Tim Bradner

Politicos have tough hands to play in 2015

Chips are down for gov, legislators facing massive budget gap Gov. Bill Walker and his new administration are still settling in as state legislators are packing up to head to Juneau for the 2015 session. The annual political poker game begins Jan. 20 when the state Legislature convenes. Walker will be at the table. So will House Speaker Mike Chenault; Senate President Kevin Meyer; House Democratic Minority Leader Chris Tuck; and Senate Democratic Minority Leader Berta Gardner. What’s different about the game this year is that the chips on the table will be painful budget cuts instead of new money for projects and programs that Alaskans have enjoyed for years. No more, at least for now. With oil prices still less than $60 per barrel and back-to-back $3.5 billion budget deficits pending it seems like a bleak year ahead. Two credit rating agencies, Moody’s and Standard and Poor’s, have issued warnings about Alaska’s finances. Still, the sky isn’t falling. Alaskans have been through these times before during prolonged oil price slumps in 1986 and in 1998 and a more recent, brief dip in 2009. The state’s economy still seems on sound footing, however. Jobs are increasing, though at slower rates, but employment in key industries like petroleum are at record highs, according to state Department of Labor and Workforce Development data. Despite the low oil prices it’s going to be another busy year of winter construction and drilling on the North Slope, mostly due to projects already in construction. Still, cuts in the state budget are in the wind and this may have an effect on business confidence. Walker issued an Administrative Order Dec. 27 asking agencies involved in several big projects to put a hold on unencumbered funds. This is more a symbolic move because much of the money appropriated to these projects, which include the Susitna-Watana hydroproject, the Knik Arm bridge, the Kodiak Launch Complex, Ambler road and the Alaska Stand Alone Pipeline, has been encumbered, and with federal funds mixed in on some projects. What may be of more substance for the immediate budget gap is a request by legislative leaders, in a Dec. 23 letter to Walker, that the governor review past appropriations for capital projects that are still unspent, or where projects were completed with money left over. Hundreds of millions of dollars in state-funded projects are still “in the pipeline” from prior year capital budgets. Alaska LNG Project proceeds Meanwhile, on the one big project that will really move the needle for state finances and the economy — the large North Slope natural gas pipeline and liquefied natural gas project — there’s no indication so far of a slowdown. The governor’s Administrative Order to stop spending affects the Alaska Stand Alone Pipeline, or ASAP, but not work being done on the Alaska LNG Project by the Alaska Gasline Development Corp., or AGDC. AGDC is the state corporation that manages both ASAP and the state’s partnership in the Alaska LNG Project. In one other development Alaska LNG Project, Walker announced that Marty Rutherford, Deputy Commissioner in the Department of Natural Resources, will lead the state’s gasline team in negotiating several major issues still to be resolved with the Alaska LNG Project partners: the North Slope producers and TransCanada Corp. Rutherford’s new role has raised some eyebrows. In her previous tenure as the state Natural Resources deputy commissioner, Rutherford was an architect of the Alaska Gasline Inducement Act, or AGIA, an initiative of former Gov. Sarah Palin. This was a project that awarded a state contract to TransCanada Corp. to lead a Lower 48 gasline initiative. Legislators became disenchanted with AGIA mainly because of a $500 million subsidy that went with the plan, but in reality the all-land pipeline was undone by a surge of natural gas from Lower 48 shale producers. TransCanada itself promoted a switch to LNG early on, a course ultimately endorsed by former Gov. Sean Parnell and the North Slope producers, which led to the present Alaska LNG Project authorized by the legislature last year. For this year, AGDC plans on spending about $100 million on the state-led ASAP plan with about half of that already expended, Baker said. However, most of this is work that will benefit both ASAP and the larger Alaska LNG Project, he said. Another $25 million was appropriated solely for AGDC’s work on the big project. “From this point forward, any work that does not benefit both projects will not be spent,” he said. State legislators may not take kindly, however, to any plans by Walker to completely scrap the ASAP project, which was initiated as a backup plan to get North Slope gas to Alaska communities in case the big project falters. Since 2010 the Legislature has appropriated $420 million to the ASAP project with those funds to take the project through to the completion of engineering and permitting and an “open season” for prospective gas shippers in 2016. A good portion of the work funded by those appropriations will benefit both projects, however. An example of this, Baker said, are the five gas off-take points that would supply gas to Alaska communities along the large 42-inch pipeline. The responsibility for planning and building those remains with ADGC regardless of which of the two gas pipelines are built. Preliminary engineering on the offtake points must be done in 2015 because it is part of the pre-Front End Engineering and Design, or pre-FEED, work now underway for the large pipeline project, Baker said. For the Alaska LNG Project to proceed into the full Front End Engineering and Design, which could happen in the first quarter of 2016, the offtake points must have preliminary engineering done, he said. State legislators who back the ASAP alternative backup plan aren’t likely to let Walker completely abandon the state-led 36-inch pipeline plan, however. Rep. Mike Hawker, an Anchorage Republican who co-sponsored legislation authorizing the backup gas pipeline, says if may be legally difficult for the governor to block expenditures of a project the Legislature has authorized in law, and such a move in any event would spark a fight with the Legislature. “It seems wrong that the governor can impound those funds from a statutorily directed appropriation,” Hawker said. “He could go after a change in board of directors (of the state gas corporation) but still have a confirmation issue on his hands,” for any replacements Walker might name to the AGDC board. House Speaker Chenault, R-Nikiski, was also a prime sponsor of the ASAP enabling legislation but Chenault was not available for comment. One potential shipper of gas in the state-led 36-inch pipeline, if the big gas project stalls, is Resources Energy Inc., Japanese consortium planning a 1 to 1.5 million tons-per-year LNG project at Port MacKenzie on upper Cook Inlet. REI hopes to have its project operating by 2020 and plans to use Cook Inlet gas as feedstock, but if North Slope gas is available from either the state-led 36-inch pipeline or an industry-led, 42-inch line, REI could expand its plant to export larger volumes of LNG, its president, Shunichi Shimizu, said in a recent briefing in Alaska. During his campaign, Walker said he hopes to keep the big gas project on schedule. The matter is more urgent now because the revenues the gas project would bring to be state treasury, estimated at $4 billion per year, will be needed to offset declining oil income. Several major steps on the gas project need to be taken this year, however. During the 2015 legislative session, a Payment-in-Lieu of Tax, or PILT, agreement for property taxes on the gas project paid to the state and municipalities must be approved. The state administration must also formally approve the gas royalty and tax payment in-kind, or in the form of gas instead of money, that is a key part of the industry’s joint-venture agreement with the state. The state must also agree to some mechanism that assures North Slope producers that state production taxes on gas won’t change, and the state must sign a long-term agreement with TransCanada Corp. to ship the state’s in-kind share of gas, 25 percent of the total, through TransCanada’s portion of the 42-inch gas pipeline and Gas Treatment Plant. Previously, state officials in the Parnell administration had said a special session of the Legislature is likely in late 2015 to ratify these agreements, but Walker has not yet spoken on this.

Producing mines keep plugging; prospects seek investors

Alaska’s miners are doing okay, at least those with producing mines. That trend seems likely to continue into the new year. But developers of new mines seem to be stuck, bogged down by a poor global investment climate in mining, and that seems likely to continue as well. It’s an irony, because the experience at the Red Dog Mine north of Kotzebue, Greens Creek mine near Juneau, and the Fort Knox and Pogo gold mines in the Interior show that developers of metals mines can be profitable and overcome challenges of high costs, remoteness and regulatory hurdles. For example, Red Dog had a good year in 2014, shipping 1.025 million tons of zinc concentrates and 205,000 tonnes of lead concentrates, volumes slightly greater than in 2013. Costs were about the same as in 2013 and zinc prices are improving, Red Dog’s owner, Teck, has reported. In Southeast Alaska, gold production at the Kensington Mine near Juneau was up, reaching 30,773 ounces in the third quarter compared with 28,322 ounces for third quarter 2013. Coeur Mining, Kensington’s owner, reported new high-grade gold ore being found. There’s also Alaska’s legacy Usibelli coal mine near Healy, which is continuing to hang in there with coal exports despite a slumping export market while also supplying Interior Alaska coal-fired power plants. Usibelli is producing about 1.6 million tons of coal annually, with about 500,000 tons being shipped to buyers overseas. Though export sales are down, they are stable with Usibelli’s power plant customers in the Interior. The lineup of mine prospects is disappointing, however. With much of the developed world stuck in slow-growth mode and China’s growth down along with its voracious appetite for minerals, the world’s mining industry is in a funk. That means developers of new mines find it hard to raise money. In Alaska, across Cook Inlet from Anchorage, the developer of the Chuitna coal project, PacRim Coal, is plugging away in an extended permitting program, which began in 2006. Meanwhile the company is dealing with the slump in export coal markets, where PacRim hopes to market the bulk of the mine’s expected 12 million tons of annual coal production. Near Ketchikan, Heatherdale Resources is looking for partners and investment for the very promising Niblack multi-metals mine on southern Prince of Wales Island, despite the promise of this underground project to be a mine similar to Hecla Mining Co.’s Greens Creek Mine on northern Admiralty Island, which is very successful. Similarly, International Tower Hills’ big Livengood gold project north of Fairbanks, now well-explored and with a gold resource of about 20 million ounces, awaits a partner with investment capital. That’s despite the successful track record of Kinross Gold’s Fort Knox gold mine northeast of Fairbanks, another large surface mine on the road system. Livengood would be very similar, and possibly bigger, if it were developed. In the western Brooks Range, NovaCopper Resources has significant copper discoveries in the Ambler Mining District and at Bornite, on the upper Kobuk River. NovaCopper has aligned itself well in the region, entering a partnership with NANA Regional Corp. of Kotzenue, which is the landowner at Bornite, and with the state’s Alaska Industrial Development and Export Authority, which is now working on permits for a road into the remote region. Despite those advantages NovaCopper is finding it difficult to raise capital for ongoing exploration and possible development of the discoveries. The proposed Ambler road has become controversial and new Gov. Bill Walker has stripped funding for it out of the proposed fiscal year 2016 capital budget. Two mega-projects also in the queue include the large Donlin Creek gold project near Crooked Creek village in the mid-Kuskokwim River region and Pebble, a very large copper and gold project near Iliamna, southwest of Anchorage. Pebble is controversial with the salmon fishing industry and communities in Bristol Bay who depend on salmon (the fear is contamination of salmon-rearing streams by the mine) and the project is now basically on hold without a major investment partner following Anglo-American’s divestiture in late 2013. However, mining opponents suffered a setback when a U.S. Alaska District Court judge in Anchorage enjoined the U.S. Environmental Protection Agency from proceeding with a preemptive move to veto a large mine in the Bristol Bay watershed until a lawsuit brought by Pebble Partnership is resolved. The fact that Judge H. Russel Holland ordered the injunction against EPA is an indication that Pebble Partnership has chance of prevailing in its lawsuit and that the company may eventually be allowed to proceed with the filing of permits. At Donlin Creek, the mine developer, Donlin Gold, is at mid-stage in a multi-year environmental impact statement process for the mine, which is now well-explored and has about 30 million ounces of known gold resources. The critical decisions for its owners, a joint-venture of Barrick Gold and NovaGold Resources, a Canada-based “junior” exploration company, lie two to three years in the future, when a go or no-go decision must be made. The Donlin Creek mine would require an approximately $6 billion capital investment and would be one of the largest gold mines in the world, if it proceeds. Both Donlin Creek and Pebble have huge implications for the economic sustainability of communities in rural regions near the mines. The surface lands at Donlin Creek are owned by The Kuskokwim Corp., a consortium of Native village corporations in the mid-Kuskokwim region, and the subsurface mineral rights are held by Calista Corp., the Native regional corporation for the Yukon-Kuskokwim region. The Y-K region is today one of the state’ most economically depressed areas, and Donlin Gold could become a significant employer and source of economic stimulus if its mine is developed.

Near-term effect of price plunge to be muted

There have been few other times when Alaska’s oil and gas industry started a new year with such uncertainty. Alaska North Slope sales prices ended the year at about half what they were six months ago in July. The immediate impacts will certainly be less severe than they will be in the booming shale oil plays of North Dakota and Texas, were there are predictions that half the drill rigs working will be laid down within a few weeks. For a lot of reasons, Alaska’s industry appears more resilient, and at least the near-term effects on the industry may be less severe than in many other states. For one thing, there are some major projects in construction, like Point Thomson and CD-5, that won’t shut down. Other projects just now launched will continue, like the new Mustang field development by Brooks Range Petroleum and, if Gov. Bill Walker signs off on a temporary royalty reduction, a new production pad at Nuna planned by Caelus Energy near the Oooguruk field. ConocoPhillips has also approved a new drill-site in the southern part of the Kuparuk River field and work actually started there last winter. Likewise, new drill rigs contracted for by both ConocoPhillips and BP in 2015 and 2016 will arrive as planned, and go to work drilling. It’s also highly likely that a robust exploration season planned for the North Slope will proceed. Repsol plans three exploration wells with three rigs working, a repeat of the programs the company has pursued in recent winter seasons. Repsol’s plan also includes substantial seismic work. Great Bear Petroleum still plans three test wells, using one rig, in its program to explore shale oil resources south of Prudhoe Bay. Seismic work is also planned by Great Bear. Capital spending plans by the industry, mostly by the large producers, seem unchanged so far. The producers submit annual estimates of capital expenditures to the state Department of Revenue in the fall, a requirement in the state’s production tax law. Record expenditures are estimated for state fiscal years 2015 (the current year, now half-way through) and fiscal year 2016, which begins July 1. Spending on projects is estimated at $4.5 billion for the current year and $4.88 billion next year. In contrast, the industry spent $3.73 billion in fiscal year 2014, the year ended last June 30; $2.9 billion in fiscal year 2013 and $2.2 billion in fiscal year 2012. State tax officials have been monitoring expenses submitted by the companies through November, in monthly tax returns filed, and so far capital spending seems on track with the estimates made earlier in the fall. Employment in the industry is still at record levels, too. The yearly average is estimated at 14,300 according to estimated by the state Department of Labor and Workforce Development, which reports labor data in calendar years. In 2013, industry employment averaged 14,100; in 2012 it averaged 13,800, according to the department’s data. Ten years ago, in 2004, 8,200 were at work in the oil fields, averaged through the year. So much for the near-term. The medium-term outlook, for next year and beyond, is more clouded. Just as it takes time for North Slope producers to ramp up projects, it takes time for things to ramp down. The larger companies have a longer-term perspective on oil price trends, too. They know prices will bounce back, but when and to what level are complete unknowns. Each company guards its price threshold for projects for competitive reasons but the common belief is that most large operators use $80 per barrel as a minimum to give new developments a go or no-go. State Revenue forecasters, who actually have a pretty good track record of predicting long-term price trends because they are conservative, believe prices will be back to more than $80 per barrel in 18 months to two years. Between now and then, however, the North Slope companies do face project decisions, and the gloomy price outlook could affect those. This spring, the ConocoPhillips board of directors must decide on whether to proceed with two projects still in the planning and permitting stages: the North East West Sak, or NEWS viscous oil project in the Kuparuk field, and Greater Moose’s Tooth No. 1, or GMT-1, in the National Petroleum Reserve–Alaska. Both are billion-dollar projects. NEWS would produce 9,000 barrels per day if it proceeds; GMT-1 would produce about 30,000 barrels per day, if it happens. Both are important in the companies’ plan to sustain production on the North Slope at roughly the current 500,000 barrels per day. Last year, an aggressive response to the Legislature’s change of the state oil production tax, in Senate Bill 21 in 2013, led to a zero decline in Slope production after two decades of steady decline only once interrupted in 2002 when two new fields began producing. The state Revenue Department has predicted a drop in current year production averages mainly due to the unusually heavy summer maintenance program on production facilities, but then a bounce back to 2014 levels, and more, over the next two years. State petroleum economists won’t say what projects are in or out of the production forecast, although the rule of thumb is that only new projects officially sanctioned, or approved, are included, but ConocoPhillips’ decisions on NEWS and GMT-1 will be closely watched by the state. Smaller companies are more sensitive to short-term oil price trends than the large companies but the projects by independents being pursued on the Slope, such as Mustang and Nuna (if the governor approves the royalty reduction) are funded by equity investors who typically have long-range perspectives and not by funds raised on public exchanges, which is common for “junior” mining exploration firms. Junior mining explorers who depend on stock exchanges are often buffeted by swings in metals prices. Also, the state’s own incentive programs to encourage exploration have the effect of locking small companies into their plans. Brooks Range Petroleum, for example, is benefiting from state tax incentives on Mustang but the company must achieve certain milestones to get the tax credits. Similarly, Caelus Energy, if the governor gives the okay, will be committed under its temporary royalty agreement to move aggressively on the Nuna project and start production on an agreed-on date.

Walker: Alaska will weather fiscal storm

Gov. Bill Walker is reaching out to community and business leaders to help guide him through some tough times with the state budget. In a speech to the Anchorage Chamber of Commerce Dec. 15, Walker’s first address to a major business group since taking office Dec. 1, the governor promised to be honest and “blunt” about the state’s deteriorated fiscal position. “We have to make adjustments. Alaskans have done this before and we can do it again. We can do it together, in collaboration, rather than making late-night decisions on the third floor,” he said, referring to the governor’s office in the state capitol building. Walker appeared at the podium with new budget director Pat Pitney and acting Revenue Commissioner Marcia Davis. The governor said he met with legislative leaders last week, with Davis showing details of the fiscal situation that were also displayed to Anchorage chamber members. State budget documents for upcoming fiscal year 2016, which starts July 1, were also released Dec. 15 as required by law, but Walker said these were placeholder budget bills that had been developed by the outgoing administration of Gov. Sean Parnell. The operating budget developed by Parnell was submitted by Walker but the capital budget was stripped of virtually all items except required state matching funds to federal programs. Walker said he will submit his own budget to the Legislature, including a new capital budget, on Feb. 19, the required date for the administration’s amendments to the fiscal year 2016 budget bill. “Any growth in the capital budget will be done with the utmost scrutiny and with an eye toward items that reduce future obligations,” said Pitney, the state budget director, who followed Walker at the podium at the chamber meeting. Walker has been dealt a tough hand of cards with oil prices that have plummeted in recent weeks, closing below $60 a barrel Dec. 15. State revenues from oil, which pay about 90 percent of the state budget, are expected to be cut in half this year. The governor was asked at the chamber meeting about his campaign pledge to expand Medicaid to cover low-income Alaskans without health coverage. “This is moving forward. We were surprised to learn that there will actually be some savings (for the state) in the expansion,” Walker said. He will release details on the savings as soon as they are known with more certainty, he said. Walker didn’t comment on the current problems in the state Medicaid payment system but in the previous week his Commissioner of Health and Social Services Valerie Davidson told reporters that the payment problems as well as issues with enrolling larger numbers of Alaskans in Medicaid were creating unexpected challenges. Grace Jang, Walker’s spokeswoman, said in an email the governor was aware of the problems in the Medicaid system. The governor did not mention the major natural gas pipeline and liquefied natural gas export project in his speech. The state is a financial partner in the gas project and preliminary engineering is now underway with major decisions by the state and its industry partners needed in 2015. Walker was upbeat in his speech about the ability of Alaskans to ride out the current fiscal problems. “The price of oil doesn’t define us as Alaskans. We’ve been here before (in previous oil price plunges) and we’ll work our way through this responsibly. We’re not declaring a crisis — we’ll work our way out of this,” Walker said. Fortunately, the state has ample cash reserves, about $12 billion in ready assets in two state reserve funds; that tally allows for a $3 billion transfer from reserves to state pension funds authorized by the Legislature in its 2014 session. Walker pledged not to just whack the budget; it would be too disruptive for the state economy. “You can’t cut your way to prosperity,” he said. There is no alternative to relying of reserves to cushion state budget deficits estimated at $3.5 billion this year and next, and continuing. The needed restructuring of state finances will also present some opportunities. Walker didn’t elaborate on these, but later, in answering questions, the governor said that “public-private partnerships” in delivering public services was a major theme that developed in transition recommendations from a conference of citizens held in late November. On the oil price outlook, Walker said state petroleum economists believe it will take some time for prices to nudge up. “Circumstances overtook us. The world commodity markets were shaken when the Saudis decided not to cut production and to just wait it out until high-cost producers drop out,” he said. “At $60 oil prices it is expected to take about a year to 18 months for the (excess) supply to drop. After that we believe the price will edge up.” Meanwhile, in doing forecasts of state revenues Walker said he has instructed the Revenue Department, “to be as accurate as possible, and conservative.” In her presentation to the chamber following the governor’s remarks, Davis said the Revenue Department has projected an average oil price of $76 per barrel for the current fiscal year, which is now about half over. The average price estimate is a blend of higher prices in the early months of the fiscal year starting in July, when the price was more than $100 per barrel, and expected lower prices for the fall and spring months. The average price is estimated at $66 per barrel for next fiscal year, fiscal year 2016. A correction in the oil markets is expected in fiscal year 2017, and prices are estimated at $93 per barrel. In years after that a $90 per barrel price is used for planning purposes but Davis, the acting Revenue commissioner, told chamber members that forecasting oil prices beyond two or three years is highly risky. The near-term price estimates are conservative, she said. State economists have assigned a 60 percent confidence level to the estimates. In later years, after 2017, there is a 50 percent confidence level in the price forecasts, Davis said. However, even a return to a $90 oil price won’t end the budget deficits, she said. The current estimate is that state reserves will be sufficient to cover budget deficits through fiscal year 2022. However, that assumes keeping the state budget at about $5.5 billion in unrestricted general fund spending, which is about the budget level of fiscal year 2014, which ended June 30. Unrestricted general fund spending for the current budget year is about $6.1 billion. Jang, Walker’s spokeswoman, said the details of a community outreach on budget issues are still being worked out. “The cabinet needs to have a few more meetings but in the near future we will meet with lawmakers are community groups. We’re not sure how this will look. The governor will attend as many as possible,” Jang said. “As for engaging the public, we will set up an online forum through which Alaskans can weigh in with their ideas. This is still in the formative stages.”

AIDEA expands study funds for Port Mac LNG

The State of Alaska has expanded its financial commitment in aiding a new Cook Inlet liquefied natural gas project being planned by Japanese companies. In its Dec. 16 board meeting the Alaska Industrial Development Authority, the state’s development finance corporation, agreed to expand the authority’s sharing of expenditures on feasibility studies from $240,000 to $440,000. A 1 million to 1.5 million tons-per-year LNG project is proposed to be built in upper Cook Inlet adjacent to the Matanuska Susitna Borough’s Port MacKenzie across from Anchorage. A preliminary capital cost is estimated at $1 billion to $1.5 billion for the plant and a dedicated LNG loading terminal but this cost is now being refined, said Mary Ann Pease, general manager for Resources Energy Inc., the Japanese consortium planning the project. Another $1 billion could be spent by REI in Cook Inlet gas purchases or participation in gas development and production, she said. Mark Davis, AIDEA’s associate development director, said the amount is modest but important in signaling the authority’s belief that the project is sound. “We believe it’s a good project,” he said. A combination of Japanese and American investment in the project is expected, “and we (the state authority) could be involved on the American side although this is very preliminary,” Davis said. AIDEA has financed and invested in several Alaska energy projects. AIDEA staff and consultants visited REI’s owners in Japan in doing due diligence, Davis said. The project is now in the feasibility study and preliminary engineering phase with a goal of beginning the final Front-End Engineering and Design, or FEED, stage in March. KBR Inc., a Houston-based engineering company, has just completed a technical study of the proposal and has given REI several options on LNG technology, Pease said. A final selection of a site is expected at the end of December. Port MacKenzie’s dock facilities will be used to bring in construction equipment and materials but under federal rules the project will need its own dedicated dock to load LNG carriers, she said. The plant would require about 160 million cubic feet per day of natural gas. Pease said REI’s studies indicate that Cook Inlet has potential to supply the volume, which would be surplus to local needs, based on discovered but undeveloped gas resources as well as potential resources. Several companies have made discoveries in the Inlet but have not moved to development because of a lack of markets, which the new REI plant would offer. Currently the only market for gas in Southcentral Alaska are regional gas and electric utilities which are being supplied by Hilcorp Energy with contracts extending into 2018 and the existing LNG export plant owned by ConocoPhillips Alaska Inc., which mainly processes the company’s own gas but has agreed to purchase some gas from other producers. A key goal of REI’s owners, a consortium of Japanese municipal governments and private firms, is to invest in a dedicated Alaska LNG project so the Japan owners will control their own supply of LNG, Pease said. REI also intends to build its project on a fast track with a goal of completion and shipments of LNG beginning by 2020 or before, she said.

Walker faced with widening deficit scenario

Gov. Bill Walker faces a grim budget scenario that may distract the new governor from other priorities, like a natural gas pipeline and an expansion of Medicaid. A template of a proposed fiscal year 2016 budget will be released Dec. 15, as required by law, but it will be empty of the real numbers Walker will propose to the Legislature in late January, the deadline for an amended budget. Walker released former Gov. Sean Parnell’s “work in progress” capital and operating budgets Dec. 5 but warned that changes are coming. The Parnell documents reflect the frustration state budget officials will have in controlling growth of the operating budget while also making cuts to the capital budget. The total budget of state funds for capital spending was $349.8 million in Parnell’s plan, including unrestricted general funds, designated funds and other state funds. About $1.06 billion in federal pass-through funding, mostly for transportation projects, brings the total capital budget to $1.4 billion. Although the Parnell budgets are documents for planning only, they show an operating budget expenditure of $10.1 billion in state general funds, an increase over $9.85 billion in total state funds in the current fiscal year 2015 budget. Parnell did reduce the expenditure of state general funds by 3.8 percent mostly through reductions in personal services, which were undesignated, but “designated” general funds mostly for state formula programs like Medicaid and education were up 5.3 percent and funding for programs funded by “other state funds,” a catch-all category, was up 22 percent. Federal funds administered through the Parnell operating budget were increased slightly from $2.019 billion for the current year to $2.027 billion for next year. Overall spending in the total budget including all categories would rise 2.1 percent from $11.88 billion to $12.13 billion, according to the budget document. New state budget director Pat Pitney said the operating budget to be submitted Dec. 15 will be the work-in-progress budget document Parnell prepared, but that a capital budget document prepared by Parnell will be changed, mostly by reducing or eliminating capital project funds the former governor had proposed. Walker will submit a new capital budget in late January along with a new operating budget. The state’s fiscal situation will require lean spending plans. A revenue projection prepared by oil and gas consultant Brad Keithley and University of Alaska Anchorage economist Scott Goldsmith predicts that at lower oil prices the current year budget deficit could double to $3 billion if oil prices were to average $80 per barrel for the fiscal year. Keithley and Goldsmith prepared their analysis for Walker’s transition teams. It was presented to the team Nov. 22. If oil production continues to decline by 5 percent annually, the historic average until last year when production was flat year-to-year, and spending continues at current rates, the state’s cash reserves will be drained by the end of fiscal year 2018, according to the analysis. However, the price of North Slope oil hit $63.67 per barrel Dec. 9 and if the price average for the year winds up being less than $80, the deficit will balloon further, according to the analysis prepared by Keithley and Goldsmith.  Meanwhile, Parnell’s work-in-progress capital budget includes state matching funds for federal programs supporting highways, airports and village safe water projects, much of which Walker is likely to include in his proposal. Some hot-button items were in the Parnell capital budget, like $20 million in continued funding for permitting work on the big Susitna-Watana hydroelectric project. Some $8 million was also included for continued permitting and planning work on the Ambler resource access road, which could be built from the Dalton Highway to mineral exploration areas in the western Brooks Range. The budget also did not include any money for the Knik Arm crossing, a large project in the advanced planning stage, or the extension of the Alaska Railroad from the railroad’s main track line near Houston to Port Mackenzie on Knik Arm of upper Cook Inlet. The rail extension is being built in phases, with some phases now under construction. Village safe water projects would total $51.5 million with the state contributing $8.75 million. This is a long-running program that is installing water and sewer systems in rural communities still on unsafe “honey buckets” sewage disposal as well as upgrading projects installed years ago. Since the bulk of these funds are federal the state money is likely to survive in a Walker budget. Another $9.98 million is for municipal grants for water, sewage and solid waste that is all state-funded. Because there are no federal funds this item will be carefully scrutinized. Another capital budget state program assisting municipalities is the Municipal Harbor Facility Grant Fund. Parnell proposed $10.4 million in state funds in his budget but there are no federal funds so this proposal will be looked at by Walker. Although it is part of the operating budget, municipalities will also be watching state funding for municipal revenue sharing. Parnell put $60 million into his fiscal year 2016 operating budget, up from $52 million in the current 2015 budget. State funds totaling $50 million are pledged as the state match to the federal highway program and another $11.7 million is included as a state match to federal aviation funds. Total surface transportation program funding is proposed by $625 million including the state match, while $210 million is proposed to airport funding including the state match. These funds will almost certainty stay in the budget. Parnell also proposed $5.09 million for continued Dalton Highway improvements and while this is a state-funded initiative the importance of this road, which is the vital surface transportation link to the North Slope oilfields, means that the money will likely remain in a Walker budget. A substantial outlay by the Alaska Housing Finance Corp. of $43.2 million is in Parnell’s budget for grants for public housing, homeless assistance and special needs housing, with most of this supported by federal funds. As with rural sewage and water, the state portion for these AHFC programs is likely to remain. However, Parnell proposed $10 million in state funds to continue funding the popular AHFC home energy rebate program, where there are no federal funds, but also zeroed out the AHFC weatherization assistance program. These allocations could change because the home energy rebate program mainly benefits urban residential owners while the weatherization assistance mainly benefits rural communities. Given the new sensitivity to rural Alaska in the Walker administration it is likely that some weatherization money will be in the governor’s budget, or if not will be put there by rural legislators. The Parnell capital budget also includes $38.8 million in major school maintenance project grants, a budget item that recurs almost every year, but no capital funds for new school construction. There is one rural school left to be funded — Kivalina — in an out-of-court settlement the state agreed to with a group of rural parents in the Kasayulie v. State lawsuit, but the construction of a Kivalina school is delayed by the need for an access road to a new school site for the community. Other rural schools agreed to in the settlement have been funded and are now in construction. The Parnell capital budget did include $4.6 million in state funds for Kivalina school design and another $2.5 million for the access road. If the Kivalina school rebuild is not funded in total within a year or so it may result in a default in the state settlement and a reopening of the Kasayulie lawsuit. The Legislature ultimately must approve the governor’s budget, almost always with changes.

State sees sharp drop in lost-time injuries

Alaska employers reported a dramatic 46 percent decrease in workplace injuries in 2014, with the accident rate dropped to 0.61 lost-time incidents per 100 employees, state Department of Labor and Workforce Development officials said in interviews. The reduction helped push a decrease in workers’ compensation insurance premiums, bringing Alaska below the No. 1 position in the nation in costs, said Mike Monagle, director of the Workers’ Compensation Division in the department. It is the first time since 2004 that Alaska has not ranked either first or second for the nation’s highest premium costs. In fact, Alaska has slipped to the No. 5 position with California, Connecticut, New Jersey and New York now with more costly premiums. For calendar year 2014, Alaskan employers saw an average decrease in premium costs of 2.6 percent. For 2013 the decrease was 3.6 percent. The 2013 reduction saved Alaska employers about $6 million in premium costs in 2014. About $300 million was paid in premiums in 2013. The data is from the 2014 Oregon state’s Workers’ Compensation Premium Rate Ranking Summary, a report published every other year. Twenty-five states showed increases in workers’ comp premiums over the two years in the Oregon study, but Alaska’s rates decreased. Monagle said the most significant factor in the reduced premium costs is better safety performance and reduced lost-time incidents. “In 2008 there were 30,000 lost-time reports and by 2013 this had dropped to 19,000. This made a huge difference,” Monagle said. “We saw job growth along with declining injuries,” he said. Monagle credited an intense safely culture that has developed among most employers. “Employers are more safety conscious, and this has increased over time. It’s just like using seat belts in autos. There was a time when people ignored seatbelt warnings but now almost everyone clicks up,” he said. “It’s not about people worrying about getting a ticket, either (seatbelts are required by law in Alaska). People can see the benefits, in reduced injuries.” The improved safety trend is national and roughly over the same period, indicating a broad nation-wide greater focus on safety is in the workplace. However, while the premium costs are declining, the overall cost of workers’ compensation insurance in Alaska is still high compared with other states, and the reason is Alaska’s notoriously high medical costs compared with the Lower 48 states. Seventy-six cents of every dollar paid out in workers’ compensation costs in Alaska are for medical services compared with 56 cents in other states, on average, Monagle said. The average medical cost per workers’ compensation claim is $53,000 in Alaska compared with $29,000 in other states. Medical costs in Alaska are significantly higher than other states for many specialized procedures, sometimes by 200 percent to 400 percent, than for similar procedures in neighboring states of the Pacific Northwest, Monagle said. This is mainly due to the limited number of specialized medical providers in certain fields, and the lack of competition leads to higher costs. Given this, controlling the cost of medical care is really the key to controlling or even reducing workers’ compensation costs and employers’ insurance. Two bills passed by the Legislature during its 2014 session should provide some help, Monagle said. One is a bill that requires medical providers serving injured Alaska workers in other states to charge fees in accordance with those states’ allowable fee schedules rather than Alaska’s fee schedule, which is typically higher. The data shows that 20 percent of injured Alaskans are given treatment out of state mainly because many of those workers are employed seasonally and live in the Lower 48 states for part of the year. House Bill 141 went into effect in September, Monagle said. Savings in workers’ compensation costs should start showing up in the next year. The second change is in House Bill 316 passed in the 2014 session, a measure that shifts the method of payment for workers’ compensation medical costs away from the “usual and customary” standard to a “relative value” approach. Relative value adopts the payment procedures currently in use by Medicaid and Medicare and adapts them to Alaska through a system of conversion factors that take into account local costs. In contrast, the existing usual and customary standard is where the fee is paid at the 90th percentile of charges by providers in a given area of the state. What this does, essentially, is that it causes the fee structure to escalate over time because if one or a handful of providers raise rates it raises the 90th percentile average for all providers even when some providers were charging lower rates. A system like that encourages an upward spiral of costs because it builds in an incentive for provider to raise rates, Monagle said. The new system, which is to be in effect next July, links the fees to what Medicaid and Medicare pay, systems health providers are accustomed to, but allows for the conversion factors to adjust the fees to local costs and conditions. The conversion factors are recommended by the Medical Services Review Committee, on which medical providers and organized labor are represented, and adopted by the Alaska Workers Compensation Commission, a state commission that is charged by HB 316 with implementing the new system. Monagle said the medical rate review committee is to meet Dec. 12 to adopt proposed conversion factors that will be considered by the workers’ compensation commission at its meeting planned in mid-January. The goal is to have the new system in effect April 1, in time to get any “bugs” in the system worked out prior to the July mandatory deadline, Monagle said.

Gasline efforts, Medicaid face challenges

In his first press conference since taking office Dec. 4, Gov. Bill Walker was circumspect on two hot-button items facing his new administration. Walker held a media availability Dec. 9 at the Governor’s Mansion in Juneau, which was also being opened to a public holiday reception. On his commitment to expand Medicaid, as allowed under the federal Affordable Care Act, Walker said: “We actually started that on day one (of taking office). I have signed some correspondence since then beginning the process. It’s in the works (but) it’s not like flipping a light switch. There’s a process involved and we’re being deliberative in that process to determine it is the right process to take, but we have begun that process.” However, there are reports that Walker and his new Health and Social Services Commissioner Valarie Davidson are also struggling with a snarl in the Medicaid payment system inherited from the Parnell administration. An immediate focus is on this priority. Medicaid expansion will also require some form of legislative authorization, although the extent of this is unclear. At minimum legislators will have to authorize the receipt of new federal funds. On the Alaska LNG Project, another priority, Walker said: “We have met with — and probably again also in the next 30 days — the AK LNG sponsors. We have met with the ADGC (Alaska Gasline Development Corp.) leadership and some of the board members and some of the outgoing administration and had a debriefing with them,” Walker said in the briefing. “One thing that was exciting about my opportunity to meet with the president in D.C. was to talk about the gasline. The president was very interested in infrastructure projects. I gave him an infrastructure project we’re working on that we’re eager to finish.” During the campaign Walker said he would scale down the alternative Alaska Standalone Pipeline, or ASAP, project because it was too small to be economically viable. ASAP is being pursued by the state through AGDC as a backup to the large export line in case it isn’t built. There may be limits to his ability to cut the smaller-scale pipeline or to gut the state corporation, however. The bulk of the funding for the smaller AGDC gas pipeline through its permitting, engineering and a 2016 open season was appropriated by the Legislature two years ago and those funds, which are still being spent, may be beyond the governor’s authority to impound. From a political standpoint this would also exacerbate problems Walker already has with AGDC’s chief legislative sponsors: House Speaker Mike Chanault and Anchorage Rep. Mike Hawker. Walker could also restructure the AGDC board by firing some or all of the current board members (they serve at his pleasure) but any vacancies filled by Walker would have to be confirmed by the Legislature. Such moves could also disrupt the state gas corporation’s other function, its role as the state entity owning part of the large natural gas pipeline and liquefied natural gas project that is now in a $500 million pre-Front End Engineering and Design phase. Juneau Empire reporter Katie Moritz contributed to this story.

Public hearings end for Chukchi lease sale SEIS

The U.S. Bureau of Ocean Energy Management wrapped up a schedule of six public hearings in Alaska Dec. 4 on a revised environmental impact statement for a 2008 Chukchi Sea Outer Continental Shelf lease sale. The final hearing was held in Fairbanks on Dec. 4 on the draft supplemental EIS. Earlier, hearings were held in Kotezbue, Point Hope, Wainwright, Barrow and Anchorage. BOEM expects to have a final EIS in late February and a Record of Decision in March, the agency wrote in a filing to the U.S. Alaska District Court. It is not certain whether that will give Shell time to mobilize for a hoped-for 2015 summer exploration drilling the company plans in the Chukchi Sea. Shell and other companies bid more than $2 billion for leases in the 2008 lease sale and Shell has been attempting to drill exploration wells, but U.S. Alaska District Court Judge Ralph Beistline ordered the EIS to be redone after a coalition of environment groups filed suit challenging the estimate of potential oil development; eventually the 9th U.S. Circuit Court of Appeals agreed with their challenge and remanded the case to his court. The revised supplemental EIS changed assumptions of possible oil and gas discoveries in the lease sale area, making them larger than in the original 2008 EIS, and also increasing the probabilities of oil spills. Shell has already filed and received BOEM approval for an oil spill containment plan for its exploration plan. That plan is keyed to a “worst possible discharge” the company has estimated from the specific prospect Shell hopes to drill, which is separate from the estimate made by BOEM in the supplemental EIS for hypothetical discoveries that could be made. Environmental plaintiffs in the case may argue that the oil spill plan previously approved should be redone but Shell has contended that its estimates for any spill haven’t changed. In the revised EIS, government geologists estimated that two commercial discoveries could be made in the sale area, one a larger “anchor” field with 2.9 billion barrels of recoverable oil followed by a smaller “satellite” field with 1.4 billion barrels recoverable, or 4.3 billion barrels of oil combined. These estimates are the  “high case” for discoveries in the sale area, according to the draft SEIS. The peak oil flow estimated is 558,702 barrels per day. In the 2008 EIS, the U.S. Minerals Management Service, the agency that preceded the BOEM, put the estimated size of a discovery at 1 billion barrels, which environmental groups said was too low. The revised estimate is based on a hypothetical development scenario that also assumes that 465 oil-producing wells will be drilled, 93 “service” wells and eight platforms installed. “The modeled anchor field and even the satellite field are larger than any field in the Gulf of Mexico Outer Continental Shelf,” according to the revised EIS. No estimates of natural gas were made but BOEM said it also relied on a 2011 resource assessment for the Chukchi Sea that estimates the sale area contains a mean estimate of 76.8 trillion cubic feet of gas as well as 15.4 billion barrels of oil. These are volumes that could be discovered and developed with current industry technology, but the estimates do not take economic or logistical factors into account, according to the draft SEIS. BOEM’s estimate of 4.3 billion barrels that could be discovered and developed assumes an oil price of $110 per barrel. The EIS also includes some discussion of possible direct loading of oil from platforms to tankers in the Chukchi Sea as an alternative to a pipeline to shore. A stipulation in the OCS leases from the 2008 sale encourages the transportation of oil and gas by pipeline to shore but does not completely forecast direct loading to tankers at sea, according to the EIS. However, according to the document, BOEM has determined that, “direct tankering of oil from offshore Chukchi Sea platforms is not a viable strategy, and that the only viable strategy is to transport produced oil by platform. “There is no precedent for direct tankering of oil from locations featuring the ice conditions which characterize the leased portions of the Chukchi Sea. While it is acknowledged that ice-hardened tankers are used or proposed to transport oil on a year-around basis in the Barents Sea and Kara Sea (off northern Russia) these areas are more protected from incursions of multi-year ice floes, have much less multi-year ice overall due to the warming effects of the (Atlantic) gulf stream, and thus do not experience the same level of ice hazard as the Chukchi Sea.” In pubic hearings, environmental groups underscored an estimate in the draft EIS that two “large” oil spills of 1,000 barrels or more could occur during the production lifetime of fields discovered, and that there was a 75 percent chance that this would happen based on BOEM’s analysis of spill history in Gulf of Mexico OCS production areas. “The agency’s prediction that there is a 75 percent chance that a major oil spill could occur is of grave concern to Alaskans,” Darcie Warden, Alaska director for the Wilderness Society, told the agency hearing panel. “Given that there is no way to clean up a spill in the Arctic’s harsh conditions, this could be catastrophic to polar bears, ringed seals, whales and marine and coastal birds which depend on the Arctic Ocean.” Other Alaskan groups held different views. Rick Rogers, executive director of the Resource Development Council of Alaska, an Anchorage advocacy group, said “Lease Sale 193 has undergone thorough environmental reviews (in 2008 and in 2014) and the BOEM has once again acknowledged that exploration can take place in the offshore waters of the Chukchi Sea with minimal environmental impact.” Shell is targeting the Berger prospect about 60 miles offshore the northwest Alaska coast. ConocoPhillips and Statoil also hold leases in the region but are watching Shell’s efforts to secure regulatory approval before filing their own applications to explore.

Walker brings back several Palin officials

New Gov. Bill Walker took office Dec. 1 and ordered immediate changes in top echelons of state government. Walker brought back several top officials from Gov. Sarah Palin’s administration for senior positions in the natural resources and revenue departments. Walker defeated former Gov. Sean Parnell by about 6,200 votes in the Nov. 4 Alaska elections. Parnell first took office in July 2009 when Palin resigned before the end of her term. Out were several state commissioners and deputy commissioners including Joe Balash at the Department of Natural Resources, Susan Bell at Commerce and Economic Development, Bill Streur at the Department of Health and Social Services, Cora Campbell at the Department of Fish and Game, and Diane Blumer at the Department of Labor. Deputy Revenue Commissioner Mike Pawlowski’s resignation was also accepted Dec. 1. On Dec. 3, he joined U.S. Sen. Lisa Murkowski’s staff on the Energy and Natural Resources Committee. Murkowski will chair the committee in the new Republican-held Congress when it convenes in January. In agencies engaged in oil and gas issues and the huge natural gas export project, Walker brought back several of Palin’s officials. These include Marty Rutherford, who was deputy Natural Resources commissioner under Palin and one of the architects of the ultimately failed Alaska Gasline Inducement Act, or AGIA, project. Walker named Rutherford as acting resources commissioner and as permanent deputy commissioner, a position she held before. “Marty is a natural fit for this position,” Walker said. “I know and trust Marty. She will hit the ground running and do an outstanding job.” Rutherford was working with Linc Energy until being tapped by Walker. Another former Palin official, Marcia Davis, was named acting commissioner of Revenue. She was deputy Revenue commissioner for tax under Palin. Davis was a strong critic of state oil tax changes made by former Gov. Sean Parnell. Prior to rejoining state government, Davis was general counsel for Calista Corp. Rutherford will be acting commissioner until Mark Myers, who Walker earlier appointed as DNR commissioner, can wrap up affairs at the University of Alaska Fairbanks, where he is vice chancellor for research. Myers was also a strong critic of Parnell’s oil tax change. Davis will likewise be in charge at the Revenue Department until Randy Hoffbeck, Walker’s appointee for revenue commissioner, arrives back in Alaska from an extended overseas commitment. There are reports that Davis is being considered for another senior position in the Walker administration. In other revenue department changes, Ken Alper, a former legislative assistant to State Rep. Beth Kerttula, D-Juneau, was named as state tax director. Alper has a background in economic modeling and became the House Democrats’ expert on oil and gas tax issues. Alper will be based in Juneau. Matt Fonder, the previous tax director, was based in Anchorage. In another appointment, Jerry Burnett, a former deputy Revenue commissioner for treasury, has been appointed again as a deputy Revenue commissioner. In other areas, Walker also named Valerie Davidson, a widely-respected advocate of rural health care, to be commissioner of the Department of Health and Social Services, replacing Bill Streur. Davidson is currently head of government relations for the Alaska Native Tribal Health Consortium. She is a strong advocate of expanding Medicaid under provisions of the federal Affordable Care Act, which Parnell, the former governor, opposed. At Fish and Game, Sam Cotten, a former legislator and Speaker of the House, was named to be acting commissioner. Walker also said Cotten is being considered for the permanent position. Cotten is a commercial fisherman with wide experience in regulatory issues affecting fishing, and was formerly a member of the North Pacific Fishery Management Council. He will replace Campbell at the upcoming council meeting in Anchorage Dec. 10-15. Under state law, the ADFG commissioner is appointed by the governor from a list of qualified persons nominated by the Board of Fisheries and the Board of Game meeting in joint session, subject to the right of the governor to request additional nominations. At the Department of Education, Walker accepted the resignation of Mike Hanley, the commissioner, but then named Hanley as acting commissioner. The state education board appoints a commissioner of education, but where there is a resignation the governor makes an interim appointment. Myers, the incoming resources commissioner, and Rutherford, the new deputy, were part of a group of state resources department officials who protested, and resigned, in 2006 when former Gov. Frank Murkowski attempted to negotiate a partnership with industry on an Alaska natural gas pipeline. In many respects Murkowski’s proposal, which failed, is similar to a state-industry partnership on a large gas pipeline and liquefied natural gas project agreed on by Parnell and approved by the legislature earlier this year. After resigning his DNR position, Myers was named as head of the U.S. Geological Survey but later returned to Alaska and became the coordinator in the DNR on the AGIA gas pipeline project. In other interim appointments, Walker made Grey Mitchell acting commissioner of the Department of Labor and Workforce Development. Mitchell was previously director of the department’s division of labor standards and safety. Fred Parady was named acting commissioner of the Department of Commerce. Parady is now a deputy commissioner. Previously he held a senior administrative position at the North Slope Borough, working for Mayor Charlotte Brower. As of Dec. 3 there have been no further changes at the Department of Natural Resources other than at the commissioner and acting commissioner appointments. Deputy Commissioners Bob Swenson and Ed Fogels are still on the job, as is Oil and Gas Director Bill Barron.

Native regional corps. exploring frontier basins

Oil prices may be in the pits but Alaska Native corporations are pushing ahead with exploration in largely-unexplored “frontier” basins in the state. Ahtna Inc., the regional corporation for the Copper River area, plans to begin 40 miles of two-dimensional seismic survey on state lands west of Glennallen this month. Ahtna and two partners hold a state exploration license in the area. If the results are favorable Ahtna hopes to drill an exploration well, said Joe Bovee, Ahtna’s vice president for land and resources. Ahtna has purchased rights and reprocessed about 90 miles of seismic data acquired by oil companies exploring in the 1970s and 1980s. The new seismic being obtained will fill gaps in this data, Bovee said. A potential target for an exploration well should be selected by May, he said. It will be a shallow test of 4,000 feet to 6,000 feet but the structure to be tested could hold a significant amount of gas. The exploration is being done in partnership with two independent oil and gas companies, Texas-based Rutter and Wilbanks Corp. and Santa Petroleum Pty. Ltd., an Australian firm, Bovee said.  Ahtna teamed with Rutter & Wilbanks in earlier exploration in the region including a well drilled that discovered gas. Technical problems with the well and reservoir prevented development of gas production, however. Most recently Ahtna and its partners have committed $2 million to the seismic work. If a well is drilled, it would cost an estimated $12 million. State exploration incentives are helping defray some of the costs of the exploration. If gas is discovered it would provide an important source of energy for power generation in the Copper River region as well as fuel for space heating of buildings and homes. Meanwhile in Interior Alaska, Doyon Ltd. of Fairbanks has just completed a 50-square-mile three-dimensional seismic survey of an area within the Nenana Basin, an area about 60 miles west of Fairbanks where Doyon holds 400,000 acres of state oil and gas leases. Doyon has drilled two exploration wells already in the basin, one in 2009 and a second in 2013. Jim Mery, Doyon’s senior vice president for lands and resources, said the seismic data will be processed and interpreted this spring, and used to determine a location for a third exploration well. Although the two wells drilled, Nunivak No. 1 and 2, did not find an accumulation of oil, the well data demonstrated the presence of active oil and gas system in the basin, meaning that hydrocarbons were being formed, Mery said. The second well was particularly encouraging in showing the presence of good source rocks for oil and gas and good reservoir rocks capable of holding hydrocarbons generated in the source rocks. The presence of impermeable rock layers to “seal” the top of reservoir traps was also determined. While Doyon had partners in its first well, the lack of a commercial discovery discouraged them from continuing. Doyon continued and funded the second well and additional seismic work on its own. Mery said the corporation hopes to attract a partner for the drilling of a third well, however. Doyon is also active in the Yukon Flats Basin, an area north of Fairbanks where Doyon and three village corporation partners, at Stevens Village, Beaver and Birch Creek, control about 1.4 million acres of land. Doyon owns subsurface and some surface rights and the three village corporations own some of the surface. The geology of the Yukon Flats is as prospective for oil and gas as the Nenana Basin and it is three times as large. The westernmost area of interest, near Stevens Village, is near the Trans-Alaska Pipeline System. Mery said Doyon is focusing for now on the Nenana Basin because the state oil and gas leases there have termination dates unless a discovery is made. The region being explored in that basin is also near infrastructure, mainly the Parks Highway, Alaska Railroad and long-distance electrical interties, and a bridge being built by the city of Nenana across the Nenana River will provide year-around road access. “Success at Nenana will open the door to the similar and much larger Yukon Flats,” Mery said. Meanwhile, in northwest Alaska, NANA Regional Corp. is interested in exploring its own lands in the Selawik Basin near Kotzebue and is working to secure an industry partner, according to Lance Miller, NANA’s resource vice president. There are no state-owned lands in the area. NANA has reprocessed 400 miles of older two-dimensional seismic done years ago by oil companies in the Selawik Basin, Miller said, and the updated processing techniques shows prospects in the basin that are much more inviting than earlier believed. Chevron and Unocal “shot” about 1,500 miles of 2-D seismic in total. NANA also has access to data from two exploration wells in 1974 and 1975 by Chevron, Nimiuk No. 1 drilled to 6,311 and Cape Espenberg No. 1, drilled to 8,373 feet total depth. Both wells were dry, but armed with new information NANA would like to attract another company to drill again.

Caelus ready to give go-ahead for Nuna, seismic work

Caelus Energy is scheduled to give formal “sanction,” or approval, Dec. 31 for its $1.5 billion Nuna development project on the North Slope and will be mobilizing contractors to install a gravel pad and road in early 2015, a company official told state legislators in a Dec. 2 briefing. Caelus plans to employ about 500 contractor employees this winter on the construction and two large three-dimensional seismic programs, company vice president Pat Foley told the Legislature’s Budget and Audit Committee. Typically Caelus employs 200 to 300 contractor workers seasonally in addition to its 80-person staff, so the 2015 season will reflect a significant increase in activity. Caelus, which is privately-held, acquired Alaska assets of Pioneer Natural Resources Co. last summer, mainly the producing Oooguruk field, in shallow waters offshore the Kuparuk River field, and the onshore undeveloped Nuna prospect. The company requested a temporary reduction in state royalty as an incentive to test new production techniques in the Torok formation, a large geologic formation that contains substantial in-place oil resources but with technical challenges in producing the oil. Nuna has estimated recoverable reserves of 50 million to 100 million barrels of oil that can be recovered in its phase one, Foley said. Thirty production and injector wells are planned. Without the temporary royalty reduction, the development of Nuna would be delayed a number of years and may not be developed at all because of the technical uncertainties with the Torok formation, Foley said. Former State Department of Natural Resources Commissioner Joe Balash gave preliminary approval for a reduction, which is still out for public review. Incoming DNR Commissioner Mark Myers or Marty Rutherford, the acting DNR Commissioner, will have to give the final OK, which would come in January. One of the seismic “shoots” will be on the western North Slope near the Nuna project and the other on the eastern Slope where the company acquired tracts in a Nov. 19 state oil and gas lease sale. Foley said Caelus has a $500 million capital budget for 2015, about half allocated to phase one of Nuna, the development of the first production pad (there is a plan for an eventual second pad) and the second to an expansion of the Oooguruk production island to accommodate more production wells. Under terms of the royalty modification, Caelus will be held to hard deadlines for Nuna, Foley said. With gravel installed in 2015 the company must begin the installation of flow lines and surface production facilities in early 2016 and to start production in late 2016. Nuna is expected to i0nitially produce 5,000 barrels per day to 10,000 barrels per day with output ramping up to a peak of 15,000 barrels per day to 20,000 barrels per day, Foley told the legislative committee. The royalty reduction for Nuna, from 12.5 percent to 5 percent, lasts until Caelus has earned $1.25 billion in gross revenues on the project, which Foley estimates would occur in 2020, although it could come earlier, in 2019, or later, in 2021, he said. After that the 12.5 percent royalty will reapply along with a 30 percent share of net profits paid to the state. State Division of Oil and Gas Director Bill Barron told the legislators the net cost to the state of the royalty reduction is estimated at $44 million, and that the net profit share provision in the Nuna leases are not changed by the temporary reduction in royalty. Nuna construction and production contracting will inject $1.3 billion into the state’s economy, Foley said, and the project will also result in $1 billion to $1.7 billion in tax and royalty payments to the state. Democratic Rep. Les Gara, said the state will receive little to no production-tax value from the field under the tax overhaul passed in 2013. State Sen. Click Bishop, a member of the Budget and Audit Committee, said, “Let me get this straight. We give up $44 million to make sure this project goes and get back $1 billion to $1.7 billion in the long run. That right?” Barron said Bishop’s conclusion was correct.

Corps publishes scoping report for Alaska Stand Alone Pipeline SEIS

Even as the state administration changes in Juneau, work is continuing on the state’s backup “Alaska Stand Alone Pipeline,” or ASAP, a plan for a 36-inch natural gas pipeline from the North Slope to Southcentral Alaska. The latest development is publication by the U.S. Army Corps of Engineers and its contractor, ERM Alaska Inc., of summaries of “scoping” sessions held by the Corps on a supplemental environmental impact statement, or SEIS, for the project. An EIS has already been approved for an earlier version of the ASAP project but a change in the project design from 24-inch diameter pipe to 36 inches and some changes in routing required a supplemental EIS to be done. The state-owned Alaska Gasline Development Corp. is leading the ASAP project as an alternative way to get North Slope gas to communities in the state in case a larger pipeline and liquefied natural gas project falters. Sixteen scoping meetings on the SEIS were held by the Corps between August and October to gather public comment on the changes in the design. The draft SEIS is expected out from the Corps in mid-2015. After a public review period of the draft, a final SEIS will be published. The Alaska Gasline Development Corp. is leading development of the ASAP project while also serving as the state entity that would own part of the larger, industry-led pipeline and LNG project if that moves forward. If that happens, the ASAP project would not be built, AGDC president Dan Fauske has said. The state Legislature has appropriated funds to the state corporation sufficient to see the project through its engineering and permitting phases to an “open season” in 2016, if that is needed. An open season is a period in which a pipeline developer solicits indications of interest from potential shippers of natural gas. If those are tendered, the pipeline developer would proceed to the negotiation of shipping contracts, which would enable financing for construction to be secured. AGDC spokesman Miles Baker said that if the ASAP project proceeds it would be state-led as far as open season. After that, the state would enter a contract with a pipeline builder and owner that would construct and operate the pipeline. The state has had discussions with Enbridge Inc., a Canada-based pipeline company, on taking this role. The state is meanwhile partnering with TransCanada Corp., a competitor to Enbrige, in the large pipeline and LNG project. To date the state Legislature has appropriated $419.8 million for the ASAP project, of which $120 million was spent through the end of fiscal year 2014, the budget year that this past June 30, with an additional $98 million being spent in the current fiscal year 2015, Baker said. Legislators made a separate appropriation of $69.8 million in fiscal year 2014 for AGDC’s work on the state’s portion of the large pipeline and LNG project, and an additional $25 million is being made available for the work in the current year. Gov. Bill Walker, who took office Dec.1, will be reviewing the ASAP project and may make changes. During the campaign he suggested scaling back funding for the project based on the budget deficits and limited economics of scale serving only in-state customers.

GTL on North Slope could slash low-sulfur diesel prices

Ohio-based Velocys Inc. is interested in Alaska. A local firm, Alaska Natural Gas-to-Liquids, is working on a proposed gas-to-liquids plant at Prudhoe Bay using Veolocys’ technology to make fuel for the oil field operators and contractors from natural gas, which could be made available by North Slope producers. The plant would make ultra-low sulfur diesel, but gasoline and methanol can also be made if customers desire those products, according to ANGTL President Richard Peterson. Those liquids must now be shipped by rail and truck from Southcentral Alaska to the North Slope. Making the fuels at Prudhoe Bay with low-priced natural gas available there could reduce North Slope operators’ and contractors’ fuel costs by an estimated 30 percent, Peterson estimates. Years ago, the Slope operating companies made high-sulfur diesel for local use but when the U.S. Environmental Protection Agency mandated the use of ultra-low sulfur diesel — no more than 15 parts per million sulfur — the Slope operators found they could not economically make the ULS diesel on the slope. It was cheaper to import the ULS by truck even though it was a matter of crude oil being shipped to Valdez, sent by tanker to Nikiski, and then after being refined shipped 900 miles back to the Slope. Some ULS diesel is made Valdez is shipped all the way by truck. However, the diesel made through the Fischer-Tropsch, or F-T, process easily meets the EPA specifications. It has zero sulfur and is EPA approved as non-toxic.  “With no aromatics, F-T diesel burns cleaner than natural gas and has the advantage that you don’t have to change any of the infrastructure to use it,” said Peterson. The plant ANGTL proposes would produce about 4,000 barrels per day of liquid products, using 40 to 50 million cubic feet per day of natural gas. ANGTL hopes to supply the North Slope operating companies as well as contractors. Drill rigs would be a customer, too. At some point a North Slope GTL plant might also be able to supply fuel to communities in the region. Coastal communities in the Arctic are now supplied by tugs and barges during the ice-free open water period in summer. One possibility is a two-way delivery of fuel in the Arctic. Barges that bring products north from Dutch Harbor to serve communities east of Prudhoe Bay, such as Kaktovik or Tuktoyutuk, in Northwest Territories, would head back west empty and could be reloaded at Prudhoe and resume the westward journey, so that Alaskan communities could get fuel from either north or south. Other applications in Alaska might be found for small GTL plants as it is demonstrated that such a plant can be built and operated in the extreme environment of the North Slope. For example, NANA Regional Corp. hopes to do more oil and gas exploration in the Selawik Basin near Kotzebue, which geologists say is prone to natural gas. If gas is found in the region a small scale gas-to-liquids plant might be able to make diesel for local use at a more affordable cost than importing it seasonally by barge. This might also help supply more affordable energy to the large Red Dog lead-zinc mine, which is also in Northwest Alaska and is a big consumer of diesel fuel. Teck Alaska, the Red Dog Mine operator, now imports its fuel. Another possibility is that if a small gas pipeline is built to the Kuskokwim River to support the large gold mine planned at Donlin Creek, a small-scale GTL plant could make liquid fuels there, too.

Joint venture enables production at Mustang

Brooks Range Petroleum will begin drilling this winter on production wells for the new Mustang oil field on the North Slope. The first release of funding from investors, which includes the Alaska Industrial Development and Export Authority, was made Oct. 29 and will finance the drilling as well as development of an oil and gas processing facility and connecting pipelines. Mustang is expected to produce about 9,000 barrels per day, or b/d, in 2016 with that increasing to about 12,000 b/d in 2017, Brooks Range Chief Operating Officer Bart Armfield has said. Production will be from the Southern Miluveach Unit west of the Kuparuk River field. In a press release, Brooks Range said AIDEA, the state’s development corporation, and CES Oil Services, a subsidiary of Charisma Energy Services Ltd. of Singapore, will own the processing facility through Mustang Operations Center 1, LLC. Brooks Range Petroleum Corp. will be the Mustang field operator and will build and operate the facility, Armfield said. The process plant and pipelines are expected to cost between $200 million and $225 million, he said. Total costs, including drilling, are expected to be $500 million. “We are very pleased to take this important step and to move forward with the construction of the production facility for the Mustang field,” Armfield said. AIDEA will invest $50 million in the processing plant  in addition to $20 million AIDEA previously invested with partners in a Mustang access road and gravel pad, will will bring the state’s total investment to $70 million. This is the first equity investment by AlDEA in upstream production infrastructure. The authority’s previous oil infrastructure investment, also done with partners, was in a jack-up rig to do Cook Inlet exploration drilling. The Mustang plant will be the first independently-owned, open-access production facility on the North Slope. “The Mustang facility will enable companies operating on the North Slope to economically develop additional fields in a highly prospective area that to date has remained relatively underexplored.” Armfield said in the statement.  This is significant because independent companies exploring on the North Slope have had difficulty negotiating access to process facilities in producing fields that are owned by BP, ConocoPhillips and ExxonMobil, major operators on the Slope. This limitation motivated AIDEA to help finance an independent open-access process plant, AIDEA officials have said. The plant is being designed to handle 15,000 barrels per day, to leave capacity available for production that would come from new discoveries, separate from the Mustang field. Armfield has said that Brooks Range has nearby prospects it intends to test once Mustang is operating, and companies are exploring and making discoveries in the immediate area. Those include Repsol, which plans to drill three evaluation wells this winter to evaluate discoveries the company made two years ago. Previously AIDEA, the state authority, has mainly financed infrastructure like access roads for mining projects and ports, although it is also now investing in a small liquefied natural gas plant at Prudhoe Bay that will ship LNG by truck to Fairbanks, in Interior Alaska. Armfield said production from the Mustang field would not have been possible without the project financing provided by the AIDEA-CES partnership.  “Because of AIDEA, BRPC was able to secure hundreds of millions in private investment to pursue additional development drilling at Mustang.” Armfield said. This project will boost the state’s economy, create hundreds of new jobs, and generate significant revenue for the state. “More drilling means more jobs, more production, and more revenue for the State of Alaska,” Armfield said. “This project will generate 50 jobs related to design and engineering, environmental permitting and services; 250 construction jobs; 20 to 25 full-time operations positions and up to 200 indirect long-term jobs. “AIDEA’s overall $70 million investment is estimated to leverage more than $500 million of private investment in Mustang Field development. We are entering an exciting new era on the North Slope. With this project, Alaska is beginning to see the fruits of Senate Bill 21 (the state’s 2013 oil tax reform legislation) which, when combined with AIDEA’s willingness to work with independent oil and gas companies, will unleash the vast potential that remains untapped on the North Slope.” Although exploration and development planning had been underway for Mustang prior to the Legislature’s passage of SB 21 the enactment of the tax changes created a more favorable long-term economic environment for production, which helped Brooks Range secure the final package of investment for the field development.

Record crowd expected at miners convention

The annual Alaska Miners Association convention will set another attendance record this year with about 1,000 signed up to attend so far, AMA Executive Director Deantha Crockett said. It is also marks the 75th anniversary of the AMA, making it one of the state’s oldest trade and professional organizations. The AMA was organized in 1939 to give the mining industry, then one of the territory’s two industries (the other being fishing) a way to present a united front in dealing with new land policies being formed in Washington, D.C. Not much has changed, Crockett said. The Alaska statehood movement, which even then was gaining strength, was also an issue the mining industry wanted to be involved in. This year, however, the convention has also moved to a new venue and larger spaces at the Dena’ina Civic and Convention Center in Anchorage, having outgrown the capacity of the downtown Sheraton, its location in previous years. The event will take place from Nov. 3 to Nov. 9. Attendance has been steadily climbing at AMA’s annual gatherings. There were 700 last year, setting a record then, and 500 to 600 in previous years, Crockett said. These aren’t the best times for the minerals industry worldwide but there’s continued interest in Alaska because of the state’s huge natural resource endowment, and a heavy turnout at the AMA convention signals that. It also indicates concerns over forces adversely affecting mining, such as government policy changes and environmental initiatives, and the miners’ annual conference is seen as a good way to hear directly from top agency officials, Crockett said. This year, she said, mining industry leaders from Nevada and Colorado will make presentations on policy problems in their state. Similar issues may crop up in Alaska. One session that will be no doubt well-attended will be luncheon sponsored by the miners and other business groups on Nov. 5, in which Ralph Samuels, a former legislator and House majority leader, will give his analysis of state election results following the general election Nov. 4, with the victorious statewide candidates invited to attend. Phillip Baker, CEO of Hecla Mining Co., will speak at the Thursday luncheon. Hecla is owner and operator of the Greens Creek Mine near Juneau. Crockett said there will be keen interest in learning about problems with mine tailings dam elsewhere as these will influence Alaska regulators’ responses to proposals for tailings facilities on new projects here. On that topic, British Columbia’s Minister of Energy and Mines, Bill Bennett, will give a presentation on his government’s response to the Mount Polley tailings facility failure. That is scheduled for Nov. 5 at 3 p.m. Crockett said Bennett will discuss the investigation now underway on the failure, why it was ordered and what is being studied. “People here are interested in what we can learn from this. There are a lot of lessons,” she said. Earlier on Nov. 5, AMA will also have a special panel session on tailings dam safety, moderated by Bob Loeffler, a veteran minerals consultant. That is scheduled for 8 a.m. Nov. 5. There will be a panel on national issues affecting mining, a hot topic with the pending preemption effort of mining in the Bristol Bay region by the U.S. Environmental Protection Agency. Hal Quinn, CEO of the National Mining Association, will give an update on EPA issues including the pending rules on power plant emissions, an issue of keen concern to the coal industry. Tom Collier, CEO of Pebble Partnership, will give the latest on EPA’s efforts on a Clean Water Act Section 404c preemption at Pebble as well as his company’s litigation against the agency on the issue. Crockett said a panel on ballot initiatives, from the Alaska perspective as well as experience in others states, will be of keen interest given the recent ballot propositions here, including Ballot Measure 4 that intends to require legislative approval for any large-scale mining in the Bristol Bay area. Tim Crowley, executive director of the Nevada Mining Association, will discuss a ballot measure in Nevada dealing with state mineral taxation. The proposal is to clear away existing Nevada statutes on minerals taxes as a preliminary step toward enacting a new tax code, which the mining industry fears will be more onerous. Stuart Sanderson, executive director of the Colorado Mining Association, will discuss the state’s implementation of its new marijuana measure (a similar law could be approved for Alaska under Ballot Measure 2) and the anti-“fracking” initiative in that state. Although this deals with oil and gas and the practice of hydraulic fracturing, the ripple effects could eventually be felt by the mining industry. This panel is set for Thursday, Nov. 6, at 10 a.m. Thursday afternoon, Nov. 6, there will be discussions of new technologies, including new transportation concepts such as dirigibles and unmanned aerial vehicles. Robert Boyd, of Lockheed Martin, will discuss his company’s work on dirigibles, which are of interest to the mining industry as a possible vehicle for heavy-lift to and from remote, roadless sites. This is set for 3 p.m. A review of AMA’s 75-year history, which is really the story of the mining industry, is scheduled for Friday morning, Nov. 7. People who were active in important events in recent years, like the Alaska Native Claims Settlement Act of 1971 and the Alaska National Interest Lands and Conservation Act of 1980, will reflect on those events, which are still affecting the industry today. Chuck Hawley and Paul Glavinovich, two veteran geologists who were active in those issues, will talk, along with J.P. Tangen on federal law changes; Tom Bundtzen of Fairbanks; former AMA director Steve Borell, and Duane Gibson, a Washington D.C. lobbyist who represents mining interests including the AMA.

Huge spikes for individual health plans but not for groups

The huge spike in health insurance premiums in the individual market due to the Affordable Health Care Act hasn’t materialized for employer groups plans, the major player in Alaska health insurance says. Premera Blue Cross Blue Shield predicts premiums will rise “in the single digits” for most group policies in 2015. The increases will range between 5 percent and 10 percent depending on the group, according to Jim Grazko, president of Premera Blue Cross Blue Shield of Alaska. Jim Grazko was named to the position previously held by Jeff Davis, Premera’s Alaska president for many years. Premera’s “small group” plans, from two to 50 members, that are in the ACA metallic plans, will see an average 5.3 percent increase in 2015 premiums, on average, he said. Groups of 51 to 99 employees will see increases that range from 6 percent to 10 percent. Increases for large group plans, which have more than 100 members will be 7.4 percent on average. Grazko said the average increases for the group plans are similar to those for groups in Washington State, where Premera is also active. “These are overall averages. The cost for a specific plan depends on how it is designed,” he said. The amount of an employee’s deductable or co-share of costs will influence the cost for a particular group plan.  “Large group rates can vary widely depending on the size of the group because it’s heavily driven by the claims experience,” wrote Melanie Coon, a spokeswoman for Premera, in an email. “There are going to be a few groups every year who get rate increases due to their claim costs going up more than expected and the overall claims activity (medical costs) of that group. The rate increase is relatively low because there are more people to balance out any high medical costs hitting the group. The trend for the last few years has been steady in the single digits.” Rates for 2015 have been filed with the Division of Insurance for groups enrolled under the Affordable Care Act “metallic” plans, to be effective Jan. 1, while other group policies issued by Premera will see the new rates as they renew through the year.  “We’ve had a lot of success in keeping the cost growth down,” he said. Grazko credits employers and employees of firms who have embraced initiatives like employee wellness programs. Surprisingly, Alaska employers seem to have taken to those to a greater degree than in other states like Washington, he said. Premera plans more initiatives to help control costs in 2015. One is a “virtual care” program that will allow members of plans reach a physician, either their own doctor or a physician in a network, electronically night or day. This could avoid costly trips to emergency rooms and visits to doctors’ offices on very routine matters, Grazko said. Grazko said Alaska medical costs are still 35 percent to 40 percent greater than those for comparable procedures in Washington state and that another cost-control initiative is offered by Premera, a “medical travel” option for patients to get care in the Lower 48 at less cost and to have travel and accommodation expenses paid for. The travel option is becoming more popular. It was suggested by some of Premera’s larger customers who self-fund health costs. It was first made available to them in 2012. The travel benefit will be offered to all groups, as well as those with individual policies in 2015 and 2016, Grazko said. Becky Hultberg, director of the Alaska State Hospital and Nursing Home Association, said she has heard similar reports of only modest increases through insurance carriers she works with as well as brokers who work with several insurers. “The small group market in particular (mostly small companies) seems to be doing a pretty good job of cost management,” Hultberg said. “Our association just renewed our policy for our employees and we were very pleasantly surprised.” Hultberg was previously state Commissioner of Administration before joining the Hospital and Nursing Home Association and in her state position gained considerable experience in health care cost issues while administrating the state active and retired public employee benefit plans. “One of the reasons why a huge run-up in costs from the Affordable Care Act didn’t materialize was that many group plans already covered things that were among the health law’s new requirements, like 100 percent payment for preventative screenings,” she said. The individual insurance market in Alaska is another story. Rates in this market segment in Alaska will jump an average of 37 percent for Premera members and 27 percent for Moda Health, the two insurers selling to people in the individual market exchange. That’s due to circumstances unique to Alaska, the very limited number of people in the pool and the fact that it includes a small number of people with serious health problems, which raised costs to an unusual extent. “This is all about size of the pool and the risk profile,” Hultberg said. “We heard predictions that this would happen,” so it should be no surprise. Individual insurance exchanges in states like Washington or Oregon, where there are much larger numbers of people enrolled, are actually seeing very small rate increases or even decreases in 2015, said Melanie Coon, a spokeswoman for Premera. Premera’s new “virtual care” program is different than similar services now being offered in the market, Grazko said. The program is set up so that people can consult either their own physician or, if he or she is not available, another physician in Premera’s Alaska network. If this doesn’t work, Premera has contracted with a national firm, Teladoc, to provide their members access to a certified physician anytime and anywhere in the U.S. That physician will be licensed to practice in the state that where the member is located, Grazko said. Teladoc will provide virtual care by phone, online video and image sharing. “This would be useful in a situation where you wake up in the middle of the night with difficulty breathing. You get immediate consultation,” Grazko said, although a call to 911 might still be needed. Another example is where there are routine questions about taking medication, he said. This could avoid a visit to the physician’s office. There are still charges for virtual care consultations but they will be typically lower than personal visits, although those can still occur. Employers and insurers like Premera are adopting other strategies to help control costs, Coon said. One trend is the rapid growth in Health Savings Plans where employees can set aside part of their earnings to fund medical costs, she said. Some employers contribute to these. “These accounts make people feel like they have more skin in the game,” so that they think about how they are using health care services, Coon said. The result will generally be less utilization of services, and less cost for everyone. Another trend, among insurers as well as medical providers, is more coordination when specific tests or procedures are needed. A good example of this is the use of advanced imaging like MRIs or C-T scans, Coon said. There was a spike in these in Alaska when physicians appeared too quick to suggest them and for patients to request them. Now in many cases approval by insurers is needed. This is not to discourage these tests when needed but to ensure they’re really necessary. Premera and other insurers have working out “best practice” models with health providers on many procedures, and when the usage appears to be deviating from the best practice model the insurer can question it. Also, Coon said, too much radiographic imaging is not good for a person’s health, either.

Producers sanction new drill site at Kuparuk River field

ConocoPhillips and its partners in the Kuparuk River field have approved a new drill site in the southern part of the field that will add 8,000 barrels per day of new production beginning in late 2015, ConocoPhillips said in an Oct. 24 press release. “Plans for construction will move forward. This is the first new drill site at Kuparuk in nearly 12 years,” company spokeswomen Amy Burnett said. “It is expected to add about 8,000 barrels per day at peak production,” she said. It will take a period for production to build to the peak, Burnett said. Engineering and permitting for the new Drill Site 2S has been underway for some time but approval has now been given for construction. Other partners in the field are BP and ExxonMobil. The project cost has been estimated at about $600 million, the company has said in previous statements. Gov. Sean Parnell hailed the announcement as a tangible result of the state’s new oil and gas production tax, enacted by the Legislature in 2013. “This announcement, when coupled when coupled with two other newly-announced ConocoPhillips North Slope projects, will provide a $2 billion investment for our state. Our oil tax reform changes are working and this is only the latest example,” Parnell said in a statement. Drill Site 2S is one of three projects ConocoPhillips has announced since the new tax law was enacted. The two others include the IH-NEWS, an expansion of the West Sak viscous oil project in the Kuparuk field, and Greater Moose’s Tooth-1, a new oil project in the National Petroleum Reserve-Alaska. IH-NEWS would product about 9,000 barrels per day, or b/d, while GMT-1 would produce about 30,000 b/d, ConocoPhillips has said. Both projects are being considered for approvals late this year. GMT-1 must still secure federal permits, also. Another project now in construction, and that was approved before the tax reform bill passed, in CD-5, a satellite of the Alpine oil field. It is expected to start production in 2015. Overall, ConocoPhillips has said that it expects to add 40,000 barrels per day of new production from these projects by 2018, assuming approval of GMT-1 and 1H-NEWS. BP, which operates the large Prudhoe Bay field, has previously announced that it is working on a series of major new development projects in the western part of the field. BP and ConocoPhillips have also laid on new drill rigs and have stepped up the drilling of production wells in the producing fields. The increased activity in the North Slope field brought resulted in enough additional production to stem a long-term decline in production. The slope producers reached an average of 531,000 barrels per day in fiscal year 2014, the state budget year ending June 30. That is about the same average daily production as the previous fiscal year and the first time production did not decline year-to-year since 2002. Historically, North Slope production has been declining at an average rate of 6 percent yearly.

State claims 20,000 acres on edge of ANWR

Alaska is laying claim to a sliver of what the U.S. Fish and Wildlife Service thinks is the Arctic National Wildlife Refuge along the northwest boundary of the refuge. The state is citing a defect in the federal agency’s interpretation of the refuge boundary. The Fish and Wildlife Service administers ANWR. Gov. Sean Parnell said ownership of the land, which totals about 20,000 acres of onshore lands and 3,000 acres of tidal and submerged lands, by the state has important implications for oil and gas development on the eastern North Slope. “Just a few miles to the west we are now seeing billions of dollars of investment in the Point Thomas gas condensate development,” Parnell said in a statement. The state is arguing that the Fish and Wildlife Service incorrectly plotted the western boundary of refuge when it prepared maps. The legal boundary of the refuge is described as the Canning River but the maps provided by the federal agency put the boundary several miles to the west, near the Staines River. The result of the error is the 20,000 acres of uplands, or onshore acreages, between the Staines and the Canning rivers being erroneously included within ANWR on Fish and Wildlife Service maps. The error has caused confusion for the state, which holds periodic oil and gas lease sales on the North Slope and would like to see the matter clarified. “If one attempts to map this description it becomes clear that the locations described are inconsistent and provide no identifiable boundary,” the state said in a briefing paper. A letter sent by the Department of Natural Resources to the U.S. Bureau of Land Management, which has jurisdiction over the acreage if the Fish and Wildlife Service does not, asks BLM to give a priority conveyance of the lands to the state under provisions of the Alaska Statehood Act, which allows Alaska to select up to 103 million acres of federal lands. “Our hope is that BLM will move quickly to convey the lands so we can offer them for leasing,” state Natural Resources Commissioner Joe Balash said. Having done the research, which included field visits earlier this year, the state has also issued two oil and gas leases in the nearshore Beaufort Sea that were originally offered in a 2011 lease sale and bid on. The U.S. Fish and Wildlife Service maps have also shown this acreage as within ANWR, and the award of the two leases was withheld pending more research by the state. With information it now has, the state argues the Fish and Wildlife Service offshore boundary for ANWR is also incorrect, and the two leases were awarded to the two individuals who submitted bids in 2011, Andrew Bachner and Keith Forsgren. One lease, Tract 79 in the 2011 sale, covers 3,016 acres. The second, listed as Tract 80, covers 160 acres. Fish and Wildlife Service spokeswoman Crystal Leonetti said her agency has not seen the state’s letter and details of the state claims and could not comment on the matter. “Our position is that the boundary of refuge has been consistent since the Arctic National Wildlife Range was formed in the 1950s, and became a refuge in 1980,” Leonetti said. Commenting on the lease awards, DNR Commissioner Balash said, “I’m pleased we are now able to award these leases to the 2011 bidders and clarify the acreage that is available for oil and gas exploration in this highly prospective area. “Our next step is to determine how the state’s assertion will affect existing leases on (other) tidal and submerged lands along the ANWR boundary.” Elizabeth Bluemink, spokeswoman for the state DNR, said the state cannot lease the upland onshore lands until the boundary issue is settled. The state’s new initiatives may be a way for Parnell, who is running for reelection in a tight race, to get in another jab at the Interior Department over ANWR. The state has also proposed to fund a winter seismic program in the refuge and contends the language of the 1980 Alaska National Interest Lands and Conservation Act, which created the refuge, requires an ongoing resource assessment in the coastal plain of ANWR, which Congress excluded from a wilderness designation because of its oil and gas potential. Interior rejected the state’s application, saying the provision on ANILCA has expired, but the state is challenging that in court, arguing the plain reading of the law requires Interior to give the state a permit to do a state-funded seismic program. The dispute over ANWR’s western boundary is not new but Parnell decided to press the issue anew after a state team visited the area this summer and did on-site surveys. A past state selection of the acreage, based on the state’s interpretation of the boundary, was rejected by the BLM on the grounds that the lands were within the refuge. It may take time to resolve the issue, Bluemink said. “We don’t expect the Fish and Wildlife Service will roll over on this,” she said.

Judge hears case on Interior effort to dismiss road lawsuit

There were new rounds of legal jousting in an Alaska U.S. District Court in Anchorage Oct. 20 as federal attorneys representing Interior Secretary Sally Jewell, residents of King Cove and the State of Alaska sparred over Jewell’s denial of permission for the state to build a 11-mile gravel road completing a connection from King Cove to Cold Bay that would aid emergency medical evacuations. District Court Judge Russel Holland listened to both sides and said he will make a decision on the Interior Department’s motion to dismiss the lawsuit, “as quickly as I can.” The original lawsuit brought by King Cove and the state said that Jewell did the environmental impact statement, or EIS, improperly. If Holland turns down the government’s request, the suit will proceed in his court. One defect in the EIS was that it failed to include a public interest determination for the decision to deny the road construction, said Gary Hennigh, King Cove’s city manager. That analysis would have weighed the benefits of the land exchange, which Hennigh said are considerable, against Jewell’s decision to turn down the exchange. The land exchange would have allowed the road to cross a small section of the 315,000-acre Izembek National Wildlife Refuge, an important habitat for black brant geese and other birds. What was proposed was an addition of about 60,000 acres of state and Native corporation land to the refuge in exchange for 206 acres being transferred from the refuge to the state for the road corridor. Jewell’s “no action” decision rejected the land exchange authorized by Congressional legislation passed in 2009. U.S. Justice Department attorney Stacey Booshardt, from the department’s natural resources section in Washington, D.C., told Holland that heath and safety issues are not germane to an EIS decision under the National Environmental Policy Act because that law deals with environmental protection, not human safety. Booshardt also argued that Jewell had no trust responsibility in matters of health care for King Cove’s Alaska Native residents, who are members of the Agdaagux Tribe of King Cove. That’s because there is no specific treaty contract agreement between the tribe and the government, she said. Booshardt said the government’s trust responsibility to Alaska Natives and American Indians is through a separate law, the Indian Health Care Improvement Act, which is administered by the Indian Health Service. That agency is not a defendant in the lawsuit and Indian health responsibilities are outside the scope of NEPA, Booshardt argued. Anchorage attorney Steven Silver, representing the King Cove plaintiff group, disputed that reasoning, arguing that former Interior Secretary Ken Salazar had recognized the trust responsibility in a March 2013 letter dealing with the King Cove road and had dispatched Assistant Interior Secretary for Indian Affairs Kevin Washburn to King Cove to investigate the medical needs of Tribal members there. Booshardt countered, saying that statements by federal officials were not sufficient to establish the trust responsibility. The plaintiffs also argue Jewell made her “no action” decision without also making a public interest finding, which is contrary to the requirement for such a finding for any alternative selected under NEPA. The plaintiffs’ challenge to the Interior Department is that the Omnibus Public Land Management Act of 2009 required the decision to conform with “all applicable laws,” which they argue includes NEPA. Booshardt rebutted the argument, saying that the 2009 bill required a public interest finding only if the exchange was approved but was silent on whether one was needed if there was a “no action” recommendation by Jewell. Silver responded that, “The defendants’ (Interior Department) interpretation is not reasonable when considered within the context of the legislation’s purpose (to facilitate the exchange) and its other provisions.” Booshardt argued with that, too, saying the 2009 law did not authorize the land exchange or the road but merely established a procedure for reviewing it, under NEPA. “Congress could have passed a bill in its original form, as proposed by the (Alaska) delegation, but Congress didn’t because it knew that this was a world-class refuge” Booshardt told Holland. “This is not the law that plaintiffs think it is. What it really did was charge the Secretary with a responsibility to study the effects of a land exchange.” There is a tangled history to the King Cove road issue. The Izembek refuge was created in 1960. In 1980, when Congress passed the Alaska National Interest Lands and Conservation Act, the bulk of the refuge, 300,000 acres of its total 315,000, was designated wilderness. That designation, the most restrictive in federal law, allows no new roads unless Congress allows it. Former Alaska U.S. Sen. Ted Stevens tried to help King Cove with a $37.5-million federal grant to improve medical services, including an upgraded community clinic, airport improvements and funding for an experimental hovercraft operation, which was operated by the Aleutians East Borough. The hovercraft operated from 2007 to 2010 when it was discontinued by the borough. When she announced her decision on the EIS last December Jewell said the hovercraft had accommodated every needed medical evacuation during that period. However, Hennigh, King Cove’s city manager, said this isn’t the whole story. There may have been medical evacuations at times when water conditions allowed the hovercraft to operate, he said, but there were times when residents needed to get out of King Cove for treatment when the hovercraft or aircraft were unavailable because of weather. The major problem for the hovercraft, however, was that it was very expensive to operate — $3 million per year — and after three years the Aleutians East Borough could no longer afford it, Hennigh said. Meanwhile, the land exchange would have been of considerable benefit to the refuge, he said. The deal included 43,000 acres of state-owned lands and about 17,000 acres of private lands owned by King Cove’s Native village corporation. The private land offering would be of considerable value because it included 5,400 acres of King Cove’s lands that are in the heart of the refuge. Bringing this private in-holding into federal ownership “would be a crown jewel for the refuge,” Hennigh said. Another valuable addition would be a 2,500-acre parcel around Kinzerof Lagoon, which is near Izembek Lagoon and, while smaller, is also important as nesting habitat for birds, Hennigh said. The opportunity to include these lands in the refuge was strongly supported, at the time discussions were held, by regional U.S. Fish and Wildlife Service managers and by the former national director of the service, Hennigh said. However, environmental groups worried about the precedent of a parcel of wilderness being traded away, even in such a lopsided deal, and mounted a fierce lobbying campaign within the Obama administration. Hennigh said what galls people in King Cove is that there are existing roads in the refuge that are used by sports hunters. “Somebody from Georgia can fly into Cold Bay, stay in a lodge and go hunting, but we can’t get a road from our community for medical emergencies,” he said.

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