late 2013, then-Interior Secretary Sally Jewell rejected land swap deal passed by Congress in 2009 after a U.S. Fish and Wildlife Service environmental impact statement urged against it; the EIS deemed the road would irreparably damage critical waterfowl habitat in the refuge. King Cove Native organizations and the State of Alaska subsequently sued Jewell over her decision to block the road, but the suit was dismissed in federal District Court and an appeal to the 9th Circuit Court of Appeals was later dropped. That swap would have traded 206 acres of Izembek land and 1,600 federal acres outside the refuge for about 56,000 acres of state and King Cove Corp. land. Members of Alaska’s congressional delegation have said the ANILCA provisions hadn’t been used during other Republican administrations that would seemingly be more open to the plan because key officials in President George W. Bush’s administration, for example, opposed the road through Izembek. The road has also become a priority for President Donald Trump, who was captivated by the situation when briefed on it in March 2017 by Alaska’s delegation shortly after he took office. Attorneys for the Interior Department have 30 days to respond. ^ Elwood Brehmer can be reached at [email protected]

Gasline leaders face daunting list of tasks

Even small construction projects are often complex in their own ways, but a July 11 legislative hearing emphasized the daunting amount of highly sensitive and technical work that must all be carefully coordinated to successfully thread the $43 billion Alaska LNG Project needle. Held in Anchorage, the joint meeting of the House and Senate Resources committees updated legislators on the progress of the megaproject, which by all accounts would be the largest in the history of the country. Alaska Gasline Development Corp. board of directors Chairman Dave Cruz said the quasi-state group has now secured letters of intent or other memorandums expressing interest in buying LNG from 15 entities. AGDC has announced a handful of those nonbinding agreements since early 2017 signed with some of the world’s largest LNG buyers, but has mostly declined to disclose details, citing commercial sensitivity and the wishes of its counterparties. The notable exception is the November 2017 signing of a joint development agreement, or JDA, with three nationalized Chinese mega corporations, which outlines the prospect of China buying up to 75 percent of the project’s LNG in exchange for financing 75 percent of its cost. The remaining 25 percent of the project’s planned production capacity of 20 million tons per year of LNG would be split among other buyers if a deal with terms similar to the nonbinding JDA is finalized with the Chinese. “I’ve absolutely been amazed at the reception we’ve gotten from the Asian countries. I’m still waiting on a call from (North Korean dictator) Kim Jong Un,” Cruz quipped. East Asia is the key market for Alaska given LNG demand from the region is likely to continue to grow and Alaska’s location is advantageous for selling into Asian — but not European — markets. AGDC Commercial Vice President Lieza Wilcox again stressed that long-term demand for LNG will continue to grow in those markets and overcome the recent supply glut as nations, notably China, move away from coal and nuclear power and towards cleaner and less risky natural gas for power generation. AGDC President Keith Meyer was occupied by a financing meeting with New York investors and was unable to attend the hearing, according to Cruz. Supply negotiations On the supply side, detailed gas sale negotiations with BP, ConocoPhillips and ExxonMobil are ongoing, Wilcox said. AGDC and BP made a big announcement May 7 that they had reached a binding agreement on the key terms of gas price and volume the company would sell into the Alaska LNG system, but further points still need to be hashed out. Gas sale negotiations with ConocoPhillips and ExxonMobil are nearing a similar level of detail as talks with BP, according to Wilcox, who also added that the companies might want to work directly on final agreements and bypass a term sheet, which makes for a longer series of talks before successes are announced. Under the tolling structure AGDC is proposing, the corporation would buy the gas shortly before it enters the North Slope gas treatment plant. AGDC would then sell the LNG at the marine terminal in Nikiski. The final LNG sale price would include the project’s revenue-generating toll that needs to cover all of the project’s costs. Wilcox said the project could afford a toll of about $6 per thousand cubic feet, or mcf, of gas and remain competitive in global markets. AGDC officials also mentioned feedstock gas prices from the producers would likely be in the $1-$2 per mcf range after stating for months that the producers would have to sell gas into the project at about $1 per mcf or less to make price-competitive LNG. AGDC’s Meyer has said the producers should generally be willing to accept a lower price for their shares of North Slope gas than previously expected because they no longer have to invest in the project infrastructure, unless they choose to. Royalty gas However, reaching agreement on commercial terms for gas sales with all three major producers — as important and momentous as it would be — is only part of getting upstream Alaska LNG issues resolved for a successful project, Department of Natural Resources leaders described at the hearing. For starters, administration officials and then legislators must decide if they want the state to get its 12.5 percent royalty portion of North Slope gas reserves in-kind or in-value. Natural Resources Commissioner Andy Mack said at this point the priority for the state is royalty in-kind, or RIK, but that could change. Royalty in-kind refers to the state taking its share as natural gas, instead of receiving payments from the producers for the market value of the resource, which is what would happen if the state took its royalty in-value, or RIV. The state regularly takes its share of royalty oil in-kind and sells it to local refineries in an effort to maximize the in-state economic benefits of oil production. Department officials are also in talks with the producers to get a sense of their preferences regarding royalty gas issues. Those issues include: the RIK or RIV, decision; details around whether the producers will pay gas production taxes in equivalent value volumes of gas, known as tax-as-gas, or TAG; the interplay of gas production from the Prudhoe Bay and Point Thomson fields; and how carbon dioxide disposal impacts other upstream matters. The 35 trillion cubic feet of North Slope gas intended to feed the Alaska LNG Project is about 10 percent carbon dioxide, which must be stripped out of the gas and re-injected underground. “I can’t go any further other than to say we’ve had detailed conversations” with the producers and AGDC, Mack said. “We do have preferences and we’ve expressed those.” Deputy DNR Commissioner Mark Wiggin said the department has a draft RIK-gas sales term sheet that is being discussed with AGDC officials. If the state makes an RIK selection, AGDC will buy the state’s royalty gas to use it in the project, Wiggin said. He also noted that valuing production is a challenge, which makes reaching acceptable RIV calculations all the more complex. “That is not necessarily, by any means, an easy or simplistic path to go down,” Wiggin commented. Additionally, the Prudhoe and Point Thomson lease agreements currently allow the state to switch between RIK and RIV every six months. Rather understandably, the producers would prefer the state to pick one for the duration of the project, which could necessitate amending the leases, he said. Mack also said that he anticipates further discussions on how to align what is happening in the project with the 2012 Point Thomson Settlement Agreement, which specified how the high-pressure gas field would originally be developed and expanded depending on whether a large natural gas project moved forward. ExxonMobil operates the Point Thomson field. Alaska LNG state investment While DNR is working on the litany of technical resource management issues for the project, Department of Revenue officials said they are busy preparing recommendations for state investment in Alaska LNG based on numerous possible scenarios. Deputy Revenue Commissioner Mike Barnhill said the department’s investment analyses is based on the high-level assumption that the state would fund about $11 billion, or 25 percent, of Alaska LNG’s overall $43 billion estimated cost. From there, it needs to be determined what portion of that $11 billion investment would be direct equity injections and how much would be raised through debt. AGDC’s Meyer has long said he envisions the project being funded through roughly 75 percent debt and 25 percent equity investment. The project’s contracts and other financial arrangements will be structured to allow debt to be “non-recourse,” according to AGDC leaders, meaning the loans would be underwritten by LNG sale contracts. In that scenario, if LNG buyers fall short on their payments, in-turn shorting AGDC’s revenue stream and ability to service its debt, the banks would seek repayment from the end buyers and not the state corporation. Barnhill commented that the risks inherent in such a large project are not necessarily bad. “Ultimately, you’re trying to answer the question: Is the projected return commensurate with the expected risks? Are you being compensated for the risk? Now, we want risk in an investment context. We want to be commensurately compensated for that risk,” he said. “Obviously, the more that this project can be structured with no recourse to the state is a good thing.” Wilcox said AGDC doesn’t expect there to be any risk to the stat in the gas sale agreements with the producers as the wholesale gas price would be passed on to LNG customers. Maria Tsu, Revenue’s gasline financing specialist and a former investment director with the Alaska Permanent Fund Corp., said the department is modeling investment scenarios and risks based on likely commercial terms AGDC can secure and then looking at potential disruptions to those assumptions. For example, the department is analyzing how construction delays could impact the project’s economics over its expected initial life of 25 years. She noted that de-risking the project can make investors — the state or others — more comfortable with it but at the same time likely means lower returns. “I think there will need to be state participation in order for the project to move forward and prevent the state’s equity interest from being diluted and for the state to not lose control it will be important for the state to provide both possibly development capital as well as construction capital to the project,” Tsu said. Investing when construction risks are largely settled would likely lead to lower, but stable, infrastructure-type returns in the 8 percent to 10 percent range, according to AGDC and Revenue officials. Meyer has stressed that investors willing to sacrifice high returns in exchange for reliability would supply the bulk of the project’s equity investments. Sen. Bert Stedman, R-Sitka, who manages an investment firm, emphasized that cost overruns of up to 20 percent — beyond the $9 billion of contingency costs built into the $43 billion Alaska LNG estimate — are often considered a relative success for megaprojects. He urged Revenue officials to test the impacts of overruns in the $20 billion to $30 billion range, which he said are not out of the realm of possibility for the project that had an original estimated cost range of $45 billion to $65 billion. He further requested the department analyze the financials of specifically Arctic infrastructure developments given the inherent challenges of building in that environment. “I don’t mind betting the cow but I won’t bet the farm,” Stedman said of the state’s role in financing Alaska LNG. Elwood Brehmer can be reached at [email protected]

In one of final acts at EPA, Pruitt updates Alaska wetlands management

In his final weeks leading the agency, former Environmental Protection Agency Administrator Scott Pruitt issued a memo reemphasizing the unique abundance of wetlands in Alaska and outlining how the EPA will manage them. The joint memo, signed June 15 by Pruitt and Assistant Army Secretary for Civil Works R.D. James, replaces longstanding guidance in prior memos from 1992 and 1994 covering wetlands mitigation. The U.S. Army Corps of Engineers manages Clean Water Act Section 404 wetlands fill permits under the direction of the EPA, which has ultimate say over if and how often-sensitive wetlands areas are developed. Pruitt abruptly resigned as EPA administrator July 5. Southeast Alaska Land Trust Executive Director Allison Gillum said she sees the memo as largely clarifying the language in Clean Water Act requirements and regulations with the recognition that wetlands management in Alaska is a much different task than it is in the Lower 48. Gillum also attended a stakeholder meeting the EPA held in Anchorage to discuss how the guidance will be applied by the agencies going forward. “I felt like they just wanted to remind people that there’s room in the rule for doing things (in Alaska) kind of outside how they are done in the Lower 48. I’m not really sure what’s going to come of it,” she said. The Southeast Alaska Land Trust is an in-lieu fee wetlands mitigation sponsor. An in-lieu fee sponsor organization is certified by the Corps of Engineers to take on the responsibility of finding wetlands to preserve that will offset those damaged by a project. The 10-page memo highlights the agencies’ mitigation sequence, describing when avoiding, minimizing or compensating for wetlands disturbances is warranted. “Given the unique climatological and physiographic circumstances found in Alaska, it is appropriate to apply the inherent flexibility provided by the guidelines to proposed projects in Alaska. Applying this flexibility in a reasoned, commonsense approach will lead to effective decision-making and sound environmental protection in Alaska,” the memo states. The members of Alaska’s all-Republican congressional delegation have for years stressed that more than half the state is classified as wetlands — accounting for more than 60 percent of the remaining wetlands in the entire country — and therefore the stringent requirements for wetlands protections used in the Lower 48 should not apply to Alaska. “When the Lower 48 were being developed, they didn’t need to deal with today’s onerous regulatory restrictions. I am encouraged to see EPA and the Army Corps recognizing these issues,” Sen. Dan Sullivan said in a formal statement accompanying the memo. “I hope we can continue to work together to set up a practical regulatory structure that protects our watersheds and cleans up existing environmental problems, while allowing us to build the projects we need to build in Alaska.” EPA Region 10 spokeswoman Suzanne Skadowski wrote in an emailed response to questions that the new guidance is meant to improve consistency and remove ambiguity regarding the agencies’ authority to be flexible in making decisions on when to require compensatory wetlands mitigation. In Alaska, compensatory mitigation usually means preserving an undisturbed wetlands area to offset filled wetlands elsewhere, Gillum noted, while in the Lower 48, compensatory mitigation is often aimed at restoring previously damaged wetlands areas. “The updated guidance ensures fair and transparent implementation of mitigation requirements across Alaska,” Skadowski wrote in response to whether or not the guidance loosens mitigation requirements in light of the Trump administration’s overarching push to ease federal regulations. “Practicable,” a key word in determining what shall be required to meet the EPA’s mitigation standards, is defined in the memo as “available and capable of being done after taking into consideration cost, existing technology, and logistics in light of overall project purpose.” When avoiding or compensating for development impacts to wetlands is not practicable, minimizing wetlands impacts will be the main means of complying with Clean Water Act requirements, according to the memo. “In Alaska, minimization of impacts has been in many circumstances the only mitigation required,” the memo notes. The memo also explains that compensatory mitigation over larger watershed scales could be appropriate for Alaska given that options to offset wetlands losses on a more localized scale are often limited. Gillum said looking at using larger watershed scales allows for more flexibility when compensatory mitigation is required. “Our service area is all of Southeast Alaska, so we could see an impact in Ketchikan and we could potentially offset it in the Juneau area; depending on a lot of different factors,” she said. Additionally, it states that “applying a less rigorous permit review” for projects deemed small, with minor environmental impacts, is consistent with Clean Water Act regulations. The guidance does not lay out quantitative thresholds for determining major versus minor impacts — that is decided on a case-by-case basis — but it outlines what should be considered in making that determination, according to Skadowski. Gillum added that she found it interesting that the memo points out the challenges of wetlands development, specifically on the North Slope. “I feel like it could be setting it up to defend certain decision that the EPA and the Army Corps might be making on big projects in that area but I don’t necessarily feel like the memorandum said anything completely new,” Gillum said. ^ Elwood Brehmer can be reached at [email protected]

Reprocessed state seafood exports exempted from Chinese tariffs

It appears the blowback from President Donald Trump’s trade dispute with China will fall on some, but not all of Alaska’s seafood exports to the country. The Trump administration’s 25 percent tariff on an estimated $34 billion of goods imported to the U.S. that took effect July 6 prompted Chinese leaders to respond with their own 25 percent tariff on U.S. goods headed for their country, including seafood, Alaska’s primary export. National Oceanic and Atmospheric Administration Fisheries Director of International Affairs John Henderschedt said June 28 that seafood products destined to be reprocessed and re-exported from China will be exempt from the tariffs after agency officials discussed the issue with the U.S. Embassy there. While a positive development for Alaska fishermen and processors, the cumulative impact the tariffs could have on the commercial fishing industry in the state is still unknown, Alaska Seafood Marketing Institute Technical Program Director Michael Kohan said in an interview. Overall, Alaska exported more than $4.9 billion of goods in 2017, of which more than $2.4 billion was seafood, according to the state Office of International Trade. China bought $1.3 billion worth of Alaska’s exports last year, including $796 million — nearly a third — of the state’s total seafood exports. Kohan said leaders at ASMI, the state’s flagship seafood advocacy group, have been wondering what role the tariffs would play in their industry since they were officially announced June 15. She noted that the ever-shifting dynamics of the volatile industry make it difficult to pin down exactly how much Alaska seafood stays in China and how much is sent back out after value-added processomg. Part of the challenge of tracking the Chinese market is that it has grown rapidly, according to Kohan, which of course is a good thing. Prior to about 2003, China bought minimal amounts of Alaska seafood — less than $100 million per year — mirroring demand growth in the country for other Alaska products as well. “We do know that higher end species are consumed domestically, so those are geoducks, sea cucumber, crab, sablefish; and most of the species that are going to be reprocessed and re-exported are pollock and pink and keta (chum) salmon,” Kohan said. Adding to the challenge of trying to quantify and track what goes where is the fact that each processing company sends different volumes of various products to different countries every year, Kohan said further. “With a billion dollars of seafood exports to China it’s a very serious issue for Alaska and could have potential effects on harvesters,” she said. “However, it’s too soon to know the full impact on Alaska seafood harvesters or the state’s overall economy.” Chris Woodley, executive director of The Groundfish Forum, a trade association the for Bering Sea Amendment 80 factory trawler fleet, said the vast majority of U.S. exports of frozen seafood to China are reprocessed to be shipped out of the country later. Such U.S. exports to China that are then re-exported are not subject to Chinese duties or the countries value-added tax because imposing them would just raise the cost of the products when they are resold. Kohan said the true impact of the tariffs should be better known in the coming weeks as more geoducks and other seafood is shipped to China and processors begin making decisions on where to send their products now that the tariffs are in place. If those impacts prove to be unworkable, the seafood could be sent elsewhere in the future, but that move would be gradual as well, she said. “Alaska seafood has a strong and growing demand worldwide. The products that are being exported to China now could fill markets for Alaska seafood such as South Korea, Japan, Brazil, the U.K., northern and southern eastern Europe are all large markets for us so there’s a great network for Alaska seafood internationally,” Kohan said. “However, as with the (2014) Russian embargo, these shifts in markets take time to develop and so we will see possibly some changes but obviously we’ll be searching to develop our other strong markets with these seafood products in the future.” ^ Elwood Brehmer can be reached at [email protected] Correspondent Jim Paulin in Unalaska contributed to this report.

Despite slight production dip, state oil revenue grows in FY18

Oil production was down a bit but higher oil prices likely afforded the State of Alaska a little more revenue than expected during the 2018 fiscal year. The final cumulative tally for North Slope production in fiscal year 2018, which ended June 30, was 190.3 million barrels, or an average of 521,398 barrels per day. In March, the Department of Revenue issued its Spring Revenue Forecast with a daily 2018 North Slope production prediction of 521,800. North Slope production in fiscal 2017 averaged 526,500 barrels per day, making for a decline of about 0.9 percent. The spring publication is a regular update to the annual Revenue Sources Book the department publishes each fall. The spring forecast, which usually provides greater accuracy than the one done released each December, is meant to provide legislators with more current information as they plan out the state’s budget for the upcoming fiscal year. The situation for oil prices was much the opposite. Revenue officials in the spring forecast upped their fiscal 2018 Alaska North Slope average oil price projection to $61 per barrel from $56 per barrel last fall. Similarly, the price estimate for 2019 was increased to $63 per barrel from $57. Alaska oil sold for $49.43 per barrel in 2017. Revenue was supposed to increase by $200 million-plus in fiscal years 2018 and 2019 based on the higher price assumptions in the spring forecast, but that will likely rise further given the actual average price for the 2018 fiscal year was higher yet at $63.61 per barrel, or 4.3 percent greater than the spring prediction. Revenue officials wrote via email that because June taxes aren’t collected until late July it is still too early to provide a preliminary estimate, but higher oil prices of late should push the state beyond the $2.3 billion forecast for unrestricted General Fund tax and royalty revenue during the year by at least $100 million, they said. The indeterminate increase in revenue will help pay down the state’s budget deficit, which has previously been pegged at about $700 million for fiscal year 2019, which began July 1. In May the Legislature passed operating and capital budgets totaling roughly $4.7 billion to largely be paid with unrestricted General Fund revenue of about $2.3 billion and about $1.7 billion from the Earnings Reserve Account of the Permanent Fund. The remaining deficit will be filled out of the Constitutional Budget Reserve savings account, which held $2.3 billion on June 30, according to the Revenue Department. The Fall 2017 Revenue Sources Book originally pegged fiscal 2018 North Slope oil production at 533,400 barrels per day. That would have been the third consecutive year of production growth from the large oil basin after many years of decline. However, Revenue officials said when the spring forecast was released in March that higher than normal temperatures on the Slope were hampering the efficiency of production facilities and leading to less oil being pulled from the ground each day. As a result, North production is expected to rebound to 526,600 barrels per day in fiscal 2019, according to the spring forecast. ConocoPhillips is scheduled to bring its Greater Mooses Tooth-1 oil project online late this year, which the company expects should provide up to 30,000 barrels of new oil per day. Additionally, leaders of the small independent Brooks Range Petroleum Corp. have said they expect to produce several thousand barrels per day of oil starting in early 2019 from their greenfield Mustang oil development. Production on July 9 almost matched the 2019 estimate at 526,489 barrels, but production for the first nine days of 2019 averaged 481,9000 barrels per day. It is common for summer production figures to be significantly lower than winter as facility efficiency is diminished and regular Trans-Alaska Pipeline System maintenance work during the warmer months forces production to periodically be reigned in. A spring surge in oil prices has helped Alaska oil start fiscal 2019 with an average price of about $79 per barrel, which is 25 percent more than the $63 per barrel expected average. Former Department of Natural Resources official and economist Ed King, who now manages King Economics Group, wrote June 29 that his firm is projecting average oil prices in the $80 range for the next 12 months. King added that the gross value of Alaska’s North Slope oil in fiscal 2018 was roughly $12.1 billion, of which he expects the state to ultimately collect about $1.9 billion in unrestricted revenue. That does not account for mandatory royalty payments to the Alaska Permanent Fund and other dedicated allocations. Elwood Brehmer can be reached at [email protected]

Field hearing focuses on improving efficiency at SBA

A senator from Idaho gave up part of his July Fourth recess to spend time talking business in Alaska. Senate Small Business and Entrepreneurship chairman Sen. Jim Risch, R-Idaho, held an oversight hearing at the Loussac Library in Anchorage June 29 to get feedback from Alaska business leaders on how Small Business Administration programs are working — or not — to help them navigate the complex world of federal contracting. Risch deferred much of the hearing to Sens. Dan Sullivan and Lisa Murkowski, who participated despite not being on the committee, as they are more familiar with the issues facing Alaska small businesses, he said. He held the hearing in Anchorage at Sullivan’s request. Risch said its critical to hear directly from those that participate in the federal programs because the SBA helped small businesses contract for more than $105 billion of federal work last year. Federal contracting for Alaska small businesses grew by more than $200 million last year, according to Risch. “The key, whether it’s the U.S. economy, or the Alaska economy, is small business growth,” Sullivan said in his opening remarks. Travel issues prevented Murkowski from attending the early portions of the hearing, but she participated in later rounds of questioning the business owners. When she did arrive, Murkowski emphasized that even a state as small, population-wise, as Alaska, has 71,000 small businesses. “We are small business. That is what we do here,” Murkowski said. Witnesses from Alaska Native corporations and professional trade sector businesses consistently stressed that federal regulations often make it difficult for the SBA to efficiently administer the guidance to the small businesses it is tasked with assisting. The specific regulations and requirements can vary greatly amongst the different assistance programs the SBA offers, but Associate SBA Administrator for Government Contracting Robb Wong largely concurred with that sentiment, saying the agency is continually working to ease those challenges. Wong said he first worked for the SBA at a lower level and moved to the private sector before returning to government, so he understands both sides of the equation. “I’m a sales guy by nature and I truly believe that if you have a better mousetrap people won’t beat down your door if they don’t know you have a better mousetrap,” Wong said. He acknowledged that the SBA’s business opportunity specialists, who work directly with small business owners seeking help, are “burdened by compliance work” to keep businesses eligible for the SBA’s federal contracting programs. For starters, he said the agency is looking at increasing the number of these specialists in Alaska and is working on a new website that will be easier to navigate and hopefully make it easier for business owners to help themselves. Additionally, the SBA is making strides in helping government contracting officers understand and use the small business programs it offers, Wong said. Sullivan said he’s hopeful a new interpretation of a provision in the 2010 Defense authorization bill that aimed to limit sole source federal contract awards at $20 million without high-level agency approval will again increase the government contracting dollars flowing to Alaska Native corporations. Known as the Section 811 provision, members of Alaska’s congressional delegation have been pushing to reverse the law since it was enacted, contending it was “airdropped” into the bill with no debate. Alaska Native regional and village corporation subsidiaries are heavily involved in multiple areas of federal contracting through the SBA’s 8(a) program, which aims to help minority and “socially and economically disadvantaged” small business owners by allowing them to receive sole-source government contracts generally capped at $6.5 million, according to the SBA. The 8(a) program provides those eligible small businesses with preferential consideration for government contracts. After much pressing, Sullivan recently got the military branch secretaries to reread and reinterpret the Section 811 language. It was previously believed the secretaries were required to sign off on any sole source contract over $20 million — which rarely happened given their other duties. “Those contracting opportunities essentially went to zero from hundreds of millions (of dollars),” Sullivan said. Based on the new reading that authority could be delegated to others who are able to focus more on such contract reviews. According to a 2012 Government Accountability Office report, the number of sole-source contracts to 8(a) businesses fell from an average of about 50 per year from 2008-2010 to about 20 per year after enactment of Section 811 in 2011. Chugach Alaska Corp. CEO Gabe Kompkoff said the 8(a) program helped the regional corporation’s leaders to build their business skills and processes in the early years after it was formed. “The SBA’s business development program proved to be the missing link for (Alaska Native Claims Settlement Act corporations),” Kompkoff testified. He pushed back against critics who characterize the 8(a) program as a government handout to the Native corporations, stressing that they still have to perform well on the contract to get follow-on work. “We believe the customer is receiving greater value in the work we do,” Kompkoff said. He and other Native corporation leaders who testified also noted their businesses also have an obligation to the overall wellbeing of their shareholders that other businesses do not. “The problem we have with the (Alaska Native corporations) is they’re misunderstood,” Wong added. “Nobody understands the responsibility they have to take care of their people.” Kompkoff said he was able to attend college only through scholarships Chugach provided. Sullivan noted that many Native corporations’ shareholders are from rural Alaska among the most economically depressed regions in the country. Elwood Brehmer can be reached at elwood.brehm[email protected]

Pruitt calls for curbs on Clean Water Act vetoes

Environmental Protection Agency Administrator Scott Pruitt issued a memo June 26 directing staff to write regulations aimed at limiting the agency’s ability to block development projects that impact wetlands. Pruitt’s goal is to stop the agency from using its historically broad authority to overrule U.S. Army Corps of Engineers decisions regarding Clean Water Act Section 404 wetlands fill permits before a permit application is filed or after a permit is issued and a project is underway. The Corps of Engineers reviews wetlands fill permit applications on behalf of the EPA, but the Clean Water Act gives the EPA the power to overrule a Corps decision if agency officials determine a project would have unacceptable impacts on wetlands areas or other water bodies, which Pruitt cited in the document. The decision has nationwide consequences, but Pruitt noted in the memo that the move largely stems from the EPA’s actions under the Obama administration’s attempt in 2014 to block the hotly contested Pebble mine project in the Bristol Bay region before the Pebble Partnership had applied for its Section 404 permit. Pebble submitted its 404 application to the Corps last December, which triggered an environmental impact statement review given the large scope of the proposed mine and ancillary facilities. “Today’s memo refocuses EPA on its core mission of protecting public health and the environment in a way that is fair and consistent with due process. We must ensure that EPA exercises its authority under the Clean Water Act in a careful, predictable, and prudent manner,” Pruitt said in an EPA release. The four-page edict, specifically directed at the agency’s Office of Water, further requires regional administrators to ask EPA headquarters officials for permission to initiate an action to restrict a development at the end of the environmental review process. Subsection 404(c) of the Clean Water Act outlines the EPA’s authority to issue such project “vetoes.” Pruitt wrote that he wants the regulations drafted within six months. The EPA has not often invoked its Section 404(c) authority — using it 13 times since the Clean Water Act was passed in 1972. However, Pruitt notes in the memo that regulations guiding how the agency implements its 404(c) power haven’t been updated since 1979 and a “long-overdue” update will provide certainty to landowners, businesses and investors hoping to advance development projects. “I am concerned that the mere potential of the EPA’s use of its Section 404(c) authority before or after the permitting process could influence investment decisions and chill economic growth by short-circuiting the permitting process,” he wrote. The possibility of EPA using its 404(c) veto authority was behind a 2010 decision by the Corps to initially deny ConocoPhillips a permit to build a bridge over the Colville River to reach its CD-5 development; the EPA favored an underground pipeline and no bridge. ConocoPhillips appealed that Corps decision and it was reversed to allow construction of the bridge to begin in 2013, which prompted a lawsuit by environmental groups and a few villagers from nearby Nuiqsut. The Corps decision to allow the bridge was ultimately upheld and CD-5 has been producing since 2015. Pebble sued the EPA twice in 2014, first contending the agency overstepped its authority by moving towards, but not finishing, a Section 404(c) veto before the company had applied for its permits. That suit was thrown out by federal Alaska District Court Judge H. Russel Holland because the action had not been finalized and therefore the issue was not ripe for adjudication. Another suit argued the agency had colluded with anti-mine activists in reaching what Pebble claims was a predetermined conclusion that the mine would be an irresponsible development amongst salmon habitat. Holland issued an injunction in that case, halting the EPA from further steps to preemptively stop Pebble, and that suit was ultimately settled out of court in May 2017. The settlement allowed Pebble to apply for its 404 permit with parameters on when the EPA could revisit a Pebble veto in the future. Pruitt’s push to end preemptive and retroactive 404(c) actions is seemingly at odds with his January decision to stop short of withdrawing the Obama-era proposed restrictions on Pebble. The aforementioned EPA-Pebble settlement called for the agency to start the process of withdrawing the proposed mining restriction, but did not require it to be finalized. An agency statement at the time said the EPA has “serious concerns” about the impacts of mining activity in the Bristol Bay watershed and public comments in stakeholder meetings stressed the importance of the world’s largest wild salmon fishery. Additionally, Pruitt said his decision would not derail Pebble’s ongoing permit review. However, he wrote in the June 26 memo that the Corps can process permit applications and conduct an EIS while a 404(c) action is ongoing, but the Corps cannot issue a permit with an outstanding 404(c) proposal. A spokeswoman for the EPA’s headquarters office did not respond to emailed questions in time for this story. Conservation and Bristol Bay-area fishing and Native groups commended Pruitt in January but hammered his latest memo. “Earlier this year Administrator Pruitt made a very strong statement regarding his concerns about the large, adverse impacts of the Pebble mine,” Trout Unlimited Government Affairs Vice President Steve Moyer said in a prepared statement June 27. “His concerns make our point. Some projects are so destructive of irreplaceable resources that they should be nipped in the bud. We urge Administrator Pruitt and the EPA to reconsider the position stated in the memo and instead, look for ways to protect aquatic treasures and fulfill the promises of the Clean Water Act.” On May 3, 18 members of the Republican-heavy Congressional Western Caucus and resource development advocates sent a letter to Pruitt urging him to lift the proposed restrictions on Pebble. The letter noted Pruitt’s history as an advocate for economic and resource development, but asked “that the proposed (veto) determination be withdrawn, as was originally planned.” It also contends that the decision is at odds with the administration’s position of making mineral development a top priority. Rep. Don Young, a member of the Western Caucus leadership group and a critic of the EPA’s attempt to stop Pebble before the permits were applied for, did not sign the letter. Elwood Brehmer can be reached at [email protected]


Subscribe to RSS - Elwood Brehmer