Tim Bradner

Furie settles Jones Act violation for $10M fine

The U.S. Justice Department announced a settlement and agreement April 4 for a $10 million fine against Houston-based Furie Operating Alaska LLC over the company’s move of a jack-up rig from the U.S. Gulf of Mexico to Cook Inlet in 2011 in violation of the U.S. Jones Act. The Jones Act requires cargoes shipped between U.S. ports to be done with American-flagged vessels. Escopeta Oil and Gas, Furie’s predecessor company, used a Chinese-operated heavy-lift ship to move the Spartan 151 rig from the gulf to Vancouver, British Columbia, and eventually to Alaska. Although U.S.-flagged tugs towed the rig from British Columbia to Alaska, the U.S. Department of Homeland Security, which enforces the Jones Act, ruled the law still applied even though the journey was broken with the stop in Canada. “Resolution of this case demonstrates that the Jones Act will be actively enforced and that an intentional violation will not be rewarded,” acting Alaska U.S. Attorney Bryan Schroder said in a statement. “The settlement also provides closure to Furie and is designed not to undermine its ability to bring natural gas to market in Southcentral Alaska.” The company was aware at the time that the move was in violation and proceeded anyway, the Department of Homeland Security said when it originally assessed a $15 million fine on the company. Furie, the new name of Escopeta after the company changed ownership, filed a lawsuit contesting the amount of the fine. It argued that there were no U.S. flagged vessels capable of rounding South America because the rig was too big to pass through the Panama Canal. The company used the Spartan 151 to drill offshore exploration wells in Cook Inlet and to assist in construction of gas production facilities based on discoveries Furie made. Furie is no longer using the rig, having switched to a larger, foreign-built jack-up, the Randall Yost, for ongoing offshore construction and drilling. The Spartan 151 is now in storage in Seward. A settlement closes an interesting chapter in Cook Inlet’s recent history. Danny Davis, former president of Escopeta, originally secured a Jones Act waiver in 2006 from President George W. Bush’s administration to move a U.S.-owned jack-up from the Gulf of Mexico to Alaska. Davis’s plan was delayed due to financing problems and when the effort was renewed in 2010 the federal administration had changed and the Department of Homeland Security changed its position and would not renew the waiver. Davis decided to begin the lengthy move with the heavy-lift vessel, which involved a route through stormy waters around the tip of South America, meanwhile hoping he could still negotiate the deal with Homeland Security. Davis hoped that breaking the journey would help his case although the transfer to U.S. tugs in British Columbia waters was done for operational reasons. The Spartan 151 finally arrived in Alaska, drilled and made gas discoveries that were able to alleviate concerns by Alaska utilities of an impending gas shortage in Southcentral Alaska due mainly to lack of new exploration. In 2015, Furie installed the first new production platform in Cook Inlet since the 1980s and has signed several gas supply deals with local utilities since. Furie signed a deal in March with Chugach Electric Association that will run until 2033 to supply at least 20 percent of the utility’s needs, with an option to double its purchases of gas. The company also plans to explore for oil this summer. The political furor over the Jones Act fine, however, resulted in Davis being replaced as president and Escopeta being taken over and renamed by its financiers, which are based in Germany. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Bills moving, but Legislature will miss Easter adjournment

JUNEAU — The Legislature will be at day 75 on March 31, 15 days away from its scheduled adjournment April 16, which is Easter Sunday. Few in the capitol believe lawmakers will really gavel out the 2017 session on Easter — too much work remains — but no one wants a repeat of the 2016 extended legislative session that drug into July, either. Almost all of the major bills for 2017 were being worked on by legislators last week, including a proposed increase in the state fuel tax, changes in workers’ compensation and an overhaul of a criminal justice reform bill passed last year. A bill expanding prohibitions on smoking in buildings including places of work, in Senate Bill 63, passed the Senate March 27 and is now in the House. On the budget — one of the big issues of the session — the Senate Finance Committee took up the state operating budget after formally receiving the House version in House Bill 26. That bill was delayed in the House almost two weeks because of an extended period of floor action, five days in fact, with 134 budget amendments being advanced by House minority Republicans. There were additional delays as House majority leaders tried to work with Republican minority on agreeing to an effective date clause for the budget, which the minority had failed to agree on when HB 57 finally cleared the House. So as it is now written, the House version of the budget would become effective 90 days after final passage. In other words, to have the budget effective July 1, the start of the 2018 fiscal year, its final passage by the Legislature must come by April 1, which will not happen. The effective date of the budget can be changed in the final conference bill for the spending plan, but it is one more procedural wrinkle that could add complications at the end of the session. If it is not done the state has no authority to spend money after June 30. On other issues, the House Finance Committee spent the week mostly working on its version of Permanent Fund restructuring along with a personal income tax, both in House Bill 115. Public hearings were held later in the week. Legislative committees traditionally write revised versions of bills soon after public hearings, so HB 115 may be moving out of the committee soon. Meanwhile, the Senate’s version of Permanent Fund restructuring, in Senate Bill 26, is now in the House Finance Committee after having passed the Senate. It also contains a statutory spending cap of $4.1 billion that increases only by inflation. The fuel tax increase, in SB 25, seemed likely to move from Senate Finance Committee by the end of the week. Sen. Anna MacKinnon, R-Eagle River, had asked for final amendments to the bill by March 29, a signal that the bill would soon move. The fuel tax increase is generally favored by legislators because it is a kind of user fee, providing revenues that would be designated for highway and airport maintenance, for example. The criminal justice reform bills, SB 54 and SB 55, are in the Senate Finance Committee, which held hearings last week. The bills mainly solve problems that were spotted after a comprehensive bill passed last year, in SB 91. Merchants objected to a lessening of penalties in SB 91 for minor theft like shoplifting. That is being addressed SB 54 and SB 55 this year. Another major bill of the session, House Bill 111, which raises taxes on oil producers, is being worked on behind closed doors in the House Finance Committee. A revised version will surface soon but there is no date yet, according to Finance Committee Vice ChairRep. Les Gara, D-Anchorage, who spoke in a March 28 briefing by House leaders. The oil tax bill will likely be brought up for action after HB 115, the Permanent Fund and income tax bill, is voted out of the Finance committee. HB 111 is being promoted as a “fix” for problems with oil incentive tax credits not done last year in HB 247, which made some changes to credits and ended most in Cook Inlet. This year’s bill does address tax credits but it also raises the minimum production tax paid by oil producers by 25 percent, from 4 percent to 5 percent, and makes other changes that indirectly raises taxes by reducing the per barrel production credits. Senators will take a dim view of any oil tax increase, but Senate Majority Leader Sen. Peter Micciche, R-Soldotna, said the body is open to tinkering with tax credits, mainly because of concerns for obligations of state cash payments for the credits. “We believe we have some exposure on the tax credits but anything we do will be to sharpen the program. We think that will be best for the state,” Micciche said in a March 20 briefing by Senate leaders. On the budget front, in the March 27 briefing Micciche said the Senate operating budget will likely wind up with about $200 million in reductions to state agencies, which is short of the senate Majority’s goal of a $300 million cut this year. However, he said there will be efforts to gain another $100 million in savings through various systematic changes that will be pursued through the summer. “We’re finding it’s not as easy to find cuts as it was three years ago,” Micciche said March 27. Many state agencies are now “right-sized,” and any major savings now have to come from structural changes involving major policy decisions, he said. One area the Senate will pursue is health care costs, which are still rising and are a burden through all state agencies and public institutions, such as school districts, he said. “We considered a tax on health care providers,” which many states have, Micciche said, “but the providers asked us to hold off for a year and to work with us over the interim. We will be assembling a panel of experts to tackle the issue,” over the summer, a process similar to that done with SB 74 last year, a bill that did a major overhaul of the state Medicaid program. Legislators are waiting for a major study of state health care services that is due in June, and which is expected to make recommendations on changes that can save money including the pooling of state health benefit programs with those of school districts. “I do believe there are significant savings that can be achieved by initiatives like these, and without affecting the classroom or other vital services,” Micciche said. The House budget now before the Senate, in HB 57, did make a $62 million reduction in state agency spending, House Majority Leader Chris Tuck in a March 28 briefing. The overall total for the House budget, however, appears to be similar to amounts being spent in the current year. Tuck said state spending has been substantially reduced in recent years and that it is now down to what was expended in 2007. “However, if you adjust for inflation and population growth, we’re really back to 1977,” in the amount being spent per capita, he said. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Military brass stress looming Real ID deadline in briefing

JUNEAU — Alaska’s top military brass were in Juneau March 23 for their annual briefing to the Legislature’s Joint Armed Services Committee. Air Force Lt. Gen. Kenneth Wilsbach and Army Major Gen. Bryan Owens had some key messages to convey. One is that Alaska’s $3 billion-plus military industry will be stable for the foreseeable future; a second is that the big construction programs at Interior Alaska defense installations are on track; third is that there are no Army reductions planned, for now, at Joint Base Elmendorf-Richardson. Another message the generals hammered home, however, is that Alaska had better get its act together on the federal Real ID program or civilian workers will face big hassles getting on bases beginning in June and all residents will face the same boarding aircraft for domestic flights in December. Without state identification that complies with the federal Real ID Act or a U.S. passport, Alaskans seeking entry to bases will have to be met and escorted, Gen. Wilsbach told legislators. “Not only will they have to be escorted into the base but the escort will be required to remain with them for the entire time they are on base,” Wilsbach said. It could be a big problem, particularly for construction workers now building facilities for F-35 interceptors at Eielson Air Force Base. Wilsbach said he has no flexibility in enforcing the federal ID law, and that he hopes the construction schedule at Eielson, and also projects underway at Fort Wainwright and Clear Air Force Station, aren’t jeopardized. Legislation proposed by Gov. Bill Walker that would allow Real ID-compliant identification to be issued in Alaska has been languishing in House and Senate committees all spring, but on the same day Wilsbach spoke (Walker also sent out a press release) the Senate State Affairs Committee moved Senate Bill 34. However, House version HB 74 is still in the State Affairs Committee. What has stalled the bills to day, and earlier efforts to comply with the federal law, is a concern for privacy, since Real ID requires a background check as a security measure. In fact, Alaska passed a law in 2008 barring the state from spending any money to comply with the federal Real ID law. The generals’ immediate concern is getting civilian workers who don’t have the IDs or valid passports to their jobs on base but Walker said Alaskans’ biggest hassle will be the inability to board aircraft. “Alaskans who want to visit family, attend a funeral or take a vacation will need a passport or federally-approved form of identification to fly, even within Alaska and the rest of the U.S., unless our state complies with the federal Real ID requirements,” Walker said in his March 23 statement. “For many, passports can be difficult and expensive to get,” but the pending legislation would allow the state to enact minimum security requirements and issue Real ID-compliant drivers’ licenses at local Division of Motor Vehicles offices, Walker said. On other issues, the two generals, also joined by Alaska’s U.S. Coast Guard commander Rear Admiral Michael McAllister and the state Adjutant General, Major Gen. Laurel Hummel, detailed upcoming exercises and projects planned for 2017. Wilsbach stressed the importance of Alaska’s ample spaces available for training, particularly in the air. The Air Force hosted 16 nations to four Red Flag air combat training sessions in 2016, which are held at Eielson Air Force Base but with some aircraft and support from JBER. More Red Flag events are planned in 2017. Another exercise in 2016 was Arctic Chinook, a major search and rescue drill, with multinational partners, simulating response to a cruise ship incident in remote Arctic waters. Wilsbach said the voyage of the cruise ship Crystal Serenity through Arctic waters last summer has raised concerns over how well prepared military and civilian agencies in Alaska are to a problem at sea requiring mass evacuation of passengers. Another Arctic voyage for the Crystal Serenity is reported to be planned for 2017. Gen. Owens, of the Army, mentioned several Army exercises including a Feb. 22 airdrop of 128 soldiers near Deadhorse, on the North Slope, in wind chill temperatures of minus-60 degrees Fahrenheit. “This was an exercise to test our ability to insert forces in full-on winter conditions. After landing, paratroopers moved out on skis and snowshoes across frozen tundra. Soldiers also tested the capacity to provide mission command and communications at high latitude locations,” Owens told the joint legislative committee. Air Force Gen. Wilsbach said the Eielson AFB preparation for arrival of F-35 interceptors is going full-bore with $298 million in projects to be underway in the current federal fiscal year 2017 involving building or renovation of 35 buildings. The total investment through fiscal year 2019 will be $512 million, Wilsbach said. Many of the projects for Eielson are still out to bid but the first major contract, awarded in December, is to Watterson Construction for a $19.8 million F-35 flight simulator facility at the base, according to the U.S. Army Corps of Engineers. A second, $11.3 million contract for earth-covered magazines for munitions, will be awarded March 31, the corps said. The first of the F-35s will arrive in spring 2020 and the last in 2022, Wilsbach told the legislators. “3,500 people are being added to Eielson’s population, and that will effectively double the base population,” he said. For JBER, in Anchorage, Army Gen. Owens said he is unaware of any planned force changes for the Army, and particularly the 4-25 infantry airborne combat brigade that was threatened with a major drawdown two years ago. “We’re hearing of no changes, up or down, for at least two years. But that’s not to say it couldn’t happen in some future budget cycle,” Owens said. Alaska was home to 27,764 Department of Defense personnel in fiscal year 2015, the most recent year for which data is available, according to the department’s Office of Economic Adjustment annual “Defense Spending by State” report. In that year, total defense-related spending was $3.3 billion including $1.7 billion in payroll. The bulk of the military personnel were in the Anchorage area, with 16,463, and another 9,571 were in the Fairbanks North Star Borough. The remainder were spread in other communities, particularly those with a Coast Guard presence. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Budget bills on the move; oil tax hike heard in House Finance

JUNEAU — The major budget bills are moving in the Legislature and the state House may have the most controversial bill of the legislative session, a bill raising oil taxes, ready for floor action the week of March 27. Last week the Senate passed its Permanent Fund restructuring bill, Senate Bill 26, which makes a major dent in the projected $2.8 billion deficit in fiscal year 2018, the budget year that begins July 1. SB 26 also contains a statutory cap on spending. The bill is now in the House Finance Committee, which is also working on its own version of state fiscal restructuring in HB 115. HB 115 contains Permanent Fund restructuring as well as a personal income tax. With lawmakers more than two-thirds of the way through their scheduled 90-day session, the pace of activity is picking up. Few expect the session to really end on the 90th day, or April 16, however. Addressing the state fiscal gap is still the top priority for almost all legislators but there are sharp divisions on how to do it. Legislators generally agree on the restructuring of the Permanent Fund to allow some of its earnings to be used to support the state budget and many, but not all, agree to reductions of the annual Permanent Fund dividend that are incorporated in the most advanced Permanent Fund plans. The Senate will sharply disagree with the House proposal for a personal income tax now in HB 115 and the House does not like the Senate’s spending cap formula that is in SB 26. The oil tax bill, HB 111, will be a particular point of contention, although Senate leaders said March 20 that they are open to some changes in oil tax credits but not the increase in the tax rates now in the House bill. Spending will be another major point of contention. The operating budget passed by the House, which finally arrived in the Senate after six agonizing days on the House floor, generally keeps spending at status quo. The Senate is now finishing its version of the budget and while final approval is still pending, the Senate Finance Committee is sticking to its plan for a $300 million cut in expenditures of state undesignated general funds for fiscal year 2018. Details of how those cuts could affect four major state agencies were released March 20, although the numbers could still change. The state Department of Health and Social Service would see its unrestricted general fund appropriations drop from $2.74 billion in the current year budget to $2.69 bullion proposed for next year, a cut of $54.6 million, or 5 percent. The proposed budget assumes the department will achieve $17.5 million in savings projected for the state Medicaid program due to reform measures enacted last year. Health and social services officials told the Senate budget subcommittee they were on track to achieve the savings, according to documents presented by the subcommittee. Sen. Peter Micciche, R-Soldotna, chaired the Senate budget committee for the Health and Social Services Department. Another large agency the Senate is focusing on is the Department of Transportation and Public Facilities, which would have its state unrestricted general fund appropriation cut $8.2 million, or 5.6 percent, to a $137.4 million allocation of state dollars next year. The DOT budget also includes federal funds used mainly for highway and airport construction, which must be matched with state funds, but those programs are largely unaffected in the pending Senate budget. There are reductions in state-funded services like highway and rural airport maintenance, and state ferry operations, however. Sen. Click Bishop, R-Fairbanks, chaired the transportation budget subcommittee. The Senate would cut University of Alaska funding by $16.2 million, or 5 percent, below the university’s current budget, for an appropriation of $308.7 million in state unrestricted general funds. Under the university’s budget procedures the Board of Regents would allocate the reductions. Sen. Natasha von Imhof, R-Anchorage., chaired the Senate’s university budget subcommittee. The Senate Finance Committee has not yet finalized its decisions for the state Department of Education and Early Development budget, in which the largest component, about $1.2 billion per year, is the School Foundation Program, which allocated state funds to school districts around the state. For the department only, not including the foundation program, the pending budget includes a $3.78 million reduction from the current year, or an 8.6 percent cut, to an fiscal year 2018 budget of $379.4 million in state undesignated general funds. Sen. Mike Dunleavy, R-Wasilla, was the budget subcommittee chair. School funding will be decided by the time the Senate Finance Committee completes its work on the budget, possibly by March 24, according to Sen. Lyman Hoffman, D-Bethel, Senate Finance co-chair for the operating budget. Reports are that the committee may seek a $50-per-year reduction in the Base Student Allocation, a formula used to allocate state dollars to school districts. That would require schools around the state to make up the deficit from other funds, including from municipalities, or to cut programs. Other state agencies, such as the Departments of Natural Resources; Environmental Conservation; Fish and Game; Commerce and Economic Development and Labor and Workforce Development experienced only minor reductions or were given funding equal to the current year. The budget subcommittee for Commerce and Economic Development, chaired by Hoffman, made very minor reductions in the department’s budget but did transfer tourism funding from the operating to the capital budgets, staff in Hoffman’s office said. Gov. Bill Walker had made substantial reductions in the Commerce and Economic Development budget, compared with the current year, when he submitted his own fiscal year 2018 budget proposal. HB 111 inches forward The House Finance Committee dove head first into the Democrat-led majority’s oil tax and credit bill with several lengthy hearings March 20 to 22 reviewing the history of the state’s oil tax and getting detailed analysis from Tax Director Ken Alper in multiple hearings per day. In short, House Bill 111 aims to, with one exception, directly eliminate cashable tax credits for companies working on the North Slope and increase the minimum production tax from 4 percent to 5 percent at low prices. HB 111 also adds complexity to the existing 35 percent net operating loss carry forward tax deduction by halving it initially while adding back interest annually, but the end value of the deduction is nearly the same over seven years as under current law, according to Tarr. The Department of Revenue projects HB 111 would garner between $60 million and $75 million per year in additional near-term tax revenue while also saving the state more than $100 million per year in tax credit payments and deductions. The bill moved out of the House Resources Committee March 14 on a party-line vote of 5-4. The tax increases were scaled back in the current version of the bill by the Resource Co-chairs Reps. Andy Josephson and Geran Tarr, Anchorage Democrats, compared to their original proposal. Industry proponents have slowly accepted the notion that the state generally can’t afford to support oil exploration with tax credits in the form of cash payments while lawmakers try to settle another nearly $3 billion budget deficit. However, conservative Republicans in the Legislature, who dominate the Senate, have no interest in raising the base tax while cutting the credit program. Oil company representatives have insisted Alaska needs to have strong traditional deductible tax credits to remain an attractive place for investment if the cash credits are cut. The bill would also add one new, after-the-fact 15 percent refundable tax credit available to companies that follow a pre-approved exploration program but come up empty, as sometimes happens. The “dry hole” credit is intended to act as a partial safety net for small companies that take the risk to explore on the Slope, which brings with it large potential and uniquely large costs compared to other oil basins. How often the dry hole credit would be used is unknown. The slow pace of HB 111 — it’s still in the House more than two-thirds of the way through the 90-day legislative session — could actually prompt Senate Republicans to put forth their own oil tax credit bill, Majority Leader Sen. Peter Micciche said March 20. “As Alaskans, we just like to say ‘oil taxes,’” Micciche quipped to reporters. More substantively, he said his caucus admits the state is facing some untenable tax credit exposures. The bill Senate Republicans apparently have ready to introduce if the House doesn’t send HB 111 over soon would “sharpen the (credit) program,” Micciche described. Recent large North Slope oil discoveries have generated excitement in the state, but the cost to develop the finds could also lead to large and prolonged tax credit bills, which Gov. Bill Walker has already made clear he does not think the state can afford.

Furie gears up for busy 2017, plans deep test for oil in Inlet

Furie Operating Alaska is gearing up for a busy season in Cook Inlet with plans to complete a gas production well drilled last year and drill two more wells including a deep test to assess potential oil resources in Jurassic-age rocks, according to Vice President Bruce Webb. Furie is based in Houston but Alaska is its operating area. The company now produces about 13 million cubic feet to 14 million cubic feet from two wells on the company’s Julius R gas production platform in north Cook Inlet, KLU-3 and A-2, a production well drilled last year. The company is now supplying gas to Homer Electric Association and Matanuska Electric Association, with other sales to ConocoPhillips and Aurora Gas. A contract to supply Enstar Natural Gas Co. begins in April 2018. Webb said Furie’s first order of business this spring is to move a small workover rig to its platform to do some work on the KLU-3 well. As soon as the Inlet is clear of ice, the Randoph Yost jack-up rig will move out from winter storage at the OSK dock in Kenai to complete Furie’s A-1 well that was started last year but not finished. Drilling and completion work on the A-2 well was finished, however. Once the A-1 is done the jack-up rig will move to a new location to drill another gas production well, A-4, and then again to yet another location to tackle a deep test with the KLU-6 well, Webb said. It is an ambitious schedule but doable, Webb said. “There should be plenty of time to do this work if we can be out there (with the jack-up rig) by the end of May. That will give us five months to drill, until October,” he said. On the deep KLU-6 test, “We want to have enough time after drilling to adequately log the well, run casing, and possibly flow test,” Webb said. The Jurassic test will be 20,000 foot-plus test, which will be expensive. “However, we see a large oil potential there. We know there is gas, based on our earlier drilling of the KLU-2 well,” Webb said. There have been wells drilled into the Jurassic-age formations in the Inlet before. Unocal Corp. drilled two deep wells in Granite Point many years ago and found oil, but technical problems with the wells impeded their use as commercial producers. The Jurassic is considered an essentially untested oil target in the Inlet, and geologists believe much of the oil found in the known, shallower conventional traps originated there. Dan Seamount, a member of the Alaska Oil and Gas Conservation Commission, said Cook Inlet has produced 1.3 billion barrels since production began in the region in 1958, and U.S. Geological Survey studies show there could still be 34 billion barrels of oil-in-place in the Inlet’s deep source rocks, mainly the Jurassic. “There are billions of barrels of oil that are unaccounted, and many of us believe it’s still down there,” said Seamount, who said he spoke from his experience as a geologist and for the commission, which is a regulatory body. “We’ve barely skimmed the surface,” of the Inlet’s potential, he said. “We’ve only tapped some of the oil that was trapped in the shallow conventional traps.” Seamount blames industry for being “too risk averse” in the Inlet because of the costs and uncertainties of drilling deeper, as well as the state for not pushing companies to be more aggressive. If Furie makes a new discovery at KLU-6, Webb said a new platform will be needed because the area is too far to serve from Furie’s current platform. A new pipeline to shore will be needed too, added to the 10-inch pipeline Furie has now installed. Furie now employs about 16 people in its Alaska operations and four people in Lousiana, who work on engineering, procurement and logistics support. Furie’s success in developing its Kitchen Lights Unit is a vindication of a vision by Danny Davis, the company’s founder, who believed there were undiscovered resources in Cook Inlet at the time when many in the industry felt the Inlet’s potential was exhausted. Davis led an effort to get a jack-up rig to Alaska that ultimately resulted in the Spartan 151 jack-up rig being brought north from the Gulf of Mexico. Furie used the Spartan rig in its initial drilling and then brought in the larger Randolph Yost jack-up rig from Asia last year, which was suited better for the work Furie had planned. Another jack-up rig, the Endeavour, was brought to Alaska by Buccaneer Energy for exploration but left when that company, an independent based in Australia, filed bankruptcy. It is now working in Africa. The Spartan 151 is still in Alaska waters, meanwhile. It is stored in Seward in anticipation of work for independents Houston-based BlueCrest Energy or Glacier Oil and Gas, formerly Cook Inlet Energy. Furie’s founder Davis, meanwhile, no longer heads the company but still holds a working interest in Kitchen Lights and actively monitors operations. “He’s not shy about telling us what he thinks needs to be done,” Webb said. In other production news, AIX Energy LLC continues to produce from two wells in its small onshore Kenai Loop field and is studying the possibility of putting a third well into production, according to latest plan of development filed by AIX with the state Division of Oil and Gas. Four wells have been drilled in Kenai Loop with two in production, KL-1 and KL-3. KL-3 is completed as a producing well but is currently not producing or tied in to the production system. KL-2 is drilled but currently suspended, and may be used as a future utility or disposal well. AIX is also studying the adding of compression at Kenai Loop to meet contractual sales requirements and to maximize recovery, the company said in its development report filed with the state. Kenai Loop was originally discovered and developed by Buccaneer Energy with the first gas production well completed in May, 2011. Additional drilling and seismic work was done over the next three years, with AIX acquiring the property and becoming field operator in late 2014, after Buccaneer filed bankruptcy. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Bill addressing contaminated property moves fast in Senate

JUNEAU — A bill easing transfers of contaminated properties is moving fast in the state Senate. Senate Bill 64, related to environmental covenants, was introduced Feb. 17, moved out of the Senate Community and Regional Affairs committee March 7 and out of Senate Labor and Commerce March 16. The bill is now in the Senate Rules Committee awaiting placement on the calendar for floor action in the Senate. That’s lightning speed for the Legislature. SB 64 is sponsored by Sen. Peter Micciche, R-Soldotna. Micciche is Senate Majority Leader and is in a position to get his bills moved along. Contamination, usually from fuel spills, is a major headache for property owners trying to sell land or buyers seeking financing to pay for it. Other states are dealing with the problem, but Alaska has not, Micciche said. “Alaska is one of seven states that do not have an environmental covenant law. Such a process is often all that is necessary to make property transferable as well as economically and functionally viable,” the senator said in a statement. “Other states have found that covenants help communities transform blighted property into marketable assets.” The bill eases the sale or transfer of property with identified contamination by establishing a mechanism, an environmental covenant, to identify the contamination and, through agreement with environmental agencies, assure buyers that risks will be managed. The environmental covenant allows for the sale of property and protects the buyer and seller while allowing the use of the property until the contamination reaches safe levels, Micciche said in the statement. A covenant is a recordable interest in real estate that would be tracked through the state Department of Environmental Conservation’s database. “It is specific to particular risks at a site and would restrict activities that could result in exposure while allowing other activities to occur,” Micciche said. There are typically certain restrictions on uses to reduce risk. The restrictions would be negotiated by the responsible party, typically the landowner, and the DEC. The process would be exactly that now used by DEC for its Institutional Controls agreements for contaminated sites. Risk assessment procedures and scientific principles will also be used, Micciche said. “The covenant would not supplant current contamination removal standards or impose new ones. They would also not affect the liability of the principal responsible parties, but would minimize exposure for third parties,” he said. Examples of use restrictions could include no residential land use; restricted residential land use; no disturbance of soil; engineered controls for soil; no drilling into or use of groundwater, and notices to construction workers. Other requirements of a covenant could include construction of buildings in ways that prevent vapor intrusion. Kristin Ryan, director of DEC’s spill prevention group, said the agency is working on a proposed standard working for the covenants. In a white paper given to legislators, DEC cited examples of how the use of covenants could have warned property buyers of contamination. One was at a residential community, Moose Creek near North Pole, east of Fairbanks, when a long-running leak from fuel pipeline serving Eielson Air Force Base was discovered in 2003. Investigations found that gasoline and diesel contamination spread off the pipeline right-of-way onto eight residential land parcels, some with water wells drawing drinking water. At least one of the houses was sold to a buyer who had no knowledge of the contamination of the soil or drinking water. Another example was with a gasoline station in Anchorage that was sold and where the buyer discovered significant additional contamination than originally believed to be the case. Had environmental covenants been in place the buyers would have been better informed, according to the DEC paper. The problem is also a real concern for Alaska Native corporations working to acquire land on or around former defense sites, and where there is often contamination. Ryan said DEC’s records indicate that there are currently 2,258 active contaminated sites in the state, with 1,148 federally owned and 1,100 under state or private ownership. The agency estimates that 835 of these are of the type where a change of ownership could occur, and where the ability to establish environmental covenants would help. So far there is no opposition to SB 64 and the only concern voiced so far has come from the Department of Defense, which is concerned about erosion of sovereignty on federal lands. A March 3 letter to Micciche from the Air Force regional environmental office, at Travis Air Force Base in California, cited federal laws that restrict covenants or notices to be posted on federal land. Ryan said she believes procedures can be put in place to protect federal government interests. SB 64 is modeled on Colorado’s environmental covenant law, and federal agencies in that state have been able to comply with it. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Legislators take on Permanent Fund, budget bills

Legislators tackled the heavy-lift items in Juneau this last week. The Senate had Senate Bill 26, its Permanent Fund restructuring bill that also includes a state spending cap, poised for final passage March 15. The bill is being closely watched because it represents a first step toward a major restructuring of state finances. The bill sets out a percent-of-market value procedure for withdrawing funds from the Permanent Fund’s earnings for the state budget and to pay the Permanent Fund dividend. The effect would be to cap the dividend at about $1,000 for a period, after which it could grow again. About $2 billion a year in new funds would be made available for the state budget which would still leave a gap of about $700 million for fiscal year 2018 that begins July 1, requiring another draw from state reserve funds. Meanwhile, the state House was grappling with the operating budget for the third day on March 15, dealing with numerous amendments offered by an aggressive minority. The House is controlled essentially by Democrats in a coalition with a handful of dissident Republicans, but the margin of control, 22 to 18, is narrow, and the Republican-led minority was successful March 13 and 14 in peeling away several votes to pass several amendments to the budget on the House floor. Overall, the House operating budget is very close to the governor’s proposed budget. The Senate Finance committee, meanwhile, was expected to introduce its version of the operating budget late March 15. This will combine the budget subcommittee recommendations into a single bill. After being reviewed a public hearing will be held and the bill will likely be held until the House passes its operating budget and sends it to the Senate, which will likely occur March 15 or a day or so following. The Senate is aiming at a cut in a substantial cut of undesignated general fund spending of about $300 million, with a goal of 5 percent reductions in the four largest state agencies, the departments of transportation, education, health and social services and the University of Alaska. Based on what was known of the Senate subcommittee reports on March 14, the 5 percent reduction goal was achieved for the university, with a $16.1 million reduction in state general funds from the governor’s proposed spending plan, and the Department of Health and Social Services, with a $33.3 million reduction in state general funds from the governor’s budget. For the education department, a reduction in the Base Student Allocation, or BSA, for school districts was being discussed to meet the 5 percent reduction target. The BSA is a formula that allocates state funds to school districts, which is one of the largest expenditures in the state budget, exceeding $1 billion overall. On a broad level, at about mid-point for the scheduled 90-day legislative session the basic structure of competing House and Senate priorities are now apparent. The House coalition Majority wants essentially no budget cuts while the Senate Majority wants $300 million in reductions. The Senate’s Permanent Fund restructuring, SB 26, has a spending cap that would retrain the budget to $4.1 billion, about the current level, which House leaders say they oppose. The House Permanent Fund restructuring, in HB 115, in still in the House Finance Committee, and also has a personal income tax. Senate leaders say no to that. There’s general agreement on the Permanent Fund proposal, and all versions of this proposal in play use variations of a percent-of-market-value annual draw and mechanisms to preserve a dividend. The state fuel tax increase, which is sitting quietly in HB 60 in the House and SB 26 in the Senate, is considered likely to pass. Both bills are in a very advanced position and are in their respective Finance committees, and no significant opposition has developed so far. The fuel tax increase would raise $45 million in fiscal year 2018 and about $85 million per year after that. Senate leaders argue that their SB 26 Permanent Fund restructure and spending cap would balance the budget in several years as revenues from the Fund grow, and if the state general fund budget is kept steady, although an inflation increase is allowed. Based on this assumption, Senate leaders say there’s no need for a major new revenue source, at least for now. House leaders disagree. Although the Senate’s spending cap in SB 26 does allow an inflation adjustment, there will inevitable difficult-to-control upward pressures on the budget, mainly in health care, House leaders say. Plus, there’s little discussion so far about a long-term plan for a state capital budget. The various spending plans being discussed assume a $180 million-per-year capital budget, which basically pays the state match for federal project money and leaves about $100 million per year for major maintenance and replacement of public facilities. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Education officials grapple with ill-prepared UA students

A recent report documenting poor preparation for college in Alaska’s high schools has sent shock waves through the state’s education establishment. While many educators have criticized the report prepared by University of Alaska Anchorage professor Herb Schroeder, others agree that the large number of incoming freshmen at the university required to take remedial classes — about 50 percent — is too high. Students pay for the remedial classes but don’t receive credit. Many get discouraged and drop out. Schroeder’s study, released in early February, found that up to 74 percent of graduates from five Alaska high schools, including one in Anchorage, have had to take remedial classes at the university, mainly in math and English, even though their high school grades showed them passing courses with flying colors. The ruckus kicked up by Schroeder’s study has been a big embarrassment for educators and has caused the university and the state Department of Education to rethink how things are being done. In an interview, University of Alaska President Jim Johnsen said he and state Education Commissioner Michael Johnson are tackling the problem in a two-pronged approach: for the Education Department through better teacher preparation working with school districts, and for the university more effort in helping freshmen students when they arrive. The model UA is considering, Johnsen said, is not to segregate students with weaker skills into remedial classes but to keep them in regular classes with extra support, an “intensive advisory” approach that is being done at some universities like Georgia State and Ohio State. Providing extra support within the university is also one of the keys to the success of the Alaska Native Science and Engineering Program, or ANSEP, at University of Alaska Anchorage, which works with students from rural schools and is headed by Schroeder. The university is asking the Legislature for extra funding in next year’s budget to support more intensive student coaching, but whether money will be made available in the current budget environment in Juneau is uncertain. However, ANSEP has also found that the most important factor is preparing students before they reach the university so they don’t need remedial work. This can be done by beefing up high school instruction and supplementing it, if needed, with summer academic camps. ANSEP does this with rural high schools it works with, the result being that no high school student going through ANSEP requires remedial work when they begin college. This costs money, though, and ANSEP’s high school outreach is largely supported by major corporate and foundation donors who are impressed by its success. Johnsen said several non-rural school districts are following a similar path by putting an emphasis on integrating senior-year high school curriculums with lower-level college courses. “None of those kids require remedial work when they reach the university,” he said. The Anchorage and Kenai school districts have similar initiatives underway. As for the dismal performance noted in Schroeder’s study, Johnsen said there could be other factors at play, such as a mismatch between what’s being taught in high schools with what the university requires of its incoming students. This is also being addressed, he said. On the teacher training front, Johnsen said one key to improving is in increasing the number of teachers trained in Alaska through the university’s school of education. This would help ensure a uniform skill-set among new teachers. Currently only 30 percent of new teachers hired each year are from Alaska, Johnsen said. Also, most new teachers hired from outside Alaska go to rural schools and many leave after one or two years. Turnover rates for many rural schools reach 40 percent per year, creating not only extra costs but disruption to the continuity of instruction. It’s no coincidence that, except for students in ANSEP’s programs, the rural high school graduates entering the university are the most likely to be required to do remedial work, and also have the highest dropout rates. Johnsen said the university believes it can increase the ratio of Alaskan teachers to 90 percent by 2025. Many can be drawn from rural communities, he said, so they would be familiar with local living conditions and the cultural environment. The University of Alaska Fairbanks is already working with the Lake and Peninsula Borough schools with locally-recruited students who take classes on-line and at the Bethel regional university campus. Despite these initiatives, the university may be hammered again on its budget this year. The Senate Finance budget subcommittee for the university has recommended a 5 percent cut to the university’s budget, which would work out to about $309 million in state general funds, down from about $325 million in the current budget. The budget subcommittee was chaired by Sen. Natasha von Imhof, R-Anchorage, and follows directions from Finance Committee Co-Chair Sen. Lyman Hoffman, D-Bethel, for a 5 percent cut to the largest state agencies including the university. These are funds appropriated by the Legislature. Student tuition also provides support and the university receives large amounts of research funding, mostly federal. Gov. Bill Walker proposed status-quo university funding of $325 million in state general funds in his budget, and the operating budget agreed by the House Finance Committee, and set to pass the House, has a similar number to the governor’s proposal. Johnsen said the university has already undergone severe belt-tightening. The current year funding is $53 million less than the $378 million in state funds the university received three years ago in fiscal year 2014, he said. The Senate subcommittee proposal would cut another $16 million next year. The university’s regents are recommending a more gradual ratchet-down for the university’s budget, on a downward slope toward a goal of $312 million in state funds in 2025, at which time the university hopes to have developed revenues from other sources, such as from university lands. If the regents’ gradual wind-down schedule were adhered to this year, then the amount of state funds appropriated for fiscal year 2018 would be $341 million, Johnsen said. The university has a tough job dealing with the reductions and sustaining not only its three main campuses in Anchorage, Fairbanks and Juneau, but also 12 smaller campuses around the state. The smaller campuses operate like community colleges, Johnsen said, with curriculums centered on vocational and career education with two-year degrees and industrial certification programs. Some of the smaller campuses also act as “feeders” from two-year degree programs to four-year programs at the main campuses, he said. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Seaton kills hundreds of Republican budget amendments

JUNEAU — House Finance Committee members will be working through the weekend in hopes of finalizing a fiscal year 2018 state operating budget, but a record 320 amendments put forth mostly by Republican minority members has slowed things down. The new minority of 18 Republicans — who were in charge of things in the last Legislature — still feel stung over that, and they are also steamed up over an unusual maneuver by Finance Co-Chair Rep. Paul Seaton, R-Homer, and other majority members on the Finance committee to fund a projected $2.7 billion fiscal year 2018 deficit with money from the Permanent Fund’s Earnings Reserve account rather than the Constitutional Budget Reserve, which would require a three-quarters majority to access compared to a simple majority to access the Fund earnings. Seaton is part of a coalition formed by Democrats and a handful of dissident Republicans, including him, to form a majority with 22 votes to control the 40-member state House. Withdrawing money from the CBR would require votes from minority members and would give them bargaining leverage. In contrast, withdrawing funds from the Earnings Reserve, which now holds about $10 billion, takes a simple majority vote in the House, or 21 votes. Last year the shoe was on the other foot with the Democrats, then in the minority, using their CBR clout to extract concessions from the Republican-led majority. Now that they’re in charge, Democrats in the majority don’t want to hand the CBR advantage over to the minority again. In any event, the delay in getting the operating budget through the Finance committee could jeopardize House leaders’ goal of delivering a budget to the Senate by mid-March, a traditional date. “I’ve worked in this (capitol) building since the 1990s as staff and as a legislator for the past 10 years, but I’ve never seen so many amendments offered at the Finance committee,” House Speaker Bryce Edgmon said in a March 7 briefing with reporters. Edgmon didn’t accuse the Republican minority of being obstructionist and slow-rolling the majority but he said the sheer number of amendments being offered consumes time and money, “not just our time in debating each one but that of legislative attorneys in drafting them.” Many of the amendments are being offered by Rep. Tammie Wilson, R-North Pole, a member of the Finance committee. Edgmon said the extra time being taken in the Finance committee could require the House to begin Saturday and Sunday floor sessions sooner than expected in an effort to keep the House on schedule for an adjournment in 90 days, although achieving that prospect looks increasingly unlikely. In one new budget development, the Finance committee backed off from a controversial proposal to cut state funds to support municipal debt service on school bonds. Seaton made the amendment in committee the previous week to reduce state general fund support for school debt by 50 percent, or about $48 million. After taking heat from constituents in public hearings last weekend, however, the committee backed off with a vote to restore the money March 7. Rep. Les Gara, D-Anchorage, made the motion to rescind the cut. Because the bond payments must be made, municipalities would have had to make up the difference, and Gara said the state’s largest cities, Anchorage and Fairbanks, have caps on local taxes. Those cities would have had to cut essential services, like police, to come up with the money, Gara said in a discussion at the Finance Committee. Restoring those funds, however, could throw a wrench in the House majority’s hopes of having a budget lower than that introduced by Gov. Bill Walker. There are no budget totals available yet for the operating budget bill now before the committee but Seaton said in the March 7 briefing that the proposed plan was about $50 million below the governor’s proposal and about $100 million below last year’s operating budget of about $4.2 billion. If the $48 million in school debt payments are restored it would put the House Finance operating budget, as it stands now, about on par with Walker’s budget in total dollars, although the amounts appropriated for agencies and programs would differ. The numbers are undesignated general funds, or UGF, which are typically used in comparing changes in spending. Other funds in the budget, such as federal funds or restricted state funds, are not included. Meanwhile, the Senate’s budget subcommittees are working to finish up their own spending plans for agencies and programs. Sen. Lyman Hoffman, D-Bethel, co-chair of the Senate Finance Committee, is supervising work on the Senate’s operating budget, and has set a target for 5 percent cuts to UGF money for four of the largest state agencies, the state Transportation, Health and Social Services and Education departments, and the University of Alaska. The Senate is working on a plan for $750 million to be cut from the budget over three years with about $300 million trimmed this year. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Legislature working out kinks in workers’ comp reform bill

JUNEAU — Legislators and state labor officials are working are working out the kinks in a bill that would clarify when workers can be classified as independent contractors who are exempt from state laws requiring workers’ compensation insurance. The legislation, House Bill 79 Senate Bill 40, both sponsored by Gov. Bill Walker, also changes penalty provisions for violations imposed on employers who “misclassify” workers as contractors and also streamlines procedures in the state Division of Workers’ Compensation in processing claims on injuries and also in handling disputes. The bill also streamlines procedures for preauthorization by employers for medical treatments of injured workers. The independent contractor definition is the heart of the bill that has also become a source of contention, although new language introduced in the House Labor and Commerce Committee on March 5 could ease the problem. Department of Labor and Workforce Development Commissioner Heidi Drygas told the House Labor and Commerce that the administration’s intent with HB 79 is to tackle an increasing problem of employers who, innocently or intentionally, misclassify workers as contractors who should be considered employees. Employers are required to purchase workers’ compensation insurance for employees, but not for contractors. The problem is really only with individual workers because a contractor or subcontractor that has employees is required to insure against workplace injuries. One other problem, Drygas said, is the practice of some employers “underinsuring” by misclassifying the type of work employees do, for example classifying an employee doing construction-type work as a clerical worker. “There are various ways fraud can be done,” Drygas said. “When more people purchase workers’ compensation insurance the risks are spread because more employers have insurance.” Other parts of the bill are aimed at speeding dispute resolution and clarifying the preauthorization process for medical treatment, which is currently “ambiguous” in current law and regulations, The bill also clarifies penalty provisions, in some cases imposing penalties where there are currently none and, in other areas, changing provisions that sometimes result in excessive penalties that are difficult to enforce, Drygas told the committee. The independent contractor definition in HB 79 and SB 40 has drawn heat, however, from some Alaskan industries where use of contractors and subcontractors is standard practice, particularly in trucking and homebuilding. Aves Thompson, executive director of the Alaska Trucking Association, said the language in the original bill is too narrow and would make it difficult for his member companies to hire independent truckers. The National Federation of Independent Business–Alaska, a small business group, voiced similar concerns. “We believe (the definition) is far too narrow and (would) prevent many Alaskan entrepreneurs functioning as the independent contractors they truly are,” said Dennis DeWitt, state director of the NFIB, in a letter to legislators. Marie Marx, director of the Division of Workers’ Compensation, said new language proposed to the House committee March 5 is broader and more flexible, and should solve issues raised by the trucking association and others. The bill is still pending in the committee. Rhonda Gerharz, chief investigator in the Workers’ Compensation Division, said having the definition in statute would add clarity and help employers understand the rules. There is currently no definition of an independent contractor in state law or even in regulations, Gerharz said. In weighing enforcement actions, the Board of Workers’ Compensation relies on a complex case-by-case procedure of weighing multiple factors that can lead to subjective decisions. Many employers misunderstand the requirements and are shocked when they are found to be out of compliance, Gerharz said. “For example, out-of-state contractors who bid on jobs here and bring employees with them often believe they are in compliance if they carry workers’ comp insurance in the state where they are from. This isn’t the case. The insurance must be purchased from an Alaska broker,” she said. Others assume that workers can be contractors if they just call them that and issue an IRS Form 1099. “This doesn’t cut it, either,” Gerharz said. It’s an issue that must be taken seriously by employers, who can be jointly held liable for workplace injuries if a worker is injured that should have been classified as an employee, and is found to be uninsured. “The liabilities for this can ruin a small business. We’re seen some real horror stories,” Gerharz said. The liability can extend to the project owner, too, in the case of construction. “Having the definition in statute is important because employers will typically read statutes to see what the rules are, where many won’t bother to dig down into regulations,” she said. “Most employers want to do it right and having the definition in law will help us be more up-front and more efficient,” Gerharz said. A section in the bill changing penalty provisions corrects a situation that currently leads to very high penalties that do not withstand appeals. The current maximum penalty of $1,000 for each uninsured worker workday had led to unintended consequences, according to the governor’s letter of introduction for the bill. One is that very high penalties usually lead to extensive appeals and costs; the second is that the penalty punishes employers who keep good records of employee work schedules but tends to benefit employers who fail to keep records of workdays. The new penalty maximum will be easier to administer. It would be three times the workers’ compensation insurance premium the employer would have paid if employees were properly classified. “We’re trying to ensure a level playing field,” Drygas said told the House committee, between employers who play by the rules and competitors who don’t. The problem has particularly concerned Alaska construction contractors and labor groups because some out-of-state contractors seeking work in Alaska try to skirt the workers’ compensation insurance requirements and underbid competitors, who are mostly Alaskan and comply with the law. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

NANA looks ahead after oil prices drove 2016 losses

NANA Regional Corp. has always one of the high-fliers among Alaska’s Native-owned companies as an early and aggressive investor in oil and gas services beginning in the 1970s, and in recent years in a variety of diversified companies intended to provide shelter from an oil shock. Diversification was a good strategy but it wasn’t enough to offset the staggering impacts of the plunge in crude oil prices and the effects those had on NANA’s customers. Oil prices have somewhat recovered and the hard-hit oil services industry is showing signs of life, but NANA’s 2016 operating losses in oil services still totaled $61.5 million, not including a writedown on subsidiary Grand Idle Shipyard Inc., according to the corporation’s 2016 annual report. Even in tough times NANA is one of the state’s major employers, with about 5,000 Alaskans working in its companies, and 14,000 employees worldwide. Leveling out It has been a tough year for Alaska, and for NANA’s business holding company, NANA Development. NANA recorded a $109 million loss in net income for 2016, although much of that, $83.5 million, was a write-down of the value of an oil and gas subsidiary, Grand Isle Shipyard Inc., or GIS. The good news is that things appear to be leveling out for NANA overall. Services to federal customers brought $39.5 million in operating income, and an additional $9.6 million in operating income from institutional commercial clients. NANA’s share of profits from the Red Dog mine brought $60.8 million in operating income, after the required 70 percent distribution of resource revenues to other Native regional corporations. The natural resources part of NANA’s business is poised for growth in 2017, particularly the Red Dog mine thanks to higher zinc prices. NANA’s share of the mine’s profits is now 30 percent and will eventually reach 50 percent. Things seem to be stabilizing in the oil sector, too. “Overall, we’re off to a good start for 2017,” said NANA President and CEO Wayne Westlake. “The Red Dog Mine is producing well and zinc prices are up — they’ve been as high as $1.31 per pound — and our federal contracting is doing well,” Westlake said. Oil and gas still presents challenges, Westlake said, particularly for GIS, its Gulf of Mexico-based petroleum support company, originally a shipyard and now a major maintenance provider for offshore platforms. “They (GIS) have diversified into fields like engineering in the Gulf of Mexico but the diversification has not yet produced profits yet,” Westlake said. “GIS is still budgeting a loss for the first quarter but the trend is positive. The company is on target for performance and is actually a little ahead of budget.” On the Gulf Coast, GIS has been able to expand its maintenance support to new customers in plastics and polymers and onshore refineries and chemical plants. A new line of business is the design of coastal remediation projects along the Gulf Coast. ‘Holding our own’ in the commercial sector As for NANA’s commercial sector, which includes mostly Alaska-based companies, “we’re holding our own,” Westlake said. NANA Management Services, which provides a variety of institutional services like camp management, food service and security, has had to squeeze margins on its oil and gas contracts. However, the company has diversified in recent years with institutional services to other customers like school districts and large health care providers, and demand for these services has been steady. NANA’s hotels, which carry the Marriott name in Anchorage, are doing well, Westlake said. The three Marriott hotels are jointly owned with Sodexo, a major international institution management firm, but NANA’s Nullagvik Hotel in Kotzebue and University Lake Hotel in Anchorage are 100 percent owned by the corporation. However, even the diversified Alaska commercial sector is feeling the effects of oil price declines as those ripple through the state’s economy. Commercial work revenues in 2016 were down 8 percent from 2015, but profits in 2016 were up, although marginally, according to the annual report. As for Alaska petroleum services, NANA has had to make sharp adjustments to help its customers, the oil producing companies, deal with low prices, and sold one of its subsidiaries, NANA Oilfield Services, at an opportune time. “With continued low oil prices, more competition on Alaska’s North Slope and the need for more investment in trucks and tanks, it was a good time to sell the company and NANA receive a fair price,” according to the 2016 annual report. Oil work picks up, a bit Work seems to be picking up, however. A module fabrication plant operated by the Alaska division of GIS that is near Big Lake, in the Matanuska-Susitna Borough, is now attracting new work, enough to keep 35 people employed. “In general, work across Alaska has slowed but we are looking at an uptick in projects coming out,” NANA spokeswoman Amy Hastings said. “There are several projects coming up and our fab shop is excited to be able to bid on them,” she said. Projects now in the shop involve gas-processing and piping upgrades for BP’s gas cycling processing plant in the Prudhoe Bay field. GIS is also doing maintenance and project work at the Red Dog mine, and that has been steady. NANA overall expects a flat year for Alaska oil and gas services in 2017, Westlake said. The corporation has a long history in providing support to the petroleum industry, with its first contracts in the mid-1980s. “We know our customers’ needs, and they know us,” he said. “The relationships will survive the current industry downswing.” Meanwhile, the drop in oil prices and the needs of its customers have forced NANA to make changes in how it does business, including several rounds of staff cuts at NANA and it’s subsidiary NANA Development. “This hasn’t been easy. We’ve had to make a lot of adjustments,” Westlake said. Consolidations, merged operations Among these is a rethinking how NANA is aligned from the parent corporation down through its business sectors, for maximum efficiency and mission clarity. For example consolidating service functions like human resources, IT support and purchasing and certain accounting services among the different subsidiaries has allowed resources to stretch further. To facilitate this, NANA’s board has made Westlake CEO of both NANA Regional and NANA Development. Previously, Helvi Sandvik was CEO of NANA Development. The overall goal is to improve internal communication and alignment of the operating businesses with the strategic goals of the parent corporation. In 2016 NANA managed more than 60 subsidiaries in its four divisions: federal, oil and gas, mining and commercial services. One result of the consolidations might be a greater focus on NANA’s investments in its own region of Northwest Alaska, particularly in development of mineral resources and even potential oil and gas in the region. NANA is already in a long-established venture with Teck, a major mining company, at the Red Dog mine, and has an exploration agreement with Trilogy Metals in exploration of large copper and zinc deposits in the Ambler Mining District east of Kotzebue. On its own, the corporation has also been exploring gold mineralization on state lands on the northern Seward Peninsula as well as working to attract and oil and gas company partner in exploring prospective areas in the Kotzebue Basin. “Within NANA we have all felt the benefits of the Red Dog mine, and we understand the importance of resource development within our region,” Westlake said. The social compact An important aspect of NANA and other Alaska Native corporations is the social compact, the obligation to improve the lives of shareholders in ways not typical for businesses, such as a focus on shareholder-hire. In 2016 there were 1,517 shareholders employed in NANA operations, with $64 million in wages earned. This includes 533 shareholders at the Red Dog mine, or 58 percent of the total workforce. NANA also contributed $2.88 million in 2016 to social and cultural projects in its Northwest Alaska region and elsewhere in the state, and paid out $752,483 in scholarships to 326 NANA shareholders. Financial pressures on NANA have caused the donation budget to be trimmed ­– $2.88 million in 2016 is down from $3.24 million in 2015 and $3.3 million in 2014 – but certain contributions, such as for shareholders’ medical, disaster and burial assistance, village economic development, which includes assistance in job-training, and educational assistance have been held steady. Gearing for the future NANA is now geared for the upswing, Westlake said. “We expect the federal and mining sectors to continue to provide a stable base of revenue and income and for the commercial sector to remain stable. In the oil and gas sector, we have put measures into place to improve efficiency, reduce costs and diversify business offerings,” he said. “The focus will be on operating efficiency, aggressively paying debt, and making changes in our business portfolio to position NANA for financial security and future success.” Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected] Editor's note: A few edits to this story have been made since publication. The Marriott hotels in Anchorage are jointly owned with Sodexho while NANA fully owns the hotels in Kotzebue and University Lake in Anchorage. The basin the company is seeking to explore is the Kotzebue Basin rather than the Selawik Basin.

Pebble revived: Owner plans to file for permits in 2017

Alaskans are used to seeing apocalyptic images about the Pebble mine. TV ads opposing the large copper-gold prospect near Iliamna cast images of toxic sludge cascading down mountain valleys into Bristol Bay, killing all the salmon. Is the hype shoe now on the other foot? It’s jarring, but sponsored-content pitches are now showing up on mainstream Internet sites touting Pebble, posted not by owner Northern Dynasty but by people touting Pebble’s stock. The headline blares: “Is this tiny gold miner about to soar? Will Trump open development of the world’s biggest gold mine … right here in America?” With a new friend in Washington — meaning President Donald Trump — Pebble’s ultimate development is a no-brainer, the story goes. “I want to share with you one of the most extraordinary opportunities I've seen in my career … You could potentially make up to 1,000% over the next year with a small company that owns the entire thing,” stock analyst Porter Stansberry writes. Stansberry is promoting his market-research newsletter, he acknowledges. “This mine, by the way, is in Alaska,” he says, “and there's estimated to be more than 107 million ounces of gold. There's so much gold here that if it is all mined, it will equal nearly 2 percent of all the gold that has ever been mined throughout all of history ... in the entire world.” Stansberry may be stretching things but he is not far off. According to a Northern Dynasty investor presentation from Jan. 9, the company intends to apply for its Clean Water Act Section 404 permit in 2017 and initiate the National Environmental Policy Act process that would have the U.S. Army Corps of Engineers as the lead federal agency. Things aren’t that simple, of course. Even if Trump rolls over the U.S. Clean Water Act and agencies that administer it, mainly the Environmental Protection Agency and the U.S. Army Corps of Engineers, Pebble must still deal with state of Alaska mining regulations, which are stringent, and an ambivalence toward the project by Gov. Bill Walker, who said he opposed the project during his run for office in 2014. All that said, it is clear that Trump’s election has given the project new life. An effort by the EPA under former President Barack Obama to shut the project down, by preempting permits for large mines in Bristol Bay, is likely to be scuttled by new EPA administrator Scott Pruitt. Northern Dynasty has already succeeded in stopping the preemptive veto effort with a federal court injunction, and that case is now in mediation. Pebble must also raise money, which it is now doing. As long as the EPA preemption was hanging over it, money was hard to raise. Since Trump’s election, however, the company stock price has tripled to near a four-year high earlier this month. Northern Dynasty’s major partner, Anglo American, pulled out of the project in late 2013 after spending more than $550 million on exploration and development. Rio Tinto also divested its 19 percent share in the project. A major mining company will have to join the project, though, as Northern Dynasty lacks the staff and funding to construct the project. Northern Dynasty will also have to deal with inevitable litigation from mining opponents. “Regardless of federal politics, the people of Bristol Bay remain steadfast in our dedication to protecting Bristol Bay and in opposition to mines like Pebble that threaten our traditional way of life,” said United Tribes of Bristol Bay Executive Director Alannah Hurley in a Jan. 24 statement. “We are anticipating welcoming home over 40 million salmon in 2017 and will continue the fight to protect our watershed as we have for countless generations.” Pebble spokesman Mike Heatwole couldn’t comment because of the pending financing but he had said previously that a lot of work is needed to prepare the permits. “We do have additional drilling, environmental and engineering before permitting can be completed. There is also work required for finalizing the permit applications,” Heatwole said in a past interview. Northern Dynasty CEO Ronald Thiessen told Bloomberg News Jan. 23 that $150 million will be needed over four years to do permitting. About $750 million has been invested to date at Pebble including $150 million in environmental studies, Thiessen said in a presentation to investors. Pebble’s measured and indicated, and inferred, resources of copper, gold, molybdenum and silver make it one of the largest undeveloped mineral prospects in the world, Thiessen said. After the EPA action is resolved, which Thiessen expects in April, it will take three to four years to obtain federal and state permits, according to the Northern Dynasty investor presentation with first production as early as 2024. Once applications are filed six months will be needed for “scoping” for the environmental impact statement, or EIS; one to one-and-a-half years for preparing the draft EIS; six months to one year for public comments on the DEIS; one year to a final EIS and record of decision, or ROD, by the lead federal agency, according to a Northern Dynasty presentation made to investors. The ROD is the final major step before the main federal permit, a corps Section 404 authorization, is issued. That timeline may be optimistic, however, given EIS schedules typical for large, complex mining projects. For example, the large Donlin Gold project on the Kuskokwim River is on a five-year schedule with its EIS, and there are not the kind of complications there that are present at Pebble. However, Pebble will also have to get its state permits and opponents to the mine will likely shift their focus from soliciting support within the EPA to the state Legislature and state administration. Walker’s appetite for taking on fierce opposition to the mine from residents in the Bristol Bay region is uncertain given his preoccupation with a large state budget deficit and his promotion of a state-led natural gas pipeline project. In December the state Department of Natural Resources put a brake on issuing new surface access permits to Pebble Partnership for lands at the mine site. The existing permits expired at the end of 2016 but the company was granted a 90-day extension while the department considers a slug of adverse public comments to new miscellaneous land use permits requested by Pebble. Heatwole said the land-use permits merely authorize access to the site for monitoring. Any new drilling, which will be needed for permit applications, will require amendments to those permits, he said. However, if Pebble is built it would stimulate the state’s economy with about 3,000 new jobs during construction and $1 billion in annual operating expenses, about equal to one of the major North Slope oilfield operators, Thiessen told investors. The mine would also boost the Bristol Bay economy, and would increase the tax base of the Lake and Peninsula Borough by 600 percent over 2013 levels according to the Northern Dynasty presentation. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]  

Unique agreement allows Ahtna group to manage harvests, habitat

A new agreement between an Alaska Native Tribal group and the U.S. Department of the Interior sets up the first framework for joint-management of subsistence game hunting on federal lands and as well as game habitat enhancement on federal and adjacent Native-owned private lands. Although somewhat similar cooperative agreements exist for subsistence taking of fish on certain rivers as well as waterfowl and walrus, this one is different because it has a Tribal group managing harvests for Tribal members along with habitat management, which is unique. The agreement between the Interior Department and the Ahtna Intertribal Resources Commission, which represents several tribes in the Ahtna region of eastern Alaska, was announced Nov. 29 by Deputy Interior Secretary Mike Connor and Christopher Gene, chair of the Ahtna commission. The Federal Subsistence Board approved the plan at its Jan. 13 meeting. Several federal agencies, such as the U.S. Forest Service and Interior department agencies like the U.S. Fish and Wildlife Service, National Park Service and Bureau of Land Management, are members of the Federal Subsistence Board. Approval by the board signals the alignment of essentially all federal land agencies on the Ahtna agreement. While the State of Alaska and state lands are not involved, at least yet, state officials support the initiative, said Jill Klein, special assistant to state Fish and Game Commissioner Sam Cotten, at the Jan. 13 board meeting. State Division of Game scientists are also working with the Ahtna Tribal groups on the habitat enhancement initiatives. The deal will authorize the Ahtna commission to issue subsistence game hunting permits on federal lands for Tribal members along with pursuing cooperative habitat enhancement on federal and private lands owned by Ahtna Inc., the regional Alaska Native corporation for the area. Non-Tribal members will still do subsistence hunts but will apply for permits under existing procedures administered by the Federal Subsistence Board. What prompted the agreement was increasing pressure on hunting in the Ahtna region and the desire by local Ahtna people to have a role in management of the hunting. “As Alaska’s population has grown, the Ahtna people have borne the brunt of increasing hunting pressure on their traditional lands because these areas are fairly accessible to much of the state’s ‘railbelt’ region, which is home to 70 percent of Alaska’s population,” said Deputy Undersecretary Connor. The traditional Ahtna region encompasses more than 1.5 million acres from Cantell, near Denali Park, to Chitina, southeast of Glennallen. Federal lands in the region include portions of Denali National Park and Preserve; Tetlin National Wildlife Refuge and scattered U.S. Bureau of Land Management lands. “This agreement is an effort to help preserve their traditional way of life, put food on the table and improve wildlife and habitat populations for everyone,” Conner said in a statement. Michael Johnson, the Alaska representative of Interior Secretary Sally Jewell, said Connor and Jewell have taken a special interest in the Ahtna agreement after having met several times with people from the region. Connor was in Alaska last summer visiting Glennallen and nearby communities to help finalize the agreement, which was signed this past November. The Alaska National Interest Lands and Conservation Act, or ANILCA, passed by Congress in 1980 gives the secretaries of the Interior and Agriculture authority to manage subsistence uses on federal lands in Alaska. The agencies have delegated this to the Federal Subsistence Board, which regulates activities. The new arrangement with the Ahtna Tribes will operate under the Federal Subsistence Board under special regulations. There is no change to the legal authority of the federal government over subsistence. The Ahtna commission represents eight federally recognized tribes in the Ahtna region including Cantwell, Mentasta, Cheesh’na, Chitina, Gukana, Gakona, Tazlina, and Kluti Kaah, Ahtna Inc., the regional corporation, as well as the Chitina Native Corp., the private village corporation for Chitina. The Tribal commission will establish harvest limits, quotas, season dates and other procedures within the framework of the Federal Subsistence Board, and are aimed at insuring the sustainability of wildlife populations. The Interior Department also agreed to establish an Ahtna regional local advisory board that will allow “greater reliance on local ecological knowledge by regional residents,” in subsistence decision-making, according to the agreement. The Ahtna deal isn’t the first such cooperative arrangement between federal agencies and Alaska Native communities and Tribes, although it is different because it involves big game and with joint federal-private habitat management. For years, the U.S. Fish and Wildlife Service has had working agreements with local communities for subsistence fish management in federal lands along the Kuskokwim and Yukon rivers. The federal wildlife agency also has long-standing cooperative agreements with local Native communities on walrus hunting and migratory waterfowl. However, those agreements are more advisory and provide for communication, and do not involve the administration of permits by the local communities, as the Ahtna agreement will do, people familiar with the agreements say. One exception to this is on Saint Lawrence Island, in the northern Bering Sea, where the management of walrus hunting has been delegated to the local communities. All of these agreements, including Ahtna’s, function under the overall legal authority of the federal wildlife agencies. One exemption to this is management of subsistence hunting of bowhead whales, which, by international treaty, is done by the International Whaling Commission. The IWC delegates the management of bowhead whale hunting by Alaska coastal villagers to the Alaska Eskimo Whaling Commission, which regulates the harvests of bowheads to ensure they remain under a cap set by the international commission. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]  

UAA among first to join entrepreneurship program

With its terrain, tough climate and remoteness, Alaska has its challenges. In certain fields, like energy, the state has become a kind of incubator for new technologies as these challenges become opportunities. For project developers, particularly Alaskans among them, the holy grail is how to take things invented here and market them elsewhere. There are examples of this, but for most success has been elusive. But if we crack that nut, does this drive more Alaska-born technology? How do we make Alaska firms into industry leaders? Now there might be a roadmap: the University of Alaska Anchorage has signed on to become the 13th U.S. university — and just the fourth state — to establish a Global Entrepreneur in Residence program. This will bring an experienced entrepreneur, a foreign-born one, to the UAA campus to mentor students and Alaskans interesting in marketing their solutions to problems. The university will be in distinguished company as the program is up and running at 13 universities in four states as Alaska joins Colorado, Massachusetts and New York. University of Colorado in Boulder has three entrepreneurs in residence in its program says Gianna Foltz, coordinator of UAA’s project. Besides UAA, Alaska Pacific University is engage in the program and is the first private university to join the network. The entrepreneur in residence will lecture in classrooms, teach workshops and lecture at community forums, and help judge business competitions, Foltz said. Private contributions are funding UAA’s effort with money for the first year from Colorado entrepreneur Brad Field and the Johnston family of Anchorage. Allan Johnston, a well-known Alaska financial consultant, has long been active in fostering local entrepreneurs and business education. Applications for UAA’s first entrepreneur-in-resident are now being solicited and so far there are 50 applicants, Foltz said. Interviews with candidates will begin in January. “We are recruiting candidates with a strong record in entrepreneurship, technology commercialization and leadership. Experience in ‘clean tech’ fields and renewable energy is preferred,” in this first go-around, Foltz said. What’s unusual about the program, with all the universities, is that it is targeted at attracting and keeping immigrant business talent in the U.S. Often, talented foreign-born business students come to the U.S. to study and want to remain to start businesses, creating more American jobs when they do. Ironically, restrictive U.S. visa rules and immigration policies often prevent that. Other western countries, like Canada, are more aggressive and creative in retaining foreign-born talent. Canada and the U.K. have created “founder visa” programs to encourage immigrant entrepreneurs to create businesses within their borders.  A textbook case of the U.S. losing out is the case of Kunal Bahl, from India, who graduated from the University of Pennsylvania’s Wharton School of Business in 2006 and applied for a visa to remain in the U.S. and start a business. The visa was rejected. Bahl returned to India to start his business there rather than in the U.S. His company, Snapdeal, has become a $6.5 billion enterprise that now competes with Seattle-based Amazon. To try and prevent future losses of talent, Brad Feld, of Foundry Group, worked with universities and the federal government to form the entrepreneurs-in-residence programs where a special visa could be granted to allow foreign-born graduates to remain in the U.S. for a period if they agree to teach and also start a business. A condition of the recruitment is that the entrepreneur agrees to start a business in the state, Foltz said. A side benefit is the knowledge of overseas markets and business practices the successful candidate will bring. “Alaska is rich in scalable opportunities but we are currently ranked 49th among states in risk capital and have the least diversified economy in the U.S.,” said Johnston, a local champion of the entrepreneur-in-residence program and also active in a local entrepreneur’s mentoring network. “This global program can help us transition from a resource-extraction-based economy to a more diversified globally integrated economy,” he said. Foltz, at UAA, said the industries targeted for the university’s first entrepreneur solicitation is energy technologies, particularly clean-tech areas like renewable energy, as well as oil and gas extraction, where Alaskans have already demonstrated leadership in innovation. The state has funded substantial development work in renewable energy for small communities, particularly in areas like integration of wind energy with diesel generation and small-community grids, and Alaskan firms have been active in these projects. There are huge opportunities in selling these technologies in developing countries that, like Alaska, do not have traditional infrastructure. “Our country’s greatest competitive advantage is a culture that welcomes immigrants and attracts the best and brightest from around the world. Unfortunately, our outdated immigration system is the reason we’re losing the global race for tech talent,” said Todd Schulte, president of FWD.us, an organization of tech companies formed to promote immigration reform. The universities initiatives provide a new way for foreign-born talent stay in the U.S. and create jobs, Schulte said.

Alaska Tribes and the confusing land trust issue

The only thing clear so far about lands-into-trust is that lawyers will make a lot of money. Lands-into-trust refers to the U.S. Interior Department’s change in regulation that will allow Alaska Native Tribal groups to apply for lands owned by Tribes to be placed in trust, where the land is held by the federal government in trust for the Tribe. Almost everything about this, as it applies to Alaska, is unclear, hence the need for the lawyers. The only practical way for Tribes to obtain substantial tracts of land is for them to acquire properties from a private Alaska Native corporation, said Michael Walleri, an Alaskan attorney specializing in U.S. Indian law. However, there is a question as to whether it is legal for a Native corporation to transfer lands to a Tribe, given language in the 1971 Alaska Native Claims Settlement Act prohibiting that, Walleri said in a lecture on lands-into-trust at the University of Alaska Anchorage. Reality may have already outpaced the law on this, however, because several village corporations have already transferred lands to Tribes. In a speech given Oct. 6, Lt. Gov. Byron Mallott told the Resource Development Council, an Alaska development advocacy group, that state Attorney General Jahna Lindemuth and other officials have met with Interior Department officials to begin clarifying procedures, currently unclear, as to how Tribes will actually put land into trust. The Interior Department has said it has received applications for lands-into-trust from some Alaska Tribes, but state officials have not yet been informed of how many applications have been received or who the applicants are, although Interior officials have said this information will be provided. Walleri said it does seem clear that once a land trust is established it will be exempt from state and local taxes along with many types of regulation now done by states and federal agencies. Although the extent of regulatory authority is unclear, it does exist, Walleri said. This worries the state’s development community, which is concerned with the potential for 200-plus separate environmental regimes in Alaska that are in addition to the existing state and federal rules. The Tribes’ regulatory reach could also be expanded by other changes in federal rules being made in the closing months of President Barack Obama’s administration. On Sept. 26, the U.S. Environmental Protection Agency expanded the authority of recognized Tribes on reservations and reserves to exercise powers under the Clean Water Act to identify impaired waters and to set total maximum daily loads that impaired waters can withstand. The EPA already allows Tribes to develop their own water quality standards, and these can exceed those set by federal or state agencies. How this plays out in Alaska is unclear but it will eventually apply in some manner as lands-into-trust. The EPA defines a “Tribe” as a group or community exercising authority over a federal Indian Reserve — and there are already several recognized reserves in Alaska — and it may also apply to many Alaska Native villages and tribes organized under the 1936 U.S. Indian Reorganization Act, or IRA, are also recognized by the government to have a kind of reserve status. As lands are put into trust status by Tribes the EPA’s delegation of power may also apply. Tribes may also be able to exercise certain tax authority if they have lands in trust despite the U.S. Supreme Court’s Venetie case in 1998 , which attorneys say was actually narrow in scope to a specific situation where Venetie’s Tribe had applied a tax on a construction contractor working locally. The Venetie case might not restrict other forms of taxation by Tribes, Walleri said in his lecture at UAA. Mallot told the RDC that Gov. Bill Walker’s administration has decided not to fight Tribes on putting lands into trust because the federal government has accepted it by changing a previous regulation. Doing that also mooted a lawsuit over the regulations and an intervention the previous Parnell administration had filed in the case.  Walker has been criticized for not appealing the decision, but procedurally the only way to continue the case was for the state to file a brand new lawsuit. That was something Walker did not want to do because it would have just stirred up bad relations between Alaska Natives and the state government. The better course, Mallott said, is to negotiate practical ways to implement lands into trust without impairing state sovereignty. To do that, Attorney General Jahna Lindemuth is initiating a dialogue between the state, Tribes and other stakeholders, Mallott said. Meanwhile, from a practical standpoint it won’t be inexpensive, or easy, for Tribal groups to put lands into trust. The procedures for doing so are not yet worked out, and there are potential legal problems. Legal costs alone will be an impediment. Origins of lands-into-trust movement In his presentation, Walleri said the lands-into-trust movement actually started a few years after the 1971 settlement act passed Congress. There was a provision in the original ANSCA bill that ended the special protections of Native land, and against shares of Native corporations being sold, 20 years after the act’s passage. This greatly worried many Native leaders, and there were rumors of major foreign corporations “scouting” Native-owned lands in the 1980s as a way of gaining access to natural resources on Native lands on the cheap, Walleri said. This fear of losing land helped fuel the “retribalization” movement among Alaska Natives in the 1980s that culminated in the federal recognition of 200-plus tribes in the early 1990s. At the time this was argued as way to allow the Alaska villages, as tribes, to administer federal health and social service programs, for which recognition by the government is needed. However, the forward path was laid out for tribes to seek to hold lands, perhaps some of the ANSCA lands, and to extend protection to them under trust status. To achieve the same protective status, the federal Bureau of Indian Affairs was promoting the idea of Alaska Native villages organizing themselves as IRA villages under the 1930s-era federal laws, which carried with them protective status for village lands. In his lecture, Walleri said there were practical reasons for the push toward tribalization and lands in trust. One was that many very small ANCSA village corporations had no significant sources of income other than their small shares of 7(i) revenues of regional corporations with resource income. “7(i)” refers to the section of ANCSA that directs a share of natural resource income for one regional corporation to be shared among other Native corporations. Yet the protection and administration of village-owned lands imposed costs. If the private ANSCA corporation could become a Tribe it could be eligible for federal funds to help with some of this, and there could even be ways for the private village corporation to contract with the Tribe for land administration even if the ownership of the land remained with the ANCSA village corporation. One other force pushing the tribalization and lands-into-trust initiative was a section in the 1971 ANCSA act that required village corporations to transfer 1,280 acres in each village to the local municipality. Most villages are organized under state law as second-class cities, most of which are very small, but the requirement holds true for villages within the large boroughs of the state where the populations are mostly non-Native. To keep the land under Native control, many village corporations moved to transfer lands to Tribes, Walleri said, which satisfied the requirement of ANCSA. However, this maneuver gets complicated because unless the Tribe also organizes itself as an IRA village, the lands would not be fully protected, Walleri said. If IRA organization were not an option, lands-into-trust might offer another route to achieve protection. Issues with LIT Lands-into-trust isn’t without its problems, Walleri said. A big one is that once lands are given trust status the federal government has the oversight responsibility, which means a Tribe must get federal permission to engage in economic development activities. This is a problem now for Native families who own Native allotments, which are 160-acre homestead-type holdings that are now held under trust. Doing any kind of development work on a Native allotment is very complex and cumbersome, to the point that it’s almost not worth the bother. Still, Lower 48 Indian Tribes have been dealing with these problems for years and have developed successful work-around solutions. There are many successful examples of joint-ventures between private corporations and Lower 48 Tribes, for example, which might provide models for Alaska’s tribes and ANCSA corporations. He pointed to Palm Springs, Calif., as a place where a local Native American Tribe worked in partnership with developers and became one of the richest Tribes in the nation. “In Alaska, there’s nothing to stop the Native village of Eklutna, a Tribal entity, from borrowing money and buying a major hotel in downtown Anchorage, perhaps in partnership with a large, sophisticated private Native corporation like Cook Inlet Region Inc.,” Walleri said. The hotel could be fully exempt from municipal and state taxes and might even be able to operate a casino, he said.  As to casinos, Duluth, Minn., offers an example where a Tribe established a downtown casino and was up against a great deal of concerns by local leaders. The experiment has proved to be highly successful, however, with the casino helping revitalize a downtown visitor industry for the city. Tim Bradner can be reached at [email protected]

Prudhoe plan approved on day Oil & Gas Division director resigned

Alaska Department of Natural Resources Commissioner Andy Mack approved the 2016 Plan of Development for the Prudhoe Bay oilfield on Sept. 20, but only after amending the original approval signed four days earlier by Division of Oil & Gas Director Corri Feige. Sept. 20 was also when Feige announced her resignation from the division. In other departure news, ConocoPhillips Vice President of Commercial Assets Leo Ehrhard, previously the top LNG manager in Alaska for the company, has retired. In a Sept. 20 email to DNR staff obtained by the Journal of Commerce, Feige acknowledged the change and gave instructions that Mack’s letter be sent to BP as a replacement for her letter signed on Sept. 16 but not yet received by BP. BP is the unit operator for the Prudhoe Bay unit on behalf of fellow working interest owners ConocoPhillips and ExxonMobil. According to the email chain obtained by the Journal, Natural Resources Special Projects Assistant Jim Stine sent the new approval letter signed by Mack to Feige on the afternoon of Sept. 20. “The decision I signed last Friday 9/16/16 after considerable work and approval by the Commissioner’s office staff, Governor’s staff and the Commissioner was thought to the final decision at that time. That decision was not widely distributed,” Feige wrote to several staff including Stine and Division of Oil & Gas Deputy Director Jim Beckham after she received the revised letter. “Subsequent information received by the Commissioner has led to this final decision.” Stine’s reply to Feige, indicates that division staff were not aware Mack would be changing the approval letter. “Thanks for your work (and patience) during this POD process,” Stine wrote. “Corri’s email accurately indicates that, as we understand the direction, the commissioner’s signed letter is meant to replace the decision Corri signed last Friday.” The new information would appear to be a Sept. 19 letter from BP and ConocoPhillips to Gov. Bill Walker throwing their support behind a state-led effort to monetize North Slope gas in the form of the Alaska LNG Project. The letter was sent the day before Mack’s approval and released by the governor’s office on Sept. 22. The letter states that several steps will be taken in the coming months including the transfer of land and the federal export licenses to the Alaska Gasline Development Corp. as well as supporting the state’s efforts to lower the cost of supply through forms of federal tax exemption. The Sept. 16 and Sept. 20 letters are nearly identical except for the closing section under “Decision” and reflect a different set of requirements for the next Prudhoe Plan of Development to be submitted in 2017. In the Sept. 16 letter signed by Feige under “Decision” she wrote: “it is the division’s expectation that the unit operators and WIO’s activities towards MGS including resolving any misalignment between WIOs that currently impedes progress towards a MGS and agreeing on development strategy will be identified in detail and updated in the 2017 POD.” (WIO refers to working interest owners and MGS stands for “major gas sales.”) In the Sept. 20 letter signed by Mack, he wrote: “It is the division’s expectation that the unit operators activities in support of a state-led MGS/AKLNG will be described as provided above.” There is another slight change in the wording in the final paragraph above the “Decision” section. In Feige’s letter, she wrote regarding future plans of development: “In these future submittals, the unit operator and the WIOs will be required to provide specific, measurable, verifiable actions they will take during the proposed POD period to move towards MGS.” In Mack’s letter in the same paragraph he wrote that the POD would be approved “with the understanding that the unit operator will be required to describe the specific, measurable, verifiable actions the PBU [Prudhoe Bay Unit] took during the proposed POD period in support of a state-led MGS/AKLNG Project.” The difference appears to be that Feige requires the companies to document their efforts toward a generic major gas sale, while Mack’s version conditions future plan approval to showing their steps to support a state-led gas project. The differences may be nuanced or they may be important, and it is not known whether Mack’s changes played any role in Feige’s decision to resign that same day, although it appears an important coincidence. Statement from Mack DNR issued a statement from Mack Sept. 23 in which he said the department is happy to have resolved the longstanding issue. The department recieved additional information from BP and ConocoPhillips after Feige's Sept. 16 approval letter, leading to Mack's revised version, accoridng to the statement. Mack also thanked Feige for "her diligent efforts to bring this critical POD process to a conclusion." "DNR has been fortunate to have Corri as a key member of our management team," Mack said. "As this sigificant effort on the POD wrapped to a close, she let us know that she would be leaving her post to pursue a new job opportunity that also will allow her to spend more time with her family. I have spoken with Corri and understand that her decision to resign was not related to the outcome of the POD, and that her decision to leave the Division of Oil and Gas was a difficult one. We wish her well and thank her for her service to Alaska." All this occurred while Gov. Bill Walker and other state officials are in Asia meeting with potential LNG buyers and where Walker spoke at an LNG conference in Singapore on Sept. 21 where he announced a Memorandum of Understanding between the state and ConocoPhillips to negotiate for a joint-venture marketing effort to sell North Slope gas. The Prudhoe Bay Plan of Development approval has been a contentious issue all year between the state administration, BP and the other Prudhoe Bay owners ConocoPhillips and ExxonMobil. The Plan of Development, or POD, is a kind of operating permit required of each field on state-owned lands. Updated plans and revisions must be approved by the Division of Oil and Gas and without approval the fields cannot legally operate. In January, the former Department of Natural Resources Commissioner Mark Myers wrote letters to every unit operator in the state demanding detailed gas marketing information including prices, volumes, and discussions with customers. After BP submitted its 2016 POD on March 31, the Division of Oil and Gas, in a letter signed by Feige in April, said the three paragraphs about major gas sales in the POD were not sufficient to meet Myers’ demand. BP and the other WIOs subsequently and repeatedly rejected the state demands, maintaining that the information is confidential and that to disclose marketing activities of any company would violate antitrust laws. The standoff continued through the June 30 expiration of the 2015 POD, when the state gave BP and the WIOs until Sept. 1 to comply with its requests and extended the old plan until Nov. 1. On Sept. 1, BP and the WIOs affirmed their previous position. In his Sept. 20 letter that approved the plan Mack said BP and the other Prudhoe owners had met with division officials and provided some information under confidentially, and had given assurances that they would continue to support the Alaska LNG Project. Alaska LNG is a proposed $45 billion project that would build an 800-mile 42-inch pipeline from the North Slope to the Kenai Peninsula, where a large liquefied natural gas, or LNG, plant would be located. A large gas conditioning plant would also be built on the North Slope for the project. So far work on Alaska LNG is being done by a joint-venture of the three major North Slope producers and the state-owned Alaska Gasline Development Corp., or AGDC. ExxonMobil has been the project lead and is the largest owner of Slope gas, and the state is second-largest at 25 percent. Earlier this year the company partners informed the state that with LNG at record low prices and huge surplus production capacity the project faces economic challenges. Given that the companies were not all in agreement to initiate detailed engineering, a $1 billion to $2 billion expense, until energy markets start showing recovery. ExxonMobil has also noted pointedly in testimony to the Legislature and in a letter to Alaska Gasline Development Corp. CEO Keith Meyer that the lack of a fiscal agreement from the state led to the two options being presented in February for either the state taking control or pacing the work within the existing structure to match market conditions. The governor quickly seized on the option to take control. The transition from a privately-led to state-led project is underway and will be completed by the end of the year. ConocoPhillips’ top LNG manager retires Meanwhile, the producer company staffing on the Alaska LNG effort is being watched closely because changes often indicate a shift in attitudes of companies, in terms of a willingness to assign experienced executives. Leo Ehrhard, a seniorConocoPhillips manager who has been on the Alaska LNG management committee, has retired, ConocoPhillips confirmed. The two other producer company managers on the committee, Dave van Tuyl of BP and Bill McMahon of ExxonMobil, remain. While industry is usually careful to keep the same managers on a major assignment to add continuity the state has seen frequent turnover of its representatives. At times the president of AGDC, the state gas corporation, is on the committee. That would be Dan Fauske in the past and now Keith Meyer, current CEO. But Gov. Bill Walker has at times assigned his special advisors, such as Rigdon Boykin, an attorney and long-time confidante of the governor’s, to be on the committee. (Editor's note: This story has been updated to include a statement from DNR Commissioner Mack.)

Joint venture for marketing could solve one AK LNG issue

ConocoPhillips and Alaska’s state-owned gas corporation, Alaska Gasline Development Corp., say they are negotiating on a joint-venture organization to market North Slope natural gas as LNG. ConocoPhillips is one of three North Slope producers and gas owners, along with the state through its royalty interest in gas.   The two are inviting BP and ExxonMobil, two other major slope gas owners, to join the group. “ConocoPhillips has always supported joint-venture marketing, and we see this as a first step,” company spokeswoman Amy Jennings Burnett said. ConocoPhillips and AGDC announced the signing of a Memorandum of Understanding at a major LNG conference in Singapore where Gov. Bill Walker also spoke. The MOU will guide negotiations on formation of the joint-venture marketing group. In its statement AGDC said negotiations with potential LNG buyers will begin as soon as the organization is formed The state corporation will take over management of the Alaska LNG Project from a four-party consortium of three slope gas producers and the state at the end of the year. ExxonMobil, current project manager, is now completing preliminary engineering on Alaska LNG, which involves an 800-mile gas pipeline and large LNG export project. The initiative for the new marketing group sidesteps a contentious issue that bogged down commercial negotiations last year among the four parties in Alaska LNG. The group failed to reach agreement, due partly to strong opposition by ExxonMobil Corp., one gas owner, which said it prefers to market its gas and LNG on its own. Joint-venture marketing is where a separate organization is formed to conduct marketing activities on behalf of its participants, who contribute their gas to a marketing pool. The other approach, favored by ExxonMobil, is where each company markets its own share of North Slope gas, in the form of LNG. The advantage of the joint-venture approach, for the state at least, is that a new state gas marketing group need not be formed. The advantage for ExxonMobil in equity marketing is that the company already has its own strong LNG marketing group and wants the ability to supply customers, under a contract, with LNG from several sources, which provides substantial efficiencies for the company. The state and ConocoPhillips supported joint-venture marketing and said so openly and BP supported the concept in the previous negotiations, although that shouldn’t be interpreted that BP will join a new marketing group. BP and senior state officials, including then-Gov. Sean Parnell, traveled to Asia to promote Alaska gas sales. The trips were signals to the Asia market that the state was working with the companies on Alaska LNG. The MOU also requires parties in the deal to work together to promote the Alaska LNG Project, which includes an 800-mile, 42-inch pipeline from the North Slope to Southcentral Alaska, a large gas conditioning plant on the slope and a large liquefied natural gas plant at Nikiski, near Kenai south of Anchorage. A revised estimate completed this summer puts the construction cost at $45 billion. Exports of up to 20 million tons per year have been approved by the U.S. Department of Energy.

New AG has tightrope to walk for lands-into-trust path

New Alaska Attorney General Jahna Lindemuth has been given a tricky assignment by Gov. Bill Walker: forge a compromise on lands-into-trust, a contentious issue that is developing around the legal status of certain Alaska Native lands. Unless resolved, this has the potential to divide Alaskans, many believe. Opinions are sharply divided, for example, between Alaska tribal groups and Native corporations who are now large private landowners. Tribes in Alaska mostly don’t own lands, unlike in the Lower 48 where there are reservations. Some tribes, however, want to own lands in trust with the federal government, which could give them certain autonomous powers. Potentially, this is a move in the direction of having Lower 48-type reservations in Alaska. Alaska Native corporations formed under the Alaska Native Claims Settlement Act of 1971 are private landowners operating under state laws. Tribes with lands in trust would fall under a different framework. Many of the Native corporations are leery of the tribal lands-into-trust effort. The State of Alaska is affected, along with business interests and resource-user groups, if there is uncertainty about governmental powers over different land tracts. There are over two hundred tribes in Alaska, so it could become a problem. Lindemuth is charged with getting this herd of cats, all spitting at each other, moving in one direction, and at the same time protect state interests and those of private citizens. Walker, Lindemuth’s boss, has decided to accept, for now, a federal court’s decision to allow the U.S. Interior Department to accept private lands put into trusts with the federal government on behalf of Alaska Native tribes. Lindemuth announced August 15 that she will not appeal the D.C. Circuit Court of Appeals decision on a lawsuit over the issue to which the state was a party. When lands are placed in trust on behalf of a tribe, the U.S. Interior Department, through the Bureau of Indian Affairs, becomes the official manager of the land for the benefit of a tribe, with the actual management typically delegated to the tribe. This is essentially the way Native American reservations in the Lower 48, which are essentially self-governing entities, are functioning.  Reservations there have their own tax and police powers and typically assume other powers including fish and game management and environmental enforcement, although these are typically under co-management systems with the relevant federal and state agencies. Lindemuth said it’s not clear that the Lower 48 reservation model or the types of autonomous powers that Lower 48 tribes have would actually be applied in Alaska. All that will have to be worked out, she said. “We have to figure our what this will look like, and it will take a lot of dialogue with all the stakeholders,” Lindemuth said. At this point it’s not a huge controversy. “There is actually very little land that can be put into trust right now. The federal government controls over 60 percent of Alaska, the state owns 28 percent and the ANCSA corporations about 12 percent. There is less than 1 percent in private ownership,” and it is not known how much that is land now owned by tribal entities, Lindemuth said.  “What is motivating the tribes is a desire to have a more active role in criminal justice issues,” she said, which in the case of tribal police powers works best if there were specific land areas around villages over which police would have clear jurisdiction to enforce tribal law. But Lindemuth must look further down the road to the possibility that larger land tracts may be place in trust, with a more expansive list of powers asserted. “The state must maintain its ability to manage resources like fish and game,” she said. The issue has raised concerns among Alaskans, however, who see lands-into-trust as the opening wedge in the creation of reservations in Alaska that would assert autonomous legal powers, known as “Indian Country,” creating a series of pockets of autonomous entities within the state. There are 229 recognized Native tribes in Alaska, so in theory that many pockets of autonomy could be created. Lindemuth said such worries may be overblown. It is likely that there will be only a limited number of relatively small Alaska land tracts, she believes. First, tribes must own the lands to be put into trust and it is unknown just how many Alaska tribes actually own lands. Substantial lands are owned by Alaska Native regional and village corporations, which are private corporations organized under state law under the Alaska Native Claims Settlement Act of 1971, or ANCSA. State law therefore governs Native corporation lands. Currently, the actual acreage eligible for trust applications would seem very limited. However, if the ANCSA corporations were to decide, for their own reasons, to put their very large land tracts into trust status, it would be a very different question. This is unlikely to be a position taken by the large regional corporations who are mostly engaged in business and natural resource development and who would seem to have less to gain from having lands in trust, but it could very well be a course selected by some village corporations. Many of these are in communities struggling with a range of social and economic issues that trust status might ease, and where the functions of the private village corporation and tribal entities might better be done under a tribal government that would have more flexibility to address problems, and who would also have access to federal funds. There are some real complications with this that might discourage village corporations from taking this path, Lindemuth believes. She emphasized, however, that the U.S. Appeals Court decision was only on a procedural issue, and the basic question of whether lands-into-trust are legal in Alaska, and were not extinguished by ANCSA in 1971, is unresolved. The state can always go back to court on the fundamental question, she said. Here’s the background: The Alaska Native Claims Settlement Act of 1971 settled the issue of aboriginal claims to Alaska lands with an agreement to transfer 45 million acres of federal lands in the state to Alaska Native regional and village corporations, which are private corporations organized under state law. At the time, neither Congress or the Alaska Native groups promoting the settlement wanted Lower 48-type reservations, which carried with them federal oversight. In accord with this, the language of ANCSA seemed to prohibit Alaska lands being placed into trust, but there were different interpretations. The Interior Department’s regulations, however, held that Alaska lands were not eligible to be put into trusts. In 2006, Alaska Native tribal entities in Akiachak vs. U.S. Secretary of the Interior, challenged these regulations, and the state entered the lawsuit on behalf of the Interior Department, the defendant. In 2013, the U.S. District Court issued a decision in favor of the tribes, striking down Interior’s regulations. The decision was appealed, and the state joined the appeal. However, the department meanwhile changed its policy and its regulations and began accepting applications for lands-into-trust from tribal groups although it was only the application that was allowed, not the actual placement of lands. This action removed the purpose of the original lawsuit, so the appeals court voided the case but at this point it was mainly a procedural issue. The basic question of whether ANCSA prohibits lands-into-trust, or the merits of the appeal of the District Court case, was not decided. The state still retains the option of raising the original issue again. Could village ANCSA corporations put their private lands into trust status? The only likely situation where there might be large land tracts placed into trust is if village corporations opt to pursue that (regional corporations are unlikely to do so). This, of course, is what the Venetie case was about, in 1998, when two villages in the former Venetie reserve, asserted tax authority over local businesses citing their lands as having “Indian Country” status. The U.S. Supreme Court ruled against Venetie and Arctic Village, saying that the lands were granted under ANCSA and were not eligible for Indian Country status, with autonomous tax powers for the two village tribal entities. (Many see the current lands-intro-trust move as a way to get around the Venetie decision.) The problem Attorney General Lindemuth sees in any ANCSA village corporation initiative for lands-into-trust is the complication of potential split-estate with surface lands going to the tribe and subsurface rights remaining with the regional corporation. This is what ANCSA prescribes except in the few former reserves established in Alaska where the villages had the right to take all land rights in the reserve, surface and subsurface, into full ownership by the villages, and not participate in any of the benefits of the regional corporation, such as dividend payments to shareholders. From a practical standpoint there’s no reason why split tribal-regional corporation surface-subsurface couldn’t work — it is split now between the ANCSA regional and village corporations — but there could be legal and procedural complications for the Interior Department in working out such arrangements, which are mostly unknown in the Lower 48. If there are legal hurdles for the Interior Department, could the regional corporation agree to transfer limited subsurface estate, under the village’s surface lands? If there was absolutely no potential for minerals discoveries this could occur, but it would occur only in isolated situations, it seems. All this is unclear, Attorney General Lindemuth says. “The federal government may well allow split estate in lands transferred to trust status, but if the regional corporation (which owns the subsurface) objects, it is difficult to see how an application (for trust status) would be approved … My initial opinion is that it’s hard to see how allowing split-estate would make sense,” she said. Also, the question as to whether the state has any sort of veto power, or any special standing, in an Interior Department decision on an application is unclear, she added. In any event, Lindemuth hopes to get a dialogue going with ANCSA regional and village corporations with the goal of getting an agreement that protects the state’s interests in unified fish and game management and environmental protection, and minimizes any conflicts on taxation issues. “This is an issue that is critical to the future of Alaska, and it’s important that we get it right. We can’t just let some judge decide this,” she said. It has to be worked out in a negotiation. Meanwhile, the state is already engaged in discussions of crime and justice issues with tribal groups — issues which spurred the original lands-into-trust application in 2006 — and will soon have agreement on a limited transfer of lower-level criminal cases involving Alaska Natives to tribal courts, according to the attorney general.

BOEM director hears support for OCS drilling in Alaska

U.S. Bureau of Ocean Energy Management Director Abby Hopper got an earful in Alaska last week. Hopper met with Gov. Bill Walker, the state’s congressional delegation and representatives of Arctic communities — all urging that Arctic offshore lease sales be included in the next five-year Outer Continental Shelf leasing schedule. Hopper’s schedule of meetings included no opponents to offshore drilling. She would not tip her hand on whether her recommendations to her boss, Interior Secretary Sally Jewell, will include lease sales in the Chukchi and Beaufort Seas. Whether Jewell will take Hopper’s advice is also unknown. The U.S. Interior Department will release a proposed new five-year schedule for OCS lease sales from 2017-22 some time this fall, Hopper said Aug. 12 in an interview in Anchorage. Hopper did say, however, that OCS Sale 244 in Lower Cook Inlet is still on track for 2017. That sale is part of Interior’s current five-year lease sale program and the BOEM has completed a draft environmental impact statement, or DEIS, for OCS Sale 244. Two Arctic lease sales in the current five-year program were cancelled last year due to lack of industry interest, Hopper said in the interview. The cancellations came after Shell’s decsion to pull out of the Arctic following unsuccessful drilling in the Chukchi Sea last summer, but Hopper said that even before Shell’s announcement there was no industry support for a Chukchi Sea sale, even from Shell, and only one company nominating acreage in the Beaufort Sea. Following Shell’s announcement of its drilling results several companies, including Shell, relinquished leases in the Chukchi and Beaufort Seas and Jewell also decided against allowing Shell an extension of Chukchi leases set to expire. The company has retained rights to one key lease, where the “Burger J” exploration well was drilled, although that lease expires in 2020. Hopper said BOEM has received no indications that Shell plans to return to do more work at the lease. BOEM officials who sat in on the interview with Hopper said the agency will eventually receive data from Shell’s drilling, and has already received some, which can be used in its ongoing evaluation of oil and gas resources in the region. Shell actually drilled on the Burger prospect in the Chukchi Sea in the early 1990s and made a significant gas discovery, although it was not economic at the time. BOEM officials would not comment on just what Shell found at Burger in its earlier drilling but said the information is included in the agency’s published estimates for petroleum resources in the region. In her meetings last week Hopper said she was struck by strong support for offshore sales from Arctic Inupiat Offshore, a consortium of Alaska Native corporations in Arctic coastal communities. “They told me that responsible oil and gas development is important in maintaining their traditional way of life,” she said, which requires, these days, economic activity and cash-paying jobs. “Oil and gas development has brought many benefits to their communities including water and sewer, roads and other infrastructure,” Hopper said she was told, although the reference was to onshore, not offshore, industry activity. Hopper also met separately with Arctic Slope Regional Corp., the Native regional corporation for the North Slope. In her meetings with the state’s two U.S. Sens. Lisa Murkowski and Dan Sullivan, Hopper got a similar message. Hopper also visited two North Slope oilfields, Hilcorp Energy’s Northstar project and the Nikaitchuq field operated by Eni Oil and Gas. Both are offshore fields in shallow water just north of the onshore Prudhoe Bay field, and part of the Northstar field extends into federal OCS leases for which Hopper is responsible. In a visit to Alaska last spring, Hopper visited North Slope coastal communities including Kaktovik, Nuiqsut, Barrow, Point Lay, Point Hope and Kotzebue and encountered several opponents to offshore drilling in some of the villages. Hopper said in the interview that the federal OCS Lands Act spells out criteria for decisions on whether to hold a sale including the position taken by the state’s governor, resource potential and environmental concerns and the alternative uses of the OCS. “There is no particular priorities as to how the criteria are applied,” she said. Even if lease sales are included in the schedule there can be no guarantee they will actually be held. Industry must first express interest in them, and a federal EIS is required. In contrast with the Arctic sales there were expressions of interest by industry in the lower Cook Inlet sale. BOEM’s Alaska spokesman, John Callahan, said the number of nominations received from companies is confidential. However, agency officials also said the nominations were received before the collapse of crude oil prices in late 2015. Hearings were held on the draft EIS Aug. 15, in Anchorage, with hearings also planned for Kenai and Homer. If the sale is held it is possible that there will be a no-show by industry, which happened once before with a Lower Cook Inlet sale, an embarrassment for BOEM’s predecessor agency, the Minerals Management Service, after the expense of the EIS and lease sale preparations were incurred. MMS also cancelled two subsequent Lower Cook Inlet lease sales when there were no nominations of acreage by companies. If Lease Sale 244 is held BOEM would offer 1.09 million acres on 224 OCS tracts for in sale 244. The lease sale area is just south of state-owned submerged lands in upper Cook Inlet, where there are several producing oil and gas fields. Previous Lower Cook Inlet OCS sales have included offshore acreage to the south, which is in deeper water and distant from infrastructure. The smaller, more compact acreage now being offered is closer to infrastructure and known oil and gas-producing fields. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

Don’t tell Delta farmers that 1980s project was a bust

It’s part of Alaska lore that the state’s Delta Barley Project in the 1980s was a huge flop and that all the farmers went bust. Tell that to farmers in Delta, who are doing quite nicely. In fact Delta farmers are succeeding, although in ways not originally intended by state planners. “I don’t see failure when I go to Delta. I see people working and tractors in the field,” says Arthur Keyes, the state’s new Agriculture director. Bryce Wrigley, a local barley farmer, says people around Delta get pretty steamed when they hear they are all failures. “The only time we hear this is when we leave Delta. We never hear it around here,” he said. Not all the original farms in the 1980s project failed, Wrigley said. There are several still farming and one where children have taken over. Wrigley himself purchased his spread in the early 1980s and has been farming since. At least 12 farmers in the area make their sole living from farming, although many have jobs to supplement the family income. Wrigley is proud that his son raised on the farm, Milo, is now back from college with a degree in international agricultural business and working in the family business, which includes the manufacturing of a value-added product, barley flour. Milo Wrigley’s goal is to begin export of that flour, which has a high nutritional content, Wrigley said. It would be the state’s first export of barley, ironically the goal of the 1980s project, and a value-added export at that. It is true, however, that the Delta project flopped as it was originally planned. The state paid for the clearing of land, held a lottery to attract farmers and helped provide financing. The idea, championed by Bob Palmer, then-Gov. Jay Hammond’s chief of staff and a long-time friend of the governor, was to grow large quantities of barley to stimulate local dairy farming and other agriculture, and to export the surplus. The Alaska Railroad bought grain cars in anticipation of shipping barley and the state purchased components of a grain terminal for Seward, which was never built. Tens of millions of dollars were invested in land clearing and subsidized loans, but North Slope oil production had started and the state was by awash in oil money. Valdez, wanting to get the edge on Seward as a barley-shipping port, went ahead and built a grain silo, which still stands (it is now a telecommunications tower). Interestingly, there was competition at the time for the location of the state barley project. Many argued that Nenana, west of Fairbanks, had better soil for growing than Delta and was at a lower altitude, which meant the growing season was longer. Politics played into the decision, however. Jack Coghill, a Republican and opponent of Hammond, was mayor of Nenana at the time and a champion for Nenana as a location, but being politically crosswise with Hammond and Palmer didn’t help Coghill’s cause. In contrast, former state Rep. Pappy Moss, a charismatic legislator who was a Democrat and represented Delta, won over Hammond and Palmer for Delta. Bad luck played into the plan, however. Once lands were cleared and farmers were established, several years of unusually bad weather hit just as people were learning the ropes. Most important, world grain prices collapsed, which undermined the whole scheme. Wrigley said land around Delta was still being cleared when he arrived in 1983, and that at the time the original concept seemed viable. Export markets were strong and Japan was importing grain from the U.S. west coast. Alaska was two days’ closer in sailing time and ship costs then were $50,000 day. “No one anticipated the collapse of the market,” Wrigley said. Newly-elected Gov. Bill Sheffield stopped the Seward grain terminal project when he came into office in 1982, and also ordered the railroad to sell the grain cars. Wrigley says the stigma of the original project persists, hyped partly by the media. It also plays into the hands of politicians who cite it as an example of why the state can’t do anything right. After the export scheme collapsed and state funding evaporated Delta’s farmers adapted to survive, focusing on local markets and niches, said Scott Mugrage, who farms and raises cattle near Delta with his son, Justin. “Everyone has a niche,” he said. In Mugrage’s case that niche is raising grain and feeding and selling cattle. Other farmers developed different strategies. Some switched from barley to hay to meet the demands from Alaska’s large and active horse community, while one farmer developed barley pellets for animal feed. Other farmers grow various grasses to sell seed. Some of the farms are very large. One is about 10,000 acres although the land is not all planted. Wrigley developed his barley into new, value-added products. He started the Alaska Flour Co. and is developing a good business milling and selling barley flour and other products in retail stores in the state. Mugrage owns about 550 acres and leases another 2,000, all in grain and hay for cattle. He raises barley and oats as well as some peas, which are mixed with the barley to add nutrition for cattle. “We’re successful. We’re satisfied with where we are,” Mugrage said. He is actually a relatively recent arrival in Delta, having purchased his farm a few years ago. But Mugrage is a veteran in the cattle business in the Lower 48 and still owns cattle feed lots in Nebraska. He has mostly Black Angus as well as some Scottish Highland cows, which are well suited to northern climates. He sells about 200 cows a year. With proper know-how the cattle business and other agriculture in the area are viable and could be expanded, Mugrage said. It’s important for Alaska to become more self-sustaining in food, which it once was. “Few people realize what a short supply chain we have with our food. We depend essentially on one ship,” Mugrage said. (Actually there are two operated by Totem Ocean Trailer Express). The federal soils conservation program, which is available to farmers nationwide, has been a big help for the Delta farmers. They rotate their crops, allowing some land to periodically remain fallow to rejuvenate the soil. The federal program helps pay for the maintenance of fallow land. Wrigley estimates that in the Delta area, in any given year, about 5,000 acres are planted in grain, 11,000 acres are kept in grass, or hay, and about 15,000 acres are maintained as pasture. That’s far short of the state’s lofty goals when the barley project was launched but it is still a sustainable small industry that helps support dozens of families in the Delta area. Like Mugrage, Wrigley believes there’s a lot of room for agriculture to expand to meet local needs. “We spend $2.5 billion a year on food and import 95 percent of what we consume. If we could increase that to 20 percent we could create a thriving local agriculture industry,” he said. That’s quite doable if the demand is there. As much as 50,000 acres in the Delta area could be put into production relatively quickly, much of the land having been cleared in the original barley project. What could jump-start the local industry in Delta is if the U.S. Army were to convert one of three boilers in the power plant at Fort Greely, which is nearby, from oil to biomass, with barley as the fuel, Wrigley said. Farmers have made a proposal to the Army and it is being studied as a way for the plant to reduce greenhouse gas emissions. Two of the boilers would remain oil-fired, under the plan. Wood chips are now used as biomass fuel in schools in Delta and Tok, but barley is superior as a fuel because it has less moisture than wood, which makes it more efficient in handling and in combustion in cold temperatures, according to the proposal made to the Army. Storage for barley is also more compact than wood chips, which means the “footprint” for storage is smaller. Also, the barley can be burned without processing unlike wood chips, where chips must be made from scrap wood and salvage timber. Fort Greely’s fuel needs could be met with 15,000 tons of barley per year. The fuel need for one boiler translates to about a truckload of barley per day, according to the proposal. If the Army were to adopt the plan it would allow Delta farmers to essentially double barley production, and with the land available that could be done quickly, Wrigley said. The additional sales would bring $2.8 million in new income to the region, which would translate to about $20 million in total benefit when a multiplier is added, according to the proposal. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

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