Elwood Brehmer

Alaska Air nets $266M while muddling through merger

Alaska Air Group Inc. leaders reported a third quarter net income of $266 million and record revenues in the third quarter during an Oct. 25 investor call despite continued operational challenges at their airlines. Seattle-based Alaska Air Group’s airlines, Alaska, Virgin America and regional carrier Horizon Air, generated a record $2.12 billion in operating revenue during the quarter and netted pretax profits of $446 million for a pretax margin of 21 percent. CEO Brad Tilden called the results, which were down year-over-year if Virgin America’s pre-merger results are factored in, “solid” considering the company is still working to combine Alaska and Virgin and fuel prices were up 14 percent over 2016 as well. Alaska Air Group stock closed Oct. 25 down 9.6 percent for the day after the morning earnings call when company executives disclosed some frustrations regarding integrating the two airlines. Its stock started Nov. 1 trading at $65.65 per share. “From an ops standpoint, we’ve come a long way from the beginning of the year, but we still have work to do. We ranked second out of the six largest carriers on on-time performance for the quarter, up from nearly the bottom of the pack during the first quarter,” Tilden said. “While we’re pleased to have closed the gap with our competitors, we remain committed to getting back to the number one position on this metric.” Alaska Airlines has long been the top on-time domestic carrier, but since bringing Virgin America into the fold in the fourth quarter of last year those numbers have fallen. Through September, 82 percent of Alaska Airlines flights arrived on time, which is down 6.5 percent year-over-year. For Virgin America-flagged flights the numbers are worse. Just more than 67 percent of Virgin flights have been on-schedule this year, a decrease of 9.3 percent. Additionally, Horizon Air continues to face the same problems retaining pilots as many regional carriers across the country, an issue that forced the airline to curb its schedule in August and September, Tilden acknowledged. “Pilots have been leaving regional airlines for mainline opportunities at higher rates in the past and at higher rates than we anticipated,” he said. Horizon’s flight schedules have since been adjusted to match pilot availability and cancellations have subsided, according to Tilden. Horizon Air agreed to an amended contract with its pilots earlier this year after the pilots’ union, the Airline Professionals Association Teamsters Local 1224, sued the airline in federal District Court alleging Horizon had offered new pilots hiring bonuses outside of its contract terms to attract new hires. And after a roughly four-year experiment Horizon will stop its service in Alaska on March 10, according to Alaska Airlines Regional Vice President Marilyn Romano. Horizon, with its smaller Q400 Bombardier turboprop aircraft, took over flights between Anchorage, Fairbanks and Kodiak for its larger sister airline in early 2014. Horizon's routes in the state will be picked back up by Alaska Airlines Boeing 737s. While 2017 has not been the smooth sailing of recent years for the company, Alaska Air Group’s record revenue allowed it to generate $1.4 billion in operating cash flow so far this year, $840 million of which has been invested in capital expenses, according to the earnings report. The remaining $520 million in free cash flow is part of $1.7 billion in cash on hand for the company. The company also lowered its debt-to-capitalization ratio to 53 percent at the end of the quarter, down from 59 percent to start the year. Looking ahead, Tilden said the next eight months will be important for Alaska Airlines as Virgin America is further blended into its operations. In January, the airlines should move to single payroll, human resources and accounting systems, according to Tilden. Air Group will also join the airlines’ loyalty programs and expects to have a single operating certificate from the Federal Aviation Administration early next year, he said. Shortly thereafter, the first Virgin America Airbus will be repainted to officially become an Alaska Airlines aircraft, Tilden added. “By the middle of next year, our most critical integration milestones will be behind us, and we’re thrilled about this,” he said. “The fact that we remain on track to complete all of our goals on schedule is a testament to the quality and dedication of our fantastic people.” Tilden continued to note the transition has not been easy, saying the challenges are not different than others the company has overcome. “We’ve also been steadily and consistently building a great company, and that’s what we’re going to keep doing for all of the people who are counting on us to do so. Our customers, our communities, our employees and our shareholders,” Tilden said. Elwood Brehmer can be reached at [email protected]

Armstrong sells major North Slope prospect

Despite holding one of the largest North Slope oil prospects, Armstrong Energy is cashing out some of its stake in Alaska. Oil Search, a publicly traded company with operations in Papua New Guinea, announced Oct. 31 (Nov. 1 local date) that it has reached a $400 million deal with Armstrong Energy and GMT Exploration Co., a silent partner, to buy into the Pikka Unit and other Slope prospects. Under the deal, Oil Search will get a 25.5 percent stake in the Pikka Unit — which is operated by Armstrong and holds the 1.2 billion barrel-plus Nanushuk oil prospect — and a 37.5 percent interest in the “Horseshoe” leases to the south. Armstrong currently operates the Pikka Unit for its partners Denver-based GMT and Spanish major Repsol. Armstrong is also in the midst of the environmental impact statement process to develop the Nanushuk field, which could produce up to 120,000 barrels of oil per day. Oil Search will take over as operator of Pikka from Armstrong on June 1, 2018, according to a company release. The company also has until June 30, 2019, to buy the rest of Armstrong’s and GMT’s interests in the prospects for another $450 million. Currently, Repsol holds a 49 percent share of the Pikka Unit, while Armstong has 38.25 percent and GMT Exploration the remaining 12.75 percent interest, according to the Division of Oil and Gas. Oil Search says it is in the process of setting up a U.S.-based subsidiary to manage its new Alaska holdings. Armstrong has estimated the cost of developing Nanushuk at $5 billion. “The acquisition, exploration, appraisal and development costs will be fully covered by existing cash, cash flows and dedicated additional financing facilities,” according to the Oil Search release. Repsol and Oil Search are partners in oil and gas projects in Papua New Guinea, according to the press release. “Oil Search looks forward to being able to apply its extensive experience of operating safely and cost effectively in challenging environments, as well as leverage its skills working with indigenous people, to these assets,” Managing Director Peter Botten said in the release. Oil Search equated the deal to buying into Nanushuk for about $3.10 per barrel. The company has a deal with Halliburton to utilize the large service company’s operating expertise in Alaska, Oil Search states. The release also stated that Oil Search will “form a long term partnership with Armstrong, leveraging its technical capabilities and experience in the identification of additional potential growth opportunities in Alaska.” It expects first oil to flow from the Pikka Unit in 2023.

AIDEA approves sale of LNG plant to Fairbanks gas utility

A comprehensive plan to get more natural gas to the Interior is halfway home. The Alaska Industrial Development and Export Authority board of directors unanimously approved a $331.2 million financing plan authority leaders hope will enable the Interior Gas Utility to bring the Interior Energy Project to fruition. Included in the deal is the sale of Fairbanks Natural Gas and its Titan LNG plant on Point MacKenzie in Southcentral for $59.5 million, as well as passing of the gas supply contract AIDEA secured in September with Cook Inlet producer Hilcorp Energy. The three-year gas contract, which starts Jan. 1, essentially underpins the whole project. AIDEA officials had been trying to reach a gas supply deal with Cook Inlet producers since early 2016 but the fact that the ultimate demand for gas is still unknown hampered progress. Under the financing plan, Fairbanks Natural Gas, which currently serves a relatively small group of customers in the core of Fairbanks, will be rolled into the Interior Gas Utility to capture the efficiencies of running one entity versus two, as has been the plan since AIDEA bought Fairbanks Natural Gas and its sister companies in 2015. Additionally, Fairbanks Natural Gas leadership is the only group involved in the project with experience operating a gas utility, particularly one with the unique challenge of having to liquefy, truck, and re-gas its fuel supply before delivering it to customers. Most of the $331.2 million will come from the $332.5 million financing package of loans, bonds and grant money approved by the Legislature in 2013 for the Interior Energy Project. To date, AIDEA has spent $14.7 million of the $57.5 million grant. About $52 million in loans were issued to the utilities for distribution build-out. If all goes as planned — construction of LNG storage, LNG plant expansion and numerous other variables — more natural gas should start flowing to the Fairbanks area in 2020. However, what appeared to be a day ripe for the celebration of a long-sought milestone being reached — AIDEA leaders have been consumed with making the challenging project work since being handed it by the Legislature in 2013 — turned somewhat contentious when it became clear IGU leaders are not keen on parts of AIDEA’s final offer. IGU General Manager Jomo Stewart told the board that the deal has troubling loan covenants and other terms that were inserted late without the consent of the start-up utility’s leaders. According to Stewart, it requires the utility to raise rates on customers as the only option to raise revenue or manage expenses should unforeseen circumstances arise, or it could potentially be in default of the state loans and bonds the Legislature authorized AIDEA to manage for the project. That could pose problems if the Regulatory Commission of Alaska doesn’t agree with a rate increase, he said. Stewart also questioned terms that would put IGU in default of the $125 million in low-interest loans the utility would borrow from the state under the deal if the Fairbanks North Star Borough, which formed and thus has ultimate oversight of IGU, were to somehow impair the utility from repaying the money. He asked the board to allow AIDEA Executive Director John Springsteen to negotiate changes to the covenants and default provisions. The Legislature gave AIDEA the authority to manage the Sustainable Energy Transmission and Supply, or SETS, loan funds as part of the $332 million, 2013 Interior Energy Project financing package. The loan is for 50 years with a 0.25 percent interest rate deferred for the first 15 years. Should IGU default on the loan the interest rate increases to 3 percent, according to the loan documents. The favorable financing terms are generally seen as necessary for the project that carries significant public benefits but also has unavoidably challenging economics. Stewart additionally criticized the AIDEA board for lowering the rates charged to Fairbanks Natural Gas customers shortly after it purchased the utility in June 2015. “When you took ownership of Pentex you reduced the rates to the consumer for political and (public relations) purposes, not charging interest or principal,” Stewart commented to the seven-member board. The rate cut of about 13 percent was explained at the time to be justified by operational savings reaped by the utility going from private to public ownership — no longer paying taxes, for instance. According to Stewart, AIDEA is instead trying to recoup the 5 percent return target it has for its revolving loan fund investments by upping the price for IGU to buy Pentex and Fairbanks Natural Gas. Pentex was to cost IGU $58.2 million when the deal was first tentatively reached in late December. The price for Pentex is now listed at $59.5 million in the latest documents. AIDEA bought Pentex for $52.5 million. In a follow-up interview Stewart said he’s concerned the IGU board of directors will reject the deal or be incurring unreasonable risks it has no ability to mitigate if it accepts the deal. IGU’s requests would simply add flexibility to the financing agreement that would allow the utility to better manage operational challenges that are likely to arise, he said. “I want documents that facilitate that (flexibility), not hamper it,” Stewart said. At the same time, though, he stressed that everyone is still working towards the same goal of lower-cost, cleaner energy in the Interior. He also thanked AIDEA and Pentex staff for helping the junior utility get on its feet. “My board as well as the AIDEA board are all fatigued and frustrated that it’s taken as long as it has” to get the deal done, Stewart said. He countered fears that IGU is not ready to take over the project by noting that several members of the utility board of directors have extensive experience in the energy utility realm, mostly with Golden Valley Electric Association. The AIDEA board ultimately approved the financing plan after an executive session and amended the corresponding resolution to allow Springsteen to make technical corrections to the loan and purchase documents. The authority directors strongly urged their IGU counterparts to approve the deal in comments leading up to their vote. AIDEA board member and Deputy Commerce Commissioner Fred Parady noted that the state funding in the deal is far better than any support the Legislature would give the project now. “At some point it’s time to bring (the Interior Energy Project) to the finish line, bring it to a close and that time is now. This is a 50-year loan at 0.25 percent.” Parady said. “We’ve done this work together so we could bring it to reality together. Tick-tock we’re on the clock. The time is now.” AIDEA board Chair Dana Pruhs said the authority is hoping the deal can get expedited consideration from the RCA, but said waiting for better loan terms also means the price of Pentex will go up so AIDEA can meet its internal return targets on the investment. “Six months is a million bucks,” Pruhs said. AIDEA board member Gary Wilken of Fairbanks said he is still concerned that the IGU board is comprised primarily of elected members, which worries him because of fears that elected leaders will choose the popularity of holding customer rates down over making necessary investments in the utility. AIDEA’s lawyer, Assistant Attorney General Jerry Juday also noted the deal can always be amended with mutual agreement at any time for any reason should the unforeseen circumstances worrying IGU officials arise. He added that the loan covenants are not unusual. “AIDEA’s remedies are similar to what a lender would have to protect collateral,” Juday said. Stewart said after the meeting that it would take several days for him to confer with his management team to decide if the deal is workable for IGU. The IGU board is expected to take up the matter at its Nov. 7 meeting. Elwood Brehmer can be reached at [email protected]

ConocoPhillips reports quarterly profit

ConocoPhillips is back in the black after posting a $420 million profit in the third quarter. The positive results are just the second profitable quarter for the company since the start of 2016. ConocoPhillips netted $586 million in the first quarter of this year but reported a $3.4 billion loss in in the second quarter. For the year, the company is still $2.4 billion in the red. ConocoPhillips reported just more than a $1 billion profit in the third quarter of 2016. Specifically to Alaska, ConocoPhillips reported a $103 million third quarter profit in the state and $291 million of net income from its North Slope Alaska operations for the year. “We are pleased with our financial and operational performance for the quarter and the outstanding resilience of our employees during Hurricane Harvey,” CEO Ryan Lance said in a formal statement. “We continued to deliver transformational actions to reset our company through non-core asset sales, debt reduction and share repurchases. While the outlook for commodity prices has improved, we remain committed to our disciplined strategy. We are focused on free cash flow generation, strong financial returns, shareholder value creation and distributions through the cycles.” The company lowered its expected $5 billion capital spend for 2017 to about $4.5 billion and reduced its operating expenses by 20 percent year-over-year, according to an investor release. Of late, Alaska projects have made up roughly 20 percent of the company’s worldwide capital budget. ConocoPhillips also paid down $2.4 billion in debt during the quarter and company leaders expect to hold less than $20 billion in debt by the end of the year, according to the release. ConocoPhillips produced 154,000 barrels of oil per day in Alaska during the quarter, a year-over-year increase of 6,000 barrels per day. Elwood Brehmer can be reached at [email protected]

Regulators order review of all Slope wells

North Slope operators are trying to determine what the effects are of sweeping orders issued by state regulators in response to an investigation into an April oil well leak at Prudhoe Bay. The Alaska Oil and Gas Conservation Commission issued emergency directives Oct. 30 to seven North Slope production and exploration companies ordering them to shut in all wells constructed similarly to a BP well that began spraying oil on April 14. The AOGCC, which regulates all subsurface technical oil and gas activities in the state on a well-by-well basis, expects such wells to be closed by Dec. 31, according to the orders. A review of the April well failure at Prudhoe Bay “revealed the root cause of the incident to be a combination of the well construction geometry — outer casing shoe set in the permafrost — and thawing permafrost and subsidence,” the orders state. As a result, the commission is evaluating all North Slope wells other than Prudhoe Bay wells that BP has already inspected. According to AOGCC records, there are 3,714 wells on the Slope, of which 1,588 actively produced in September. The rest are injection or disposal wells, or idle production wells. Casey Sullivan, spokesman for the mid-sized independent producer Caelus Energy, said the company is in discussions with AOGCC officials to clarify what exactly is expected of the company. Caelus operates the small Oooguruk field on a manmade island, which is currently producing about 12,000 barrels of oil per day. Sullivan said Caelus officials don’t believe they have any wells that fit the description of the order in their operation but they are making sure they meet the commission’s expectations. Hilcorp Alaska, which operates the Endicott, Milne Point and North Star fields, declined to comment on the AOGCC orders. ConocoPhillips Alaska spokeswoman Natalie Lowman said the company, which is the operator at the Kuparuk and Alpine fields, is evaluating its wells to see if they fall into the category cited in the AOGCC order. Industry officials generally said they are struggling to make sense of what is seen as a broad edict with very technical distinctions. BP Alaska spokeswoman Dawn Patience said the company plugged five producing wells after its Prudhoe Bay assessment spurred by the April leak. That leak released approximately 100 gallons of oil, according to the Department of Environmental Conservation, but the crude was contained to the gravel drilling pad. BP recently reported on its internal review to the AOGCC. “The report identified the most likely cause of the (April) incident was a mechanical failure related to permafrost subsidence specific to the design of this well,” Patience wrote in a formal statement. “BP quickly took appropriate steps to evaluate other similar wells, five of which were in production. Mechanical plugs were put in place and those five wells remain shut-in today. BP is committed to operating Prudhoe Bay in a safe, reliable and compliant manner.” AOGCC Special Assistant Jody Colombie wrote in an emailed response to questions that the commission does not expect the well shut-ins to have a substantial affect on North Slope oil production. The hot fluids produced from a well can melt the surrounding permafrost, causing the thawed water to drain away, leading the ground to sink. That gradually puts the outer well casing under a compression load, which combined with other pressure and temperature affects, can cause the casing to fail, according to BP’s report. In late October, BuzzFeed News reported from leaked internal BP company emails that a string of potentially deadly, near-miss accidents at Prudhoe Bay this year scared BP Alaska leaders enough to retrain many of the company’s Alaska employees on workplace safety in the hazardous industry. In response to the BuzzFeed story, the company issued a statement Oct. 20 that read: “The safety of our workers and protection of the environment are BP’s top priorities. In Alaska, one of the ways in which we work to fulfill our commitment to safe, compliant and reliable operations is a program for pipeline assurance that includes nearly 300,000 inspections each year. In addition, this month, while continuing daily operations, we instituted a safety timeout when we held workshops and other trainings to continue to educate workers and promote personal and process safety.” In 2006, BP was forced to temporarily shut in Prudhoe Bay after a leaking pipeline spilled more than 200,000 gallons of oil. The company eventually paid the State of Alaska $255 million in fines and lost revenue from forgone production from the incident. London-based BP reported $1.9 billion in profits during the third quarter on higher oil and natural gas production and prices. Comparatively, the company netted $680 million in the second quarter of 2017 and lost roughly $200 million in the third quarter of last year. BP attributed $1.6 billion in pre-tax, upstream profits to its bottom line for the quarter. “We are steadily building a track record of delivering our plans and growing across our business,” BP CEO Bob Dudley said in a formal statement. “This quarter, three new upstream projects and the highest downstream earnings in five years, underpinned by reliable operations and disciplined spending, have generated healthy earnings and cash flow.” The company also reported $2.3 billion in pre-tax downstream profits and $6.6 billion in operating cash flow, which was down from $6.9 billion the previous quarter. BP expects to pay out about $5.5 billion this year from settlements related to the 2010 Deepwater Horizon oil spill. Those payments will shrink to about $2 billion per year in 2018 and continue to decrease thereafter, according to a company investor presentation. Elwood Brehmer can be reached at [email protected]

Armstrong sells Nanushuk prospect

Despite holding one of the largest North Slope oil prospects, Armstrong Energy is cashing out some of its stake in Alaska. Oil Search, a publicly traded company based in Papua New Guinea, announced Oct. 31 (Nov. 1 local date) that it has reached a $400 million deal with Armstrong Energy and GMT Exploration Co., a silent partner, to buy into the Pikka Unit and other Slope prospects. Under the deal, Oil Search will get a 25.5 percent stake in the Pikka Unit — which is operated by Armstrong and holds the 1.2 billion barrel-plus Nanushuk oil prospect — and a 37.5 percent interest in the “Horseshoe” leases to the south. Armstrong currently operates the Pikka Unit for its partners Denver-based GMT and Spanish major Repsol. Armstrong is also in the midst of the environmental impact statement process to develop the Nanushuk field, which could produce up to 120,000 barrels of oil per day. Oil Search will take over as operator of Pikka from Armstrong on June 1, 2018, according to a company release. The company also has until June 30, 2019, to buy the rest of Armstrong’s and GMT’s interests in the prospects for another $450 million. Currently, Repsol holds a 49 percent share of the Pikka Unit, while Armstong has 38.25 percent and GMT Exploration the remaining 12.75 percent interest, according to the Division of Oil and Gas. Oil Search says it is in the process of setting up a U.S.-based subsidiary to manage its new Alaska holdings. Repsol and Oil Search are partners in oil and gas projects in Papua New Guinea, according to the press release. “Oil Search looks forward to being able to apply its extensive experience of operating safely and cost effectively in challenging environments, as well as leverage its skills working with indigenous people, to these assets,” Managing Director Peter Botten said in the release. Oil Search equated the deal to buying into Nanushuk for about $3.10 per barrel. The company has a deal with Halliburton to utilize the large service company’s operating expertise in Alaska, Oil Search states. It expects first oil to flow from the Pikka Unit in 2023. Elwood Brehmer can be reached at [email protected]

BLM announces largest-ever NPR-A lease sale

In keeping with the Trump administration’s energy policies the Bureau of Land Management announced Wednesday that it will be putting more of the National Petroleum Reserve-Alaska up for bid than ever before in the agency’s annual fall lease sale. According to a BLM Alaska release, oil and gas explorers will be able to bid on 900 tracts covering 10.3 million acres in the NPR-A before bids are opened Dec. 6 in Anchorage. The largest NPR-A offering to-date was in 2004 when 5.8 million acres over 508 leasable tracts were made available. “In May, I put my hand on (the Trans-Alaska Pipeline System) and pledged to help fill it by putting Alaskans back to work on the North Slope,” Interior Secretary Ryan Zinke said in the release. “This large and unprecedented sale in Alaska will help achieve our goal of American energy dominance.” The members of Alaska’s congressional delegation and North Slope Borough Mayor Harry Brower Jr. lauded the decision in associated statements. “The secretary’s announcement demonstrates his commitment to maximize the tracts offered for sale in the NPR-A lease sales while striking a balance between promoting development and protecting subsistence and surface resources.” The 2016 NPR-A sale was for 1.4 million acres over 145 tracts but yielded more than $18.8 million in bids, the largest amount since 2004, as recent oil have renewed interest in the NPR-A and adjacent state leases. Much of the 22.8 million-acre NPR-A was prioritized for wildlife habitat and other uses in the 2013 NPR-A Integrated Activity Plan and therefore is off limits to oil and gas leasing. ConocoPhillips is advancing its two mid-sized Greater Mooses Tooth oil developments in the eastern NPR-A and last January announced a 300 million-barrel oil discovery it calls Willow in the same general area. Preliminary production forecast calls for third year of increase A preliminary oil production and revenue forecast released Wednesday calls for a third straight year of increased production on the North Slope. The state Revenue Department is estimating production of 533,000 barrels per day in the current fiscal year 2018, or just more than a 1 percent increase versus the 524,000 barrels produced per day in fiscal year 2017. “Compared to the department’s previous forecast, this preliminary fall forecast represents a modest decline in forecasted oil prices combined with a material increase to the oil production forecast, leading to an overall increase in expected revenue during most of the forecast period," Revenue Commissioner Sheldon Fisher said. "Alaskans should be pleased with the potential of these new developments to stabilize Alaska’s oil production and add to our economy.” Elwood Brehmer can be reached at [email protected]

State appeals habitat initiative ruling

The ballot initiative proposed to strengthen laws protecting salmon habitat is headed for a supreme resolution, which doesn’t bother the initiative’s primary sponsor. On Oct. 20 the state Department of Law appealed to the Alaska Supreme Court to have a Superior Court ruling upholding the initiative on constitutional grounds overturned. Subsequent to that, Lt. Gov. Byron Mallott wrote a letter to lead sponsor and Cook Inlet commercial fishermen Mike Wood informing him of the administration’s decision to appeal the Oct. 9 Superior Court decision. Mallott stressed in his one-page letter that the appeal is meant to settle a legal issue, not a political one. “Although I believe an appeal was the right thing to do, I want to make it abundantly clear that this decision is based solely on the Alaska Department of Law’s unbiased analysis of the constitutionality of your proposed initiative,” Mallott wrote in the second sentence of the letter. The lieutenant governor — whose primary responsibility is to oversee state elections — also noted the Law Department has requested expedited consideration of the time-sensitive issue to ensure it is resolved in time for next year’s elections if the initiative ultimately succeeds. “Despite the spurious claims that my stance is solely political in nature, I want to remind you and all Alaskans that when I became lieutenant governor in 2014 I took an oath of office and swore to ‘support and defend the Constitution of the United States and the Constitution of the State of Alaska,’” Mallott wrote further. “I do not take those words for granted. I also believe this is an important issue that our highest court should ultimately decide.” Attorney General Jahna Lindemuth echoed Mallott in a formal statement issued by the Department of Law. “We take no position on whether (the initiative) is good policy. This is about the Superior Court’s legal conclusion and our duty to defend the Alaska Constitution, and we believe the Superior Court got it wrong,” Lindemuth said. Wood said in an interview that he understands the public perception bind the issue has put Mallott and Gov. Bill Walker in. “They have to do this. This isn’t a surprise,” Wood said of the appeal. “In many ways, I’m like, ‘go for it,’ let them push it that far. I think we’ll come out on top in the end, which will just strengthen our position.” Mallott refused to certify the “Stand for Salmon” ballot initiative Sept. 12 based on a Law Department opinion that concluded the changes to state law in the language of the measure would constitute prioritizing using state waters as salmon habitat above all other uses, such as in industrial or infrastructure developments. The Alaska Constitution prohibits citizen initiatives from prescribing such resource allocations; that power is reserved for the Legislature. However, Superior Court Judge Mark Rindner overturned Mallott’s rejection Oct. 9, ruling the initiative, which aims to prevent projects that would have “significant adverse effects” on salmon waters as a resource regulation, not an allocation. Wood also chairs the nonprofit group Stand for Salmon. He and other supporters of the law change contend the current language in Title 16, the state’s fish and game habitat permitting statute, which state’s the Fish and Game commissioner shall approve projects that “provide for the proper protection of fish and game,” is too ambiguous and has been eroded over time. Industry groups including the Resource Development Council for Alaska and the Alaska Chamber insist enacting the initiative would kill any meaningful development right down to local infrastructure projects, such as roads, bridges and utility projects. In July, the heads of the 12 Alaska Native regional corporations signed a joint letter opposing the ballot measure. Jason Metrokin, CEO of Bristol Bay Native Corp., which has led the fight against the proposed Pebble mine — a project the initiative sponsors have said they also hope to stop — wrote in a statement for the Journal that notwithstanding BBNC’s position on Pebble, the corporation believes developments that align with local opinion and don’t threaten fisheries should be allowed to proceed. BBNC also opposes House Bill 199, which largely mirrors the initiative language, and the Stand for Salmon initiative. “Each would unnecessarily and negatively impact resource development projects and potentially the subsistence activities upon which our shareholders depend,” Metrokin wrote. “Accordingly, BBNC is interested in working with the Walker administration, the Legislature and all stakeholders to appropriately update Title 16’s anadromous fish habitat provisions.” House Bill 199, sponsored by Rep. Louise Stutes, R-Kodiak, and the initiative were spurred in large part by an open-ended January request by the Board of Fisheries to update Title 16 at the behest of fishing groups. Similarly, the Kenai Peninsula Borough Assembly unanimously passed a resolution last year asking for further habitat protections in Title 16, which hasn’t been changed since statehood. Cook Inlet Region Inc. CEO Sophie Minich co-authored an op-ed opposing the initiative while the Eklutna and Chickaloon Native village councils — comprised of CIRI shareholders — have supported HB 199 in written testimony to the Legislature. CIRI spokesman Jason Moore said the regional corporation respects the rights and motivations of the Tribal organizations on this issue, but added that the initiative could restrict economic development opportunities on CIRI land that would ultimately benefit its shareholders. “We just think this measure is trying to solve a problem that doesn’t exist,” Moore said. On Oct. 18, RDC Executive Director Marleanna Hall, Alaska Chamber CEO Curtis Thayer and Doyon Ltd. CEO Aaron Schutt and Joey Merrick, a manager for the Laborers’ Union Local 341 filed with the Alaska Public Offices Commission to form Stand for Alaska, a group aimed at campaigning against the initiative. Hall said in an interview that the language in the measure “would leave too much speculation and uncertainty” for developers regarding what would be allowable disruption and mostly ignores accepted mitigation practices to improve habitat in one area of another is damaged. She also questioned why the sponsors are not being asked to prove why the initiative is necessary, saying that goes back to her belief that it is “seeking an answer to a problem that doesn’t exist.” “This initiative goes way beyond what the original request was from the Board of Fish to the Legislature in January. It goes way beyond our existing regulations that are already protecting fish habitat,” Hall said. “I think people get really excited about something that they get emotional about instead of looking at the facts.” Supporters insist the measure allows for habitat disruption if corresponding mitigation and recovery efforts are made to the same water body. A court affidavit submitted prior to the Oct. 9 Superior Court ruling by Alvin Ott, a fisheries biologist and manager in Fish and Game’s Habitat Division states that Ott believes the current plan for the massive Donlin gold mine proposed for the Upper Kuskokwim River drainage would not be permissible under the initiative because it calls for destroying American and Anaconda creeks. As an offset, Donlin is planning to enhance coho salmon rearing habitat in nearby Crooked Creek; however, such mitigation to an offsite stream would not be sufficient under the initiative, which requires that the impacted waters eventually be restored, according to Ott. Wood contends the initiative would provide industry interests clarity around about what activities are allowable, instead of relying on the open-ended “proper protection” phrase. He and other initiative backers have also said the only reason Alaska’s premier salmon fisheries have not been damaged so far is the state’s large mines are in the Interior and other areas away from large salmon runs. “We’re trying to make sure that industry can continue with assurances on both sides that it won’t affect fish. This is not designed to stop development at all. This raises the bar again,” he said. ^ Elwood Brehmer can be reached at [email protected]

EPA designation for Yukon River complicates gasline plans

Alaska Gasline Development Corp. leaders are worried a special label the Environmental Protection Agency Region 10 office has placed on the Yukon River could challenge construction of both of their pipeline projects. AGDC Senior Vice President Frank Richards said during the corporation’s Oct. 23 board meeting that the EPA has deemed the Yukon watershed an aquatic resource of national importance, or ARNI, as it relates to the in-state-focused Alaska Standalone Pipeline, or ASAP, and potentially the larger Alaska LNG Project. EPA Region 10 officials wrote a letter to the U.S. Army Corps of Engineers Alaska District Aug. 29 detailing the agency’s concerns with AGDC’s approach to building the ASAP project through wetlands in the Yukon watershed. Roughly half of the 737-mile pipeline corridor is through the massive river drainage, according to Richards. “(Region 10 EPA) took the opportunity to identify, from their perspective, that the Army Corps’ actions in terms of authorizing fill in wetlands is of concern to the EPA,” Richards said. “So they identified not just specific wetlands along the pipeline corridor, they identified they entire Yukon River basin, an area of approximately 200,000 square miles, from the Canadian border all the way west to the outlet of the river. It essentially bisects the entire state of Alaska.” The Army Corps of Engineers is in the midst of writing the draft supplemental environmental impact statement, or EIS, for the ASAP project and generally issues wetland fill permits under the Clean Water Act for the EPA. Under a 1992 memorandum of agreement between the two, the agency, as part of its participation in the EIS, can raise issues it sees in the Corps’ evaluation of a project plan in an ARNI and initiate a consultation process. The EPA took similar steps while the Alaska Railroad was seeking permits for its new Tanana River bridge southeast of Fairbanks — part of the Yukon watershed — and for a bridge over the Colville River to ConocoPhillips’ CD-5 North Slope oil development. “This was done unbeknownst to EPA headquarters in D.C. so we’ve taken the opportunity to identify that to EPA Administrator (Scott) Pruitt,” Richards said. ASAP received a final EIS in 2012 but changes made to the project necessitated amending the document. EPA Region 10 Environmental Review Director R. David Allnutt wrote in the August letter that the agency supports the state’s desire to develop its energy resources, noting the ASAP project could help Fairbanks improve its poor winter air quality by providing the area access to natural gas, which is an ongoing issue the EPA has pushed the community to resolve. However, Allnutt also outlined why it doesn’t think AGDC’s compensatory mitigation plan for the project’s impacts to wetlands is sufficient. He wrote that the pipeline is expected to damage 8,907 acres of wetlands, yet AGDC’s plans to offset those impacts with compensatory mitigation by buying into a mitigation bank on 105 acres are, “approximately 1 percent of the impacted wetland area,” Allnutt noted. That’s because AGDC considers the 105 acres to be the only “ecologically significant” wetlands out of the 8,907 acres without accounting for indirect losses from associated permafrost degradation, according to Allnutt. The pipeline would also cross 60 watersheds in its path across the state. “Although the project would adversely impact wetlands, streams, and other aquatic resources in all 60 watersheds, the draft compensatory mitigation plan uses a novel approach to summarily dismiss potential impacts on the aquatic ecosystem in all but two of these watersheds as ‘insignificant,’” he wrote. “This conclusion is particularly remarkable since the draft SEIS assigns some of these same wetland impacts [e.g., wetland loss and fragmentation] a ‘major’ or ‘moderate’ negative effects ratings.” As a result, the EPA wants the wetlands plans for ASAP to be reviewed in further detail, Allnutt stated. Gov. Bill Walker subsequently wrote in a letter to Pruitt Oct. 4 that AGDC followed guidance from the Corps’ in establishing its mitigation plan and the state believes it is sufficient. He also noted Alaska’s abundance of wetlands; the state holds roughly 65 percent of all the wetlands in the U.S. “As you are likely aware, almost all wetlands in our state are undisturbed, and accordingly, most of the wetlands traversed by our proposed pipeline are also undisturbed,” Walker wrote to Pruitt. “As large and remote as Alaska is, and as many wetlands as it contains, it would not be practicable, nor environmentally justifiable, for this project to mitigate for all wetland impacts along the entire pipeline route.” Pruitt named Alaska Commerce Department Commissioner Chris Hladick to be the EPA Region 10 director, a position he will take over in December. Pruitt made the announcement Oct. 17. Hladick previously served on the AGDC board of directors under Walker. Richards said further mitigation could mean limiting construction to winter when gravel pads, which add to filling wetlands, would not be needed, but that would add greatly to the time and cost of either pipeline project. The EPA suggested building sections of the gasline above ground, similar to how the trans-Alaska oil pipeline was built, but that would raise costs and having a large gas pipeline above ground for substantial sections presents safety issues as well, Richards said. A final outcome is expected soon as to whether AGDC will have to modify its plans, but for now a final EIS is still on track for early next year, he said. “We’re on schedule until the Corps tells us otherwise for a final EIS and a record of decision, but I’m anticipating with the EPA action that we will have a delay, how much, I don’t know,” Richards added. Elwood Brehmer can be reached at [email protected]

ANWR fight far from finish line

Whether Congress opens the Arctic National Wildlife Refuge to drilling rigs could hinge on the fate of President Donald Trump’s tax plan. The House and Senate have both passed budget resolutions that include provisions to open the Arctic National Wildlife Refuge to oil exploration. House Republicans inserted a provision directing the House Natural Resources Committee to come up with ways to generate at least $5 billion in new revenue over the next 10 years. Similarly, the Senate budget orders the Energy and Natural Resources Committee, chaired by Sen. Lisa Murkowski, to add $1 billion to the Treasury in the coming decade. Revenue from oil and gas lease sales for the ANWR coastal plain is seen as a way to meet those instructions, and using prospective ANWR revenue to in theory help pay down on the national deficit allows the controversial action to be taken with a simple majority vote — all that is needed for budget matters in Congress. House Republican leaders have said subsequent to the Senate’s Oct. 19 budget vote that they will likely acquiesce to the Senate’s budget in order to allow Congress to move on to the president’s tax reform bill. Kentucky Republican Sen. Rand Paul, a staunch fiscal conservative, was the only Republican vote against the budget measure, which barely passed the Senate 51-49. An amendment to pull the ANWR language from the Senate budget failed on a 52-48 party line vote. Murkowski said in a statement released shortly after the vote that the budget sets the stage to move on several Republican priorities. “This budget resolution offers a tremendous opportunity to secure the future of Alaska, from long overdue federal tax reform to responsible energy development in a small part of the non-wilderness (ANWR) 1002 area. Tonight was just the first step, but we are now on a path that will allow us to create jobs, generate new wealth, keep energy affordable, and protect our national security,” Murkowski said. Recent iterations of ANWR-opening legislation introduced in both the House and Senate by the Alaska congressional delegation have limited the overall development footprint inside the refuge’s coastal plain, or 1002 area, to 2,000 acres. The ANWR coastal plain is about 1.5 million acres of the total 19.2 million-acre refuge. Rep. Don Young often touts that he has led ANWR-opening legislation through the House a dozen times during his tenure, but nearly each time it has failed in the Senate, which requires a filibuster-proof, 60-vote threshold to move most legislation. President Bill Clinton vetoed the one ANWR bill to reach a president’s desk in 1996. Republicans are trying to replicate what the House did while George W. Bush was president in 2005, when it included opening the ANWR coastal plain to industry activity in the fiscal year 2006 budget; however, it stalled in the Senate and failed to make the final budget. This go-round, the Republican budget holds language that marries it to the tax plan, allowing each to be passed without Democrat support if the president can get enough support from Senate Republicans to avoid a repeat of the failed attempts to repeal the Affordable Care Act. The Associated Press reported Oct. 22 that House leaders hope to pass a tax bill by Thanksgiving. The federal government is funded through Dec. 8 under a continuing resolution Congress passed in September. Cuts to the corporate income tax and doubling the standard individual deduction, among other provisions, are being justified through the subsequent economic growth brought on by lower federal taxes that is expected to generate more taxable income in the country. Elwood Brehmer can be reached at [email protected]

Zinc prices help NANA rebound from oil crash

Strong returns from the Red Dog mine are helping NANA Regional Corp. overcome oil and gas industry losses. NANA CEO Wayne Westlake said in an interview that the Northwest Alaska zinc mine is outpacing production forecasts at a time when zinc prices are high. The open-pit Red Dog mine sits about 90 miles north of Kotzebue, the largest community in the region. NANA, the Alaska Native regional corporation for the area, owns the mine that is operated by Vancouver-based Teck Resources Ltd. Teck expects production from Red Dog to be between 525,000 and 550,000 metric tonnes this year, according to a September release from the company. Output in that range would be about 10 percent above prior production forecasts. The uptick in production is the result of changes to mine sequencing and advancements in metallurgical recoveries, Teck states. It also comes at a time when zinc prices are more than double what they were less than two years ago. Zinc sold on spot markets for between 80 cents and about $1 per pound for several years before dipping to 70 cents per pound in early 2016. Since, the corrosion-resistant metal commonly used in steel coatings has steadily increased in value to its current spot price of about $1.45 per pound. For an owner of one of the largest zinc mines on Earth, like NANA, the production bump and price spike add up to a big deal. It’s also a positive equation for the other 11 Alaska Native regional corporations and the roughly 200 Native village corporations that share in the mine’s revenues. The Alaska Native Claims Settlement Act mandates Native regional corporations share 70 percent of their timber and subsurface resource revenues with their fellow Native corporations in the state in a system known as 7(i) resource revenue payments. Much of the 7(i) revenue dispersed amongst the Native corporations has historically come via oil and gas royalties from production on Arctic Slope Regional Corp. holdings on the North Slope and Cook Inlet Region Inc. lands in Southcentral Alaska. NANA also became a significant 7(i) contributor when Red Dog opened in 1989. However, when oil prices started to drop by roughly half in late 2014, 7(i) revenues fell accordingly as well. Westlake said Red Dog’s increased revenue of late has largely made up for the recent decline in 7(i) distributions brought on by $50 oil. He noted that the resource development payments are often one of few private cash flows going into rural Alaska communities. “It’s not coming from the state; it’s not coming from the federal government. It’s coming from another Alaska Native corporation,” Westlake said of the 7(i) funds. “It’s been very important to the state especially with the price of oil down.” While the oil price depression hit Native corporations through revenue sharing, NANA is among the group of corporations that is heavily invested in the business side of Alaska’s oil and gas, with seven subsidiary firms working on the support services side of the industry in Alaska, Colorado and the Gulf Coast. About 40 percent of NANA’s revenues come from the oil and gas sector in some fashion, according to company leaders. That led to NANA absorbing a $109 million loss in 2016 and its business operations company, NANA Development Corp., also had its credit rating downgraded last year as a result of its oil business struggles. “The good news is that we’re doing better than last year; we’ve taken a number of steps to make that happen,” Westlake said. NANA shuttered two of its challenged subsidiaries doing work outside Alaska — NANA Pacific and NANA Australia — and has sold other companies working Outside to refocus on its strong federal contracting businesses and in-state operations, according to Westlake. Which companies NANA has divested are still confidential at this point, he added. “You just got to keep cutting and trimming,” he said, given oil prices and Alaska’s associated recession. Another positive for NANA on the mining side this year came in April when Teck agreed to a 10-year payment in-lieu of taxes, or PILT, deal with the Northwest Arctic Borough for the severance tax the borough levies on mineral production. The previous PILT agreement expired in 2015 and when a new deal couldn’t be reached the borough moved to impose a tax that would have increased Teck’s severance payments from $12 million in 2015 to somewhere between $30 million and $40 million. Teck sued, contending the borough was singling out the mine operation, which is a primary economic driver in the region. The new PILT is about 30 percent larger than the prior agreement, according to Teck. Westlake said the 10-year deal provides NANA and Teck with greater business stability versus the PILT arrangements that had been made previously. “We can at least now have some ability to plan, to understand what the tax would be and in the past it was over five years and its seemed like in a few years you had to be thinking about planning for the next round of negotiations,” he said. Westlake further described the successful PILT negotiations as a “win-win,” not only because it settles a contentious issue for the companies and the local government, but also because the PILT payments go directly to fund services used by NANA shareholders. “It’s something that we look at as a cooperative exercise because of where the (PILT) benefits go,” he said. Teck focused long-term While Red Dog is a current bright spot for NANA, its future is looking equally as positive. Teck is in the midst of a $110 million upgrade to the mine’s mill, which should increase its production capacity by about 15 percent. That ultimately will help keep zinc production steady despite the declining grade and harder ore in the existing deposit. Red Dog’s current life is expected to expire in 2031, but with Teck describing the mill upgrade as having “robust economics” in a September release, the company is clearly looking further out with its investment. Teck also announced in September that the Aktigiruq deposit it has been exploring for several years on state land about 7 miles northwest of the mine could hold up to 150 million tonnes of 16 percent zinc ore with smaller amounts of lead as well. If the estimates prove out, the Aktigiruq deposit is another world-class zinc discovery near what is already a world-scale zinc mine. Westlake said the new find could potentially support Red Dog many decades to come. To date, Red Dog has milled 78 million tonnes of ore of 19 percent zinc and 5 percent lead, according to Teck. Elwood Brehmer can be reached at [email protected]

‘Bioblitz’ turns up no new non-native aquatics

WHITTIER — When on the hunt for invaders, no news is usually good news. That’s exactly the kind of good news Smithsonian Environmental Research Center scientists were able to report to the Prince William Sound Regional Citizens’ Advisory Council after a summer-long search in 2016 for non-indigenous species in the waters around Valdez. Smithsonian Center Research Technician Linda McCann told the council’s board of directors during its September meeting in Whittier that the “bioblitz” the organization led in the Valdez harbor and other species surveys done in Prince William Sound over the summer turned up no new reports of ocean creatures not native to the sound. The Annapolis, Md.-area Smithsonian Environmental Research Center is an arm of the larger Smithsonian Institution focused on studying coastal ecosystems worldwide. McCann said the quick but intense bioblitz built on similar non-native species surveys the council had led. It was also a way to train “citizen scientists” on what to look for when out and about in the Sound. “We wanted to expand our methodology to include the general public,” McCann said. “That gives us an opportunity to not only get to some additional places to survey, but we’ve got some additional eyes out there to look for us.” The daylong bioblitz surveyed every slip in the Valdez harbor via plankton tows, fouling plates and crab traps. It followed two days of training to bring volunteers up to speed on what to look for. “We did a rapid assessment of all the structures (in the harbor) and we pulled up the traps and it also provided an opportunity for us to refresh some of our plate watch monitoring techniques,” McCann described. Plankton tows are done with ultra-fine mesh nets capable of capturing the often-microscopic organisms. The fouling plates used in the surveys were small PVC squares left in the water to be covered by all types of marine invertebrates. “(The plates) are colonized by all kinds of organisms in the water column, so this is a way for us to be able to monitor these organisms under the microscope,” McCann said. Prince William Sound RCAC staff were also trained to identify non-native zooplankton the researchers think could be on their way to Southcentral Alaska waters. Crab traps targeting European green crab were dropped around Valdez as well. European green crab were found in San Francisco Bay in the late 1990s and their movement northward has been tracked since. They were last identified about 60 miles south of Alaska waters and heavy trapping is being done in British Columbia to at least slow their spread, according to McCann. The only species caught in the traps were native crabs and fish, she added. In addition to the bioblitz in the Valdez harbor, Smithsonian researchers also led plankton tows at the city’s ferry terminal and the Alyeska Pipeline Service Co. oil tanker terminal. Fouling plates were also set at the tanker terminal and in the Cordova marina to expand the study beyond Valdez. Finally, dive surveys were conducted in Valdez and the nearby village of Tatitlek. The dives were in search of a non-native species of tunicates, McCann said. “The only thing we found in the dive surveys was a nonnative bryozoan, an encrusting moss-like animal that we know is all over Alaska and we had seen previously, so all good. The results of all of the surveys was great news,” she said. McCann recommended the Prince William Sound Council continue the “citizen scientist” monitoring and training and conducting comprehensive surveys similar to the bioblitz every two to five years. She also said Smithsonian staff learned that the training to identify particularly small non-natives is a must and that the training is most effective when focusing on fewer species. But it’s certainly something that could be expanded statewide by other organizations as well, she suggested. Council spokeswoman Brooke Taylor said the citizens’ organization is looking at conducting the larger surveys but hasn’t made any decisions yet. Taylor also noted the council does its own invasive species monitoring and sets traps for green crab. “What we do is kind of spot checking in a few communities and this bioblitz — it was basically a full-on check for invasive species in the port of Valdez versus the sampling that we do, which is kind of a snapshot of a couple specific locations throughout the year,” Taylor said. Elwood Brehmer can be reached at [email protected]

ExxonMobil stands by its Point Thomson plan of development

ExxonMobil Alaska leaders insist the company has complied with a 2012 settlement with the State of Alaska over the long-challenged $4 billion Point Thomson North Slope natural gas project and that current state regulators don’t understand the company’s future plans. ExxonMobil Alaska Production Manager Cory Quarles wrote to Department of Natural Resources Commissioner Andy Mack on Oct. 12 that the Point Thomson Unit plan of development the company submitted to the department’s Division of Oil and Gas on June 30 is sufficient, despite the division’s claims to the contrary. Division of Oil and Gas Director Chantal Walsh wrote a six-page letter to Quarles Aug. 29 detailing the multiple ways in which the state believes the company is not making good on its commitments to further develop Point Thomson, as the state argues is required under the Point Thomson Settlement Agreement reached in March 2012. As a result, and most importantly, Walsh approved ExxonMobil’s plan of development, or POD, for the existing Point Thomson initial production system and rejected the portion of the POD document outlining the company’s work to expand natural gas and condensate production from the unit. ExxonMobil submitted a single Point Thomson POD to the state on June 30, but division officials determined it contained two PODs because the 2012 settlement does not spell out what the company must do with its current infrastructure at the large eastern Slope gas field after this year. The settlement does, however, direct the company to start expanding production at Point Thomson by 2019 under one of several scenarios because a large natural gas export project hasn’t been sanctioned yet. Quarles first wrote that DNR regulations, the Point Thomson Unit agreement, and the settlement with the state all call for a single POD. “There are not separate PODs for separate projects, but a single POD for a unit or specific participating area,” he wrote. PODs are submitted annually by the unit operator company for every oil and gas unit in the state and detail the company’s work plan for the coming year. The plans are generally adhered to but not strictly enforced by the state if unforeseen factors, such as changes to a project’s economics from external market forces or technical challenges, arise. But in the unique case of Point Thomson, development is prescribed by the settlement, which the Division of Oil and Gas considers to be a contract with the state, meaning its terms must be upheld regardless of extenuating circumstances, according to Walsh. The current facilities at Point Thomson are capable of producing up to 10,000 barrels per day of natural gas condensates — diesel-like fluids that are shipped down the Trans-Alaska Pipeline System — and up to 200 million cubic feet of natural gas per day. However, the company has been unable to keep production at those levels of late because of technical challenges with the reservoir, which is one of the highest-pressure gas reservoirs on Earth. The gas so far is being reinjected into the high-pressure reservoir. In the future, ExxonMobil plans to grow production to upwards of 50,000 barrels per day of condensates and 920 million cubic feet of gas and then pipe the gas 62 miles to the west for injection into the Prudhoe Bay field to further enhance oil recovery if the Alaska LNG Project has not been sanctioned by the end of 2019, according to the POD. Broadly, Walsh contends that ExxonMobil’s use of the words “if” and “would” when discussing future Point Thomson development indicate the company is not committed to what DNR feels are its obligations. According to Quarles, “the POD addresses all the matters identified in the Settlement Agreement and, contrary to the assertions of the division, is consistent with the terms of the Settlement Agreement.” The POD states ExxonMobil has to work out commercial arrangements with the Prudhoe Bay working interest owner companies before advancing into detailed engineering and design of the project. Walsh countered by noting that BP, ConocoPhillips and ExxonMobil collectively own 99 percent of both fields — Chevron holds 1.6 percent of Prudhoe — and therefore Exxon would be, in part, negotiating with itself. Quarles rebutted that ExxonMobil has obtained approval from the other working interest owners to progress the expansion project through the end of this year. “All requisite approvals to progress expansion project work to a decision point of year-end 2019 have not been received and thus ExxonMobil has clarified the statues and process for owner approvals,” he wrote. “The POD sets forth a plan to progress that work and that is what the Settlement Agreement requires. The Settlement Agreement neither envisions nor requires certainty of result.” Quarles included a five-page attachment to his letter outlining the regulatory and high-level technical steps the company would have to take to advance Point Thomson expansion. DNR’s Ed King, a special assistant to Mack, said the department is reviewing Quarles’ letter and has 60 days to make a determination. The 2012 settlement with the state also calls for any further disputes over Point Thomson to bypass the typical administrative procedures and be sent directly to state Superior Court. The Point Thomson Settlement, reached under former Gov. Sean Parnell, ended years of litigation between the state and the company in which the state argued ExxonMobil had not fulfilled its responsibility to develop the leases it held for many years. It also set a course for ExxonMobil to develop Point Thomson and start production by May 2016. Production started in late April of last year. Gov. Bill Walker, who’d lost to Parnell in the Republican primary in the 2010 governor’s race, promptly sued the state over the settlement in 2012 on the grounds that it was reached in private negotiations and was not in the best interest of Alaska residents. He withdrew his appeal to the Alaska Supreme Court in February 2015 shortly after taking office following his defeat of Parnell in 2014. Last year Walker’s administration deemed the Prudhoe Bay Unit POD incomplete until BP, as unit operator, and the state reached an agreement after a months-long standoff that the company would provide more information on its efforts to further the Alaska LNG Project in future PODs. Elwood Brehmer can be reached at [email protected]

Solving deficit in ‘revenue’ session challenged on multiple fronts

Alaska legislators will convene in Juneau Oct. 23 at the behest of Gov. Bill Walker but indications are their time together could be brief. Senate Majority Leader Peter Micciche, R-Soldotna, said his caucus will be in Juneau for the necessary formalities of the 30-day special session but will hold most of its committee meetings in Anchorage. Micciche expressed frustration over the situation in a brief interview. He said Senate Republicans asked Walker starting about five months ago to hold informal meetings with them and leaders of the Democrat-controlled House Majority on the hope the three sides could work out a compromise deal to fix the state’s ongoing budget problems. Those meetings never materialized, according to Micciche, so the sides are not any closer to filling the state’s $2.5 billion-plus budget deficit for yet another year. The Senate Majority decided to hold most of its meetings during the special session in Anchorage so the public in the state’s largest city would have more direct access to their legislators in a place where the message isn’t “filtered,” Micciche said. House Minority Republicans have pushed to move the special session to Anchorage, similarly claiming it offers the public more opportunities to provide input on issues and would save the state money because legislators from Anchorage and some from the Mat-Su area would not be able to claim per diem at the full rate they would get while in Juneau. Walker has said legislators can hold committee meetings wherever they choose, but as long as the capitol is in Juneau that’s where he intends to hold legislative sessions. Walker’s spokesman Jonathon Taylor wrote in an email simply that “the governor and member of his administration have been meeting informally with leadership from both houses on (fiscal issues) frequently, both during and outside of the regular and special sessions.” House Speaker Bryce Edgmon, D-Dillingham, said in a subsequent interview that he was surprised to hear of the comments from Senate Republicans, stressing his caucus has had regular discussions with officials in the governor’s office about the state’s fiscal issues. He added that House leaders have had “good, constructive dialogues” with their Senate counterparts over the summer but the topic of meetings to reach a fiscal compromise was never broached by the Republicans. “We have been willing to meet anywhere, anytime with them and the governor,” Edgmon said. The House will conduct its work from Juneau, according to Edgmon. An Oct. 18 press release from the House Majority references a Legislative Affairs Agency calculation that an Anchorage special session would cost the state nearly $1 million and be about $220,000 more expensive than Juneau primarily because the Legislature would have to rent space in Anchorage. The former Downtown Anchorage Legislative Information Office building served as a second capitol of sorts in 2015 and 2016 before the Legislature vacated the building last fall. The Midtown Anchorage LIO purchased last year for $11 million is not set up to handle all 60 legislators and staff. Regardless of who is where, Edgmon said ideally the Legislature would “get SB 54 passed and really take a hard look at a long-term fiscal solution” for the state during the special session. While it was first dubbed the “revenue special session,” Walker added Senate Bill 54 to address the rash of low-level crime that is plaguing the state to the call in addition to his modified head tax proposal. The Senate passed SB 54 last spring. The bill would roll back some of the sentencing provisions in the omnibus criminal justice reform legislation, Senate Bill 91, that passed the Legislature with strong bipartisan support in 2016. On the other ever-pressing issue of the state’s continuous budget imbalance, things don’t seem to have changed much. Senate Republicans continue to demand further budget cuts instead of enacting a broad-based personal income tax. The House Majority still insists such a tax is essential for a comprehensive fiscal fix to offset the more regressive nature of the other tools. That’s because the legislation to draw roughly $2.5 billion per year from the Permanent Fund’s income account — the single largest way to resolve the deficit, which passed both bodies but still needs to be reconciled — is likely to lead to smaller Permanent Fund Dividend checks than the current formula and would hit low-income Alaskans the hardest. Walker has generally supported the House Majority’s position, but has also indicated he wants the deficits resolved above all else and the exact means are negotiable. The 1.5 percent payroll tax under the governor’s latest plan is capped at $2,200 per person or twice the previous year’s PFD amount. The House will consider it, according to Edgmon, who called it “a starting point,” noting no bill makes it through the Legislature without changes. He stressed that besides the philosophical reasons for his coalition’s support of a broad-based tax, increasing fixed costs to the state will mean next year’s budget will have to be several hundred million dollars larger just to remain at the status quo. “Where will that money come from?” Edgmon asked. He said he hopes the Legislature can reach a fiscal deal this fall, allowing it to focus on other issues during the regular session starting in January and ideally setting it up to adjourn on time in April, he said. Budget fights in the Legislature have forced Walker to call special sessions each of the last three years to get a budget passed before the state government would shut down on June 30, the end of the state fiscal year. Edgmon acknowledged the challenge of reaching such an agreement in the coming weeks, but said not doing so puts the Legislature on a path to either completely drain the Constitutional Budget Reserve — the state’s last remaining savings account — or make an unstructured draw from the Permanent Fund Earnings Reserve Account next spring to fill the deficit, which would set a very bad precedent, he said. “We have less than a year’s worth of reserves left,” in the CBR, Edgmon noted. Administration officials have said the roughly $2 billion that is expected to be in the CBR at the end of the current fiscal year should be left to cover a state emergency or other unexpected expenses that could crop up. Legislators have not objected to that stance but so far have not been able to come to agreement on another option. Elwood Brehmer can be reached at [email protected]

State still seeking major LNG customer by year-end

The Alaska Gasline Development Corp. won’t be asking for additional funding before the agency knows if it will build the roughly $40 billion Alaska LNG Project, corporation leaders told legislators Oct. 16. AGDC Board of Directors Chairman Dave Cruz said in response to questions from several legislators that the state-owned corporation won’t be requesting additional funding in the 2019 fiscal year state budget, which will be sorted out in the next regular legislative session starting in January. He testified before a joint Alaska LNG Project update hearing of the House and Senate Resource committees in Anchorage. Last February the AGDC board approved a $102 million budget plan to carry the agency through the next 18 months, or roughly until midsummer 2018 when the 2019 fiscal year begins. The AGDC spending plan was meant to complete the needed work within the available funds instead of matching funding to meet the expected workload as the Legislature and Gov. Bill Walker spend another year trying to pull the state out of annual deficits averaging nearly $3 billion. At the time, the corporation had $102 million left from legislative appropriations dating back to 2013 to pursue the Alaska LNG Project and the smaller Alaska Standalone Pipeline, known as the ASAP project. However, AGDC Senior Vice President Frank Richards said the agency had spent only about $22 million this year through August; its expenses have averaged about $3 million per month despite board authorization to spend about twice that. As a result, AGDC should get to a final investment decision on whether to build the megaproject much of the state has waited decades for without asking for more money. The major final investment decision is currently pegged for early in 2019 based on AGDC’s current schedule. Democrat Sen. Donny Olson said he was concerned that the nearly $700 million the state has spent on the project over the past five years has led to a mantra that the Alaska LNG Project is “too big to fail” and AGDC and the Walker administration might not be willing pull the plug on it even if it becomes clear the project doesn’t fit in the ultra-competitive global LNG market right now. Cruz acknowledged that AGDC leadership doesn’t yet know if the project will ultimately be successful, but added, “There’s only one way you get that (money) back: it’s to follow through and build something.” Founder and owner of the heavy construction firm Cruz Construction Inc., Cruz has served on the AGDC board since its inception in 2013 and has been one of the biggest proponents of the state’s effort to utilize the long-stranded North Slope natural reserves, through either the state-focused ASAP project or the larger Alaska LNG export plan. “I would say the sun and the moon and the stars have aligned to bring closure to this project,” he said. Alaskans should have a much better idea as to whether the celestial objects will stay in sync at the end of the year when AGDC officials hope to have a prospective Asian LNG customer in the fold. President Keith Meyer, who usually leads AGDC’s legislative presentations, is currently in Asia marketing Alaska LNG to potential buyers. Cruz said Meyer was hired in 2016 with the lone task to “get us a gas customer.” “Are we going to be able to deliver a gas customer? That’s what it really boils down to,” Cruz said. Securing even one large customer would allow AGDC to then start soliciting investors and other forms of project financing, which would be underwritten by the take-or-pay customer LNG contracts. AGDC is shooting to have a letter of intent from an Asian utility or industrial gas buyer by the end of this year. Cruz conceded AGDC probably won’t have a firm contract with a customer by the end of the year, but receiving a letter would be the next best thing. “They don’t break those letters of intent,” he said of LNG buyers. Getting a letter of intent by Dec. 31 would consummate a year of incremental progress for the corporation, which took a big step in April when it filed with the Federal Energy Regulatory Commission to start the daunting environmental impact statement, or EIS, process for the Alaska LNG Project that would span from the North Slope wells to a 20 million tons per year LNG plant in Nikiski on the Kenai Peninsula. An 800-mile buried gas pipeline would connect the infrastructure at each end of the state’s mainland. In June, AGDC announced it had signed a memorandum of understanding, or MOU, with Korea Gas Corp. to work on a partnership to advance Alaska LNG. Kogas, as it is commonly known, is a government-owned corporation and one of the largest LNG buyers in the world. While it was reported that Kogas has MOUs with other hopeful LNG sellers, Cruz said Alaska’s project, while very large, would be a page in the supply portfolio for many Asian utilities that buy immense amounts of LNG each year. AGDC officials are currently in talks with a Chinese state-owned utility that serves 300 million customers, he noted. “Our project is a drop in the bucket for them to contract with us for a long-term supply,” Cruz said. AGDC then received a favorable tax-exempt opinion from the Internal Revenue Service in July, meaning profits the corporation would net for the state from the project would be free of federal income taxes, as AGDC is an arm of the State of Alaska. Profits earned by private investors in the project are still subject to federal taxes. Then, at the end of August, the corporation got interest from one of the large North Slope producers — and former partners with the state in the Alaska LNG Project — in its capacity solicitation, according to AGDC officials. Which of the “big three” has interest in signing up for capacity in the gas pipeline and LNG tolling system is confidential, but Cruz reiterated at the meeting that ConocoPhillips Alaska leaders have repeatedly said the company prefers to sell its gas at the wellhead. In January, BP and AGDC announced a deal in which the producer — which operates the Prudhoe Bay field expected to supply three-quarters of the natural gas for the project — would assist AGDC in advancing Alaska LNG through the end of the year. Regulatory progress AGDC’s Richards said one of the ways the corporation has saved money is by maximizing in-house resources on EIS work to avoid paying outside contractors whenever possible. The corporation has spent the last five months answering FERC questions on the roughly 60,000 pages of environmental, engineering and socio-economic information it filed with the commission to start the EIS in April. In total, AGDC has already responded to more than 800 data requests from federal regulators, according to Richards. He said he hopes the numerous prior examinations of a gasline project will help FERC get the EIS done in the 18-month window AGDC is shooting for. “Many of the questions they’re asking have been asked and answered before,” Richards said. The Alaska LNG Project also qualifies for measures in the 2015 surface transportation reauthorization known as the FAST Act that set a comprehensive schedule for all federal permits for large transportation projects and are intended to expedite project reviews when possible. To that, Richards said he expects FERC to publish the project’s EIS schedule “any day now.” Additionally, the Establishing Discipline and Accountability in the Environmental Review and Permitting Process for Infrastructure executive order President Donald Trump signed Aug. 15 directs agencies to issue determinations on infrastructure projects within two years of permit applications and requires federal agencies to follow a prescriptive permitting timetable for infrastructure projects. Richards said the Alaska LNG Project meets the guidelines of the executive order. The permitting timeline is critical because AGDC is trying to align its efforts to secure a customer and project financing with the countless federal authorizations it needs to hit the 2019 investment decision and start construction to have the Alaska LNG Project in service by 2025. Elwood Brehmer can be reached at [email protected]

ANWR authorization through budget would avoid filibuster

Republicans in Congress are angling to use the budget process as a means to opening part of the Arctic National Wildlife Refuge to oil development. The House of Representatives passed House Concurrent Resolution 71 on Oct. 5, which authorizes spending for the 2018 fiscal year and provides general recommendations on spending priorities through 2027. It includes language instructing the House Natural Resources Committee to find ways to generate at least $5 billion in new revenue over the next 10 years as a way to cut the annual deficit. The 464-page budget report also instructs Congress to focus on energy production from federal lands. “Unlocking domestic energy supplies in a safe, environmentally responsible manner will increase receipts from bonus bids, rental payments, royalties, and fees,” the budget report states. “The budget allows for greater access in areas such as Alaska, the Outer Continental Shelf, the Gulf of Mexico, and the Intermountain West.” The Senate Budget Committee had its own instructions for the Senate Energy and Natural Resources Committee, chaired by Sen. Lisa Murkowski, to find ways to generate $1 billion for the Treasury in its 2018 budget resolution released Sept. 29. Murkowski said she was happy to see the directive. “This provides an excellent opportunity for our committee to raise $1 billion in federal revenues while creating jobs and strengthening our nation’s long-term energy security,” Murkowski said at the time. Rep. Don Young said a day prior to the House vote that he’s committed to working with the Senate through budget reconciliation to open ANWR to industry. “There is the ability to include language in (budget) reconciliation that would pave the way to open ANWR — the 1002 — for development,” Young’s spokesman Matt Shuckerow said. The ANWR coastal plain is regularly called the “1002 area”, a reference to the section of the 1980 Alaska National Interest Lands Conservation Act, or ANILCA, that describes it. ANILCA established many of the designated federal areas in Alaska, including ANWR. Section 1002 of the exhaustive legislation called for the initial wildlife and hydrocarbon resource assessments and outlines the subsequent steps for oil and gas exploration and development if Congress were to approve it. Using the federal budget as a vehicle to authorize drilling in the refuge would allow Republicans to avoid the 60-vote, filibuster-proof threshold needed to pass most bills in the Senate because any measure deemed to reduce the deficit only need simple majority support from each body. The lease and royalty revenue ANWR activity would go towards closing the deficit and therefore standalone ANWR legislation is not needed, Shuckerow said. “Though imperfect, this budget is an important step to unlocking our nation’s tremendous energy resources within ANWR, reforming frivolous regulations that hinder job creation and growth, and tackling the first major tax reform in over three decades,” Young said in a release from his office. It’s an avenue similar to that Republicans tried to use to repeal the Affordable Care Act earlier this year but failed because there was not enough support within the party on the Senate side to reach 50 votes for multiple reasons. Young often mentions he has shepherded ANWR-opening legislation through the House 12 times during his tenure, but each time it has died often in the Senate and once via a veto from President Bill Clinton in 1996. In this case Republicans are trying to replicate what the House did while George W. Bush was president in 2005, when it included opening the ANWR coastal plain to industry activity in the fiscal year 2006 budget, according to Shuckerow. However, it stalled in the Senate and was not included in the final budget bill. Whether there will be enough votes in the Senate to pass a budget bill with ANWR language is still unclear, however. With 52 Republicans in the Senate the margin for dissent is small and Republicans Sen. John McCain of Arizona and Sen. Susan Collins of Maine have previously broke from the party on the issue and opposed opening the refuge to industry. If they continue to hold that stance there would be no room for other Republicans to break from the party’s traditional stance with Vice President Mike Pence needed to break a tie if necessary. Recent iterations of ANWR-opening legislation introduced in both the House and Senate by the Alaska congressional delegation have limited the overall development footprint inside the refuge’s coastal plain to 2,000 acres. The ANWR coastal plain is about 1.5 million acres of the total 19.2 million-acre refuge. On May 31 in Anchorage, Interior Secretary Ryan Zinke ordered the U.S. Geological Survey to update its oil and gas resource assessment for the refuge, a process that is still ongoing. The last assessment was done in 1998 using seismic data from the 1980s; it concluded the mean estimate for recoverable oil in the coastal plan to be 7.6 billion barrels, with another 3.5 trillion cubic feet of natural gas likely in place. During the winter of 1985-86 Chevron and BP partnered to drill the KIC-1 exploration well on ANWR in-holdings owned by Kaktovik Inupiat Corp. and Arctic Slope Regional Corp. It is the only well drilled in ANWR and what was found remains one of Alaska’s best-kept secrets. National and state-focused conservation groups have long opposed drilling in ANWR, contending it is the most pristine refuge left in the country and the industry activity could drastically damage the Porcupine caribou herd that migrates through the refuge and is relied upon by Alaska Natives and Canadian First Nation Tribes. Pro-development Alaskans counter by noting many North Slope residents support opening ANWR. Arctic Slope Regional Corp., the area’s Native regional corporation has long pushed for drilling the coastal plain. Developing the contentious area is a priority for Voices of the Arctic Inupiat, a nonprofit formed in 2015 that includes 20 North Slope villages and Native corporations as its members. But leaders of the Gwich’in tribe in the Upper Yukon region of Alaska and Canada argue that using the general position of North Slope residents to show all Alaska Natives support opening ANWR is ignoring the people who actually depend on the Porcupine caribou and in-turn the refuge. Gwich’in Steering Committee Executive Director Bernadette Demientieff said in an interview that her group — formed in 1988 to oppose development in ANWR — is going to make itself heard. “Enough is enough. We don’t want more drilling,” Demientieff said. “The people who want more drilling hear what they want to hear.” The Native regional and village corporations that support development have a profit motive and do not speak for the people of the region, she contends. The Gwich’in people rely on the Porcupine caribou for up to 80 percent of their diet, she said, and by extension are “a part of the caribou herd.” Climate change has already pushed the herd’s migratory route through the refuge farther north and potentially into the area that could be developed, according to Demientieff, while other North Slope caribou populations have generally declined of late. “You can’t tell us that our food security is going to be protected when this is happening,” she said. “It’s just really frustrating that we have to be fighting for our way of life like this.” ^ Elwood Brehmer can be reached at [email protected]

Judge overturns Mallott on salmon habitat proposal

Alaskans seeking more protections for the state’s salmon notched a victory Oct. 9 when a Superior Court ruling overturned Lt. Gov. Byron Mallott’s denial of a ballot initiative to overhaul permitting laws for projects in and around salmon-bearing waters. Judge Mark Rindner wrote in a 20-page order that the salmon habitat initiative does not prescribe how countless miles of state rivers and wetlands be used, but rather simply regulates the quality of that water while it is in use. In September the Department of Law deemed the initiative, pushed by the conservation group Stand for Salmon, as an unconstitutional appropriation of state assets and thus recommended Mallott reject its inclusion on the 2018 statewide ballot. He did so Sept. 12. The Alaska Constitution prohibits voter initiatives from appropriating state assets; that power is reserved for the Legislature. In June, Assistant Attorney General Elizabeth Bakalar wrote a letter to initiative sponsors Mike Wood, a commercial fisherman, Bristol Bay lodge owner Brian Kraft and Gayla Hoseth of Dillingham, informing them that a prior version of the initiative would likely be denied because it was deemed to appropriate state resources. At the same time, the state Supreme Court has instructed lower courts interpret initiatives broadly to give voters a say whenever possible, Rindner noted in his order. “We need to have clear rules for projects proposed in sensitive salmon habitat to ensure they’re being done responsibly — as well as provide more certainty in the permitting process for the industry that is proposing the project. That’s exactly what this measure calls for. It works to ensure a prosperous economy for all Alaskans by bringing balance to our approach for permitting,” said Wood, who chairs Stand for Salmon. The decision comes just six days after Bakalar and Trustees for Alaska argued the case in front of Rindner. The mining group Council of Alaska Producers also argued in support of the state’s position. Trustees for Alaska is a nonprofit environmental advocacy law firm, which is representing Stand for Salmon in its appeal. Bakalar contended in oral arguments that a plain-language reading of the eight-page initiative leads to the conclusion that fish habitat is prioritized above all other uses, namely any type of meaningful development. And she said Rindner needed to rule based on how voters would interpret the initiative in the voting booth. Bakalar said, and Rindner similarly wrote, that the dispute is not over whether or not the initiative is good policy, but whether or not it ties the Legislature’s hands when deciding how to appropriate state resources. History suggests the case is headed for the Supreme Court, as a high court ruling is the only way it is truly settled, but Bakalar wrote in an email to the Journal that evaluating whether or not to appeal will take several weeks. Valerie Brown, legal director for Trustees for Alaska and the attorney who argued on behalf of Stand for Salmon, centered her argument on language in the initiative that mirrors what was in a 2008 ballot initiative attempting to restrict mine waste from being discharged into state waters. Voters ultimately shot down that initiative but the Supreme Court upheld its constitutionality after a challenge by Pebble Ltd. Partnership, which similarly claimed it amounted to an unconstitutional appropriation of state water. The habitat initiative aims to restrict developments that, even after attempts at mitigation, would inflict “significant adverse effects” on salmon streams. The 2008 “Pebble” initiative looked to prohibit operations that “could adversely affect water that is used by humans or salmon.” The current initiative would allow for developments that could restore damaged habitat in a “reasonable period.” Council of Alaska Producers attorney James Leik told Rindner during the Oct. 3 hearing that Stand for Salmon just scattered the words “adverse effect” into the revised initiative to align it with the Pebble case. If so, it worked. Rindner concluded there is leeway in the language for it to be a permissible regulation and not prescriptive appropriation in favor of fish. “(The initiative’s) definition of ‘substantial damage’ leaves the Legislature the discretion to determine ‘accepted mitigation measures,’ what level of impact ‘adversely affects’ the habitat, the acceptable probability of recovery for fish habitat to ‘likely recover,’ and what timeframe constitutes recovery within a ‘reasonable period,’” he wrote. If the Pebble initiative was constitutional, the one in question today is too because it also “leaves the Legislature discretion in its implementation through the use of a plethora of undefined terms,” Rindner continued. Opponents argue the language ostensibly prohibits any large development that could result in such impacts, but the issue at hand is a matter of law and no one has been able to provide any evidence supporting that claim, according to Rindner. “The impact of the initiative at this time is pure speculation,” he wrote. He wrote further that the Legislature would still have enough room that it “could implement” the initiative in a way that allows development projects. The state’s current salmon habitat law, Title 16, directs the Fish and Game commissioner to issue a development permit as long as a project provides “proper protection of fish and game.” The petitioners contend that is far too vague and an update is needed to just define what “proper protection” means. Rindner added that the argument purported by the Council of Alaska Producers that the initiative favors water for fish habitat mischaracterizes the basis of what the proposed law change is. That argument concludes that water is a public asset and fish habitat is how that asset is used, which is wrong, according to Rindner. “The correct taxonomy is that water is a genus of public asset, and anadromous fish habitat is a particular species of public asset within the water genus,” he described. “(The initiative) does not explicitly favor any particular use of anadromous fish habitat between recreational fishing, kayaking, commercial fishing, hatcheries, mining, pipeline, or dams; it only concerns itself with the condition of the water,” Rindner continued. He ordered the Division of Elections to immediately begin printing petition booklets for the initiative and have them ready by Oct. 17. Bakalar said that while the state obviously disagrees with the decision, officials have been working with Stand for Salmon during the litigation process to make sure the booklets were ready if need be. Even a favorable court ruling does not mean the initiative will surely reach the 2018 ballot. The sponsors still need to get more than 30,000 signatures supporting it statewide before it can be fully certified. Elwood Brehmer can be reached at [email protected]

CEO unveils Pebble 2.0

Pebble Limited Partnership has finally done one of the things it has long been criticized for not doing: the company released an actual mine plan. CEO Tom Collier discussed the major points of the plan Oct. 5 at a Resource Development Council for Alaska meeting in Anchorage. Long a topic of ample speculation, Collier said the mine plan the company plans to submit for environmental review to the U.S. Army Corps of Engineers in December has a footprint that is 60 percent smaller than the concept the Environmental Protection Agency used to determine Pebble’s prospective impacts in the 2014 Bristol Bay Watershed Assessment. He noted that the 1,000-plus page assessment, which Pebble contends was a biased document from its genesis aimed at stopping the project, determined a much smaller mine could pass permitting muster. Pebble’s plan is for a mine pit, waste rock and tailings storage facility to cover 5.4 square miles, which Collier described as “in the ballpark” of the 4.2 square mile project the EPA then deemed acceptable. The EPA used a concept operation covering 13.5 square miles when it concluded in the Bristol Bay Watershed Assessment that what was believed to be the company’s plan was unacceptable. In May, the company settled a lawsuit it filed in 2014 against the EPA over the process behind the watershed assessment and the agency’s subsequent proposal to preemptively prohibit the project, which put intense criticism on the Trump administration by Pebble’s opponents. However, Collier said the company also had a deal with the Obama administration that fell apart. “Few people know this — we actually negotiated a settlement with the Obama team before they left the White House and at the very last minute the administrator of the EPA (Gina McCarthy) refused to sign the document that we’d been told for a week had been approved,” he revealed. The EPA is currently taking public comments on whether it should reverse the process started in 2014 to ban a large mine in the Bristol Bay region, despite the fact that as a condition of the Pebble settlement the assessment remains valid and on which the Pebble “veto” was based. In late 2014, Alaska U.S. District Court Judge H. Russel Holland issued an injunction stopping the EPA from completing the Pebble veto until that suit was resolved. Three-quarters of Pebble’s proposed footprint would be the tailings storage facility. Shrinking the size of the project allowed Pebble to move it out of the Upper Talarik Creek drainage that feeds Iliamna Lake and the Kvichak River. The Kvichak River has one of the two largest sockeye returns in Bristol Bay most years. The smaller mine plan also eliminates waste rock piles, as the company will start mining where the copper and gold ore is closest to the surface, according to Collier. Waste rock that is removed will be used in the tailings dam. Additionally, Collier said Pebble acquiesced to opponents over one of their biggest concerns with the project and will not be leaching gold out of the ore. The secondary recovery process would otherwise recover about 15 percent of the available gold, he said. “We’re going to leave that 15 percent of gold in the rock at the mine site and there won’t be any cyanide at Pebble,” Collier said. A redesigned tailings facility with improved buttresses and a more gradual slope increases protection against earthquakes, according to Collier. He said the tailings dam would be built to withstand ground acceleration more than twice what the U.S. Geological Survey believes there is a 2 percent chance to exceed every 50 years at the project site. He also noted the nearest fault line — the Lake Clark fault northwest of the project site — has not been active since the last ice age. “We believe that our mine has been designed to withstand the greatest possible seismicity predicted by science, period,” Collier asserted. Tailings with acid generating potential would be stored in a separate, lined containment facility. Leading up the expected release of Pebble’s new plan, many mine opponents, including state House Speaker Rep. Bryce Edgmon, D-Dillingham, who represents the Bristol Bay region, said there is nothing Pebble can do to change their minds about the project they feel will unnecessarily put the region’s world-class salmon fisheries — and the jobs linked to those fisheries — at risk. Alannah Hurley, executive director of United Tribes of Bristol Bay, an organization that has been at the forefront of the fight against Pebble, said the revised vision for the mine was met with skepticism from Bristol Bay tribes in a release from the group and would still be one of the world’s largest mines. “This is just a wolf in sheep’s clothing. For more than a decade, the Pebble Limited Partnership has tried to convince Alaskans that it should build a mine in Bristol Bay, at the headwaters of the world’s last great salmon runs,” Hurley said. “In that time, opposition has only increased, and Bristol Bay has been crystal clear on its feelings towards Pebble.” If the worst were to happen and the tailings dam failed — a scenario Collier said many inside Pebble did not want him to discuss — the smaller project would now impact only the North Fork of the Koktuli River, he said, as it is no longer in the Upper Talarik drainage. He added that based on the Bristol Bay Watershed Assessment, about 20 miles of the North Fork of the Koktuli would be severely damaged for about a decade from turbidity in the water. After that the river would eventually return to being viable fish habitat. The North Fork of the Koktuli, which feeds the Mulchatna River and eventually the famed Nushagak River, produces approximately 0.02 percent of the sockeye salmon that return to Bristol Bay each year, according to Pebble. “I can’t tell you how many times I’ve spoken to people and asked them why are they against the Pebble project and the answer they tell me is that if we have an accident we’ll kill all the fish in Bristol Bay,” Collier said. “The Obama administration EPA says we’re only going to kill two one-hundredths of one percent if we have a catastrophic incident that we don’t think is even possible to have.” Finally, Pebble has scrapped plans for a road around giant Iliamna Lake in favor of employing an ice-breaking ferry to traverse the lake to supply the mine via a shorter road from a new port that would be built on Cook Inlet near Augustine Island. Cutting out miles of roads removes much of the project’s impacts to wetlands, Collier said. The EPA’s Pebble concept had 86 miles of new roads; the new plan needs 42 miles, according to the company. “Is this project worth building given all the other benefits, given all the risks of it? Damn straight it is and these numbers I think show that,” he said. He continued: “The key, though, is that all this stuff I talked to you about today has to go into the environmental impact statement process and it will be tested. And if the calculations we’ve done are correct we’re going to get a permit. If they’re not correct, if they’re not reliable, we’ll have to change them; we’re going to have to modify our proposal so that it will be correct. “We’re not going to build a project that’s going to damage that fishery. We’re not going to build a project that’s going to have significant environmental damage to that region. But we’re confident that we can build the one that we’re talking about now without any of those consequences and we’re going to move it forward aggressively.” Gov. Bill Walker said that he doesn’t have enough information on Pebble’s new plan to support it in a recent interview with Alaska Public Radio. In an Oct. 6 prepared response to Walker’s comments, Collier said Walker’s hesitancy towards the project is appropriate at this point. Walker “should be skeptical; ask hard questions; and allow the permitting agencies to do their work,” Collier said. The governor said during his 2014 campaign that he was against the — at that point — large mine concept because of the potential impacts it could have on Bristol Bay fisheries, but also criticized the EPA for its move to preemptively prohibit the project because of the fear it could apply the same process to other projects in the state. Collier said in an interview following his talk that the company doesn’t have plans now to expand the project beyond the current proposal if it reaches production but noted any expansion would trigger another scrupulous environmental review. Pebble’s owner company, Northern Dynasty Minerals has indicated in recent investor presentations that it estimates the Pebble deposit holds up to 1.9 percent of all the gold ever mined in recorded history. “It’s not like since you’ve done phase one you get a leg up at all. You start all over, from scratch, new permit,” Collier said of expanding the mine. “And the key to that new permit is it’s going to look at whether the two together are too big and if it’s too big then it’s not going to get a permit but that doesn’t affect the first one. The first one stands on its own. If it works, it works and then if we propose a second one and it’s concluded that’s too big, it’s too much for the region then it doesn’t get built but that’s tomorrow’s question.” He also said that while Pebble and Northern Dynasty leaders previously said the parent company needs to secure a second investor in the project before starting what is expected to be a $150 million environmental impact statement, or EIS, process, that isn’t necessarily the case any longer. But he also said during his presentation that Northern Dynasty should announce a partner on Pebble by the end of the year — the time by which it will be known if Pebble makes good in its statements to formally apply for permits this go-round. Sharing the project The benefits of the mine start with jobs and could end with direct revenue payments to local residents based on the programs Pebble is proposing. Collier acknowledged that “Pebble’s got a credibility problem,” which in part stems from numerous claims not coming to fruition over a decade that the company would advance the project. Further, he noted that because the project is on state land there is no established way for Alaska Native residents in the region to benefit from it as have Natives closer to other mines in the state on Native corporation land. As a result, Pebble is suggesting it could set up a corporation to hold 5 percent of the project and distribute that revenue to the five area Native village corporations and nearby residents. Based on the company’s projections, such a setup would directly pay each of the village corporations about $500,000 and each resident, assuming about 5,000 people signed up, about $500 annually. Pebble would also bring excess power to a region that has exorbitant electricity prices — upwards of 80 cents per kilowatt-hour, Collier said. The company is in discussions with some of the large regional Native corporations in the state about owning the prospective power plant and other infrastructure related to the project, he added. “We’ll need to work with the state; we’ll need to work with the villages on how we wheel that power from the mine site to the region but that’s our clear intention,” Collier said. Pebble is also investigating ways it could benefit the Bristol Bay commercial sockeye fishery, he continued. “We’d like to do something with some of the revenue that this mine generates that would be seen as us showing that we’re good neighbors to that fishery. We don’t buy the dichotomy that you have to choose between the fishery and the mine. We think they can both coexist,” Collier said. The company is pursuing a crop insurance-like concept to mitigate the economic volatility in fishery. Collier described a plan that would pay fishing permit holders in years when the average vessel revenue fleet-wide dropped below a certain point. “When I first looked at this the numbers were daunting but when I went back and looked at it perhaps only for the fishermen from Bristol Bay that hold permits or perhaps only the Alaskan permit holders, the numbers are not quite so daunting,” he said. He also suggested a permit buyback program for Outsiders that hold permits as a way to get more ownership of the fishery back to the region. “We haven’t decided what we’re going to do yet but we have decided we’re going to do something,” Collier said, adding Pebble has economists running numbers while discussing the possibilities with fishermen. Hurley dismissed the revenue sharing concepts as more attempts to purchase support for the project, saying the salmon fishery will sustain the region longer than the life of any mine. In hard numbers, even the smaller project would bring about 2,000 jobs over the projected 20-year life of the mine to the region, according to the company’s figures. It would add about $20 million to the Lake and Peninsula Borough’s annual revenue and pay the state between $49 million and $66 million per year, Pebble estimates. Elwood Brehmer can be reached at [email protected]

Permanent Fund trustees seek inflation-proofing bill

The folks in charge of Alaska’s largest asset made few, but significant, requests of the Legislature at their meeting Sept. 28. The Alaska Permanent Fund Corp. Board of Trustees unanimously passed a resolution directing corporation executives to pursue legislation to strengthen inflation-proofing mechanisms for the corpus of the $61 billion Permanent Fund, and passed motions requesting an exemption from state procurement codes and to add up to 10 new employees to its Juneau headquarters. CEO Angela Rodell said during the meeting that inflation-proofing the roughly $40 billion corpus of the Fund — the portion made up of resource royalty and inflation-proofing payments — is the only way to truly ensure growth in the Fund. The Fund holds another nearly $8 billion in unrealized gains from investments, according to its August balance sheet. The trustees also passed a more specific motion asking that inflation proofing be accounted for as part of the Fund’s annual statutory net income calculation. Doing so would prioritize the inflation-proofing payment to be made before tallying the Fund’s gains or losses in a year. Natural Resources Commissioner Andy Mack, taking part in his first meeting as a trustee, said there are other ways to address inflation proofing beyond making it a part of the income calculation, but added he feels “strongly it should be accounted for in the legislative process.” Mack, a former director at the Alaska private equity fund Pt Capital, was just appointed to the APFC board by Gov. Bill Walker Sept. 27 to replace retired Revenue Commissioner Randy Hoffbeck. Similarly, new Revenue Commissioner Sheldon Fisher said he totally supports strengthening inflation-proofing provisions but he’s not sure if the way proposed in the motion is the best way to do it. He noted the passive inflation-proofing provision in Senate Bill 26, Walker’s bill to establish an annual percent of market value, or POMV, draw from the Fund to pay dividends and support government services. Historically, the Legislature has made the inflation-proofing payments to the corpus of the Fund on an as-needed basis. Inflation payments are transferred from Earnings Reserve Account to the corpus that is off limits to spending by the Legislature. The Earnings Reserve, which holds the Fund’s investment gains and is the only portion of the Permanent Fund that is available for appropriation by the Legislature, currently has more than $13 billion. However, the last two fiscal years the Legislature has broken from tradition and chosen not to inflation-proof the corpus of the Fund while the expectation of employing a POMV draw on the Earnings Reserve has grown. SB 26, passed by both the House and Senate last session but needing reconciliation of details in a conference committee before heading to the governor’s desk, calls for any cash in excess of four times the annual POMV draw amount left in the Earnings Reserve after the draw to be automatically transferred to the corpus as an inflation-proofing payment. With the total POMV draw expected to start at roughly $2.5 billion, the Earnings Reserve as it stands now is almost large enough to trigger those payments. Rodell said in an August interview with the Journal that the precedent set by the Legislature the last two years is worrisome. It has been helpful that inflation rates have been very low of late; two years ago the payment would’ve been just $47 million, she said. But it jumped to more than $500 million last year and is up to $693 million for the current fiscal year, according to APFC calculations. The corporation typically seeks support from the governor first when proposing legislative changes, but APFC leaders can go to individual legislators to find a bill sponsor if need be. Walker’s spokesman Jonathon Taylor said it is too early to speculate on what legislation the governor will support for the upcoming regular session in January. Walker’s former DNR Commissioner Marty Rutherford, who he appointed to the board after she resigned in July 2016, said inflation proofing should be dealt with irrespective of the pending POMV legislation, which is largely expected to be fully passed next year. “I feel very uncomfortable with not pushing the Legislature to deal with inflation proofing because it is in fact a future generations’ protection,” Rutherford said, echoing Rodell’s sentiment. Other requests Getting an exemption from state procurement codes for investment management-related contracts would allow the corporation to more efficiently contract with outside investment managers and consultants on often time-sensitive investments involving proprietary information, according to Fund leaders. The exemption would also require legislative action. In an interesting move, the trustees also approved two proposed fiscal year 2019 budget amounts for the APFC, a $174.2 million “status quo” budget, which would be up from a $151 million budget for the current fiscal year. The second budget — including 10 new positions — would actually be $5 million less than the status quo at $169.2 million. The APFC budget is funded out of the Earnings Reserve. Operations Director Laura Achee said the 10 new jobs, if approved by the Legislature and Walker, would add to the corporation’s internal investment programs and reduce the need for expensive outside managers, thus reducing the overall budget. The budget proposal with the 10 new personnel has $136 million for outside investment manager fees; the status quo budget has a $145 million line item for those costs. The corporation in charge of $61 billion currently has 42 employees. “The Fund has grown $9 billion in the last 15 months and growth in the size of the Fund also triggers growth in the request that we need to have the tools that we need to have in order to be able to manage the Fund in the way that the people of the state of Alaska expect,” Achee said. The new positions would include four investment officers, three finance positions, two IT staff and one office administrator, she said. Additional IT support is needed as the Fund is invested more and more in global markets, which requires tech help be available 24/7 for traveling investment officers, Achee explained. She also said the industry standard for middle and back office support staffing has grown to about 2.5 support personnel for each investment position and the corporation doesn’t come close to that now. “For every front office (investment) position we have 0.8 middle or back office staff, so we’re very much understaffed in that area, in that scenario, where we need to catch up if we’re going to continue to support the work that our front office is doing,” Achee said. Elwood Brehmer can be reached at [email protected]

First look at Nanushuk released

The details of how Armstrong Energy plans to develop its billion-plus-barrel North Slope Nanushuk oil prospect are now public after the U.S. Army Corps of Engineers released the draft environmental impact statement for the project. Tucked between ConocoPhillips’ large Alpine and Kuparuk River fields, the Nanushuk project in the Pikka Unit is expected to produce upwards of 120,000 barrels per day of conventional light oil at its peak rate. An exploratory well and sidetrack Armstrong drilled last winter about 20 miles south of the project area indicated the reservoir could hold more than 2 billion barrels of oil, company CEO Bill Armstrong said in a prior interview with the Journal. At this point, though, the Nanushuk project is based on 1.2 billion barrels of proven recoverable reserves. It is named after the Nanushuk geologic formation that is Armstrong’s primary target. Armstrong Energy operates the Pikka Unit for its partners Spanish major Repsol and Denver-based independent GMT Exploration Co. Armstrong increased its stake in the project to become majority owner and took over as operator of the project from Repsol in late 2015. Long an overlooked North Slope play, 3D underground seismic mapping technology has helped geologists locate subtle but large oil-bearing traps in the Nanushuk formation in recent years. Armstrong has emphasized his belief that more Nanushuk oil reservoirs can be found in other areas of the Slope and this past January ConocoPhillips announced its Willow discovery, a 300 million-barrel recoverable Nanushuk find west of the Alpine field in the National Petroleum Reserve-Alaska. For its project, Armstrong Energy is proposing three gravel drill sites just south and east of the Colville River delta to hold a total of 146 production and injection wells. A central processing facility to improve the oil to sales quality would also be located on the northernmost drill site pad. According to the draft EIS, nearby oil processing facilities at Kuparuk and Alpine do not have the capacity to handle the 120,000 barrels per day of peak production from the Nanushuk project. The Bureau of Ocean Energy Management also recently released a draft EIS for Hilcorp Energy’s proposed Liberty project, which would produce about 60,000 barrels of oil per day from a manmade island in shallow federal waters just offshore from Prudhoe Bay. Initial production from Nanushuk is targeted for sometime in 2021; however that would overlap with the tail end of what is expected to be a four- to five-year construction period. A final EIS is expected next year, according to the Corps. The workforce on the project is expected to start at just 20 to 50 construction-related workers during the first year of development and peak at about 1,450 construction and drilling personnel by year four. A drilling workforce of about 450 people is expected to remain on the project for up to 15 years after construction, in addition to about 200 permanent operations personnel needed for the length of the expected 30-year production life of the project. Drill Site 3, on the southwest edge of the project area, would be the closest infrastructure to the Village of Nuiqsut, which sits about 6.5 miles to the southwest and across the Colville River from the proposed development. In total, Armstrong’s plan would require 331 acres of new gravel pads, 26 miles of new gravel roads and use an estimated 2.74 million cubic yards of gravel fill from nearby mines. It would impact an estimated 330 acres of wetlands. Three alternative project options developed by the Corps of Engineers would make modest reductions to the cumulative gravel footprint down to 301 acres and 21 miles of road. A southern access plan would utilize a road built by the state-owned Alaska Industrial Development and Export Authority and Anchorage-based Brooks Range Petroleum for the small Mustang oil project that Brooks Range is advancing adjacent to the Nanushuk project. But that would move the processing facility and operations camp closer to Nuiqsut on new gravel pads about 10 miles from the village. A northern access option would utilize a road expected to be built for Caelus Energy’s delayed Nuna development to the northeast of Nanushuk. It would also require additional pads for the processing facility and operations camp but would move them farther from Nuiqsut. The third alternative would re-route as much of the road and pipeline infrastructure out of the Colville River’s 50-year floodplain as possible. It would also try to alleviate concerns of area residents and regulators about potential impacts to migrating caribou by routing the roads to be less parallel to the general south-to-north Colville River. Segments of north-south roads and pipelines could act as impediments to caribou traveling along the coast, particularly during the summer when the animals move closer to the Beaufort Sea coast for relief from insects, according to the draft EIS. The Army Corps of Engineers is accepting public comments on the draft Nanushuk plan through Nov. 14 on the project’s website, www.nanushukeis.com. Elwood Brehmer can be reached at [email protected]

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