Tim Bradner

Wide coalition forms to oppose marijuana legalization

Alaska employers should brace for problems if a ballot proposition legalizing marijuana sales and use is approved in the November state general election, critics of the measure say. Ballot Measure 2, legalizing marijuana, is virtual similar to a Colorado measure passed in 2012 that is now causing big problems in the state. Like several states, Alaska already has a law allowing medical use of marijuana and personal use and cultivation has been legal since a 1975 state Supreme Court ruling that household possession was protected by a constitutional right to privacy, but a Colorado-type law would sharply increase access to the drug. Alaskans have twice voted against legalization, first in 1990 and again in 2004, both times with 55 percent opposed. In addition to business organizations that have come out against Ballot Measure 2, it is being opposed by Alaska Native regional and village corporations, various law enforcement and medical organizations and the Alaska Conference of Mayors. Employers worry this will exacerbate drug-screening problems affecting their ability to hire and expose them to litigation that could undermine company drug-prohibition policies. Supporters of the ballot proposition who point to backing from some individual groups of parents, members of both political parties and former law enforcement officers, say concerns on this and other issues are overblown. “Marijuana is already here. Approximately 15 to 18 percent of Alaskans now smoke marijuana in the privacy of their homes and away from children. The typical user is not an 18-year-old stoner,” said Bruce Schulte, an Anchorage architect who spoke for the proposition at an Anchorage Chamber of Commerce debate Oct. 13. Many have doubts about this, however, from the experience of Colorado and Washington state, two states that legalized recreational marijuana sales and use in 2012. That includes Colorado people who voted for the proposal. “People are now having ‘buyers’ remorse’ in Colorado. Things are turning out a lot differently than we were told they would,” said Jo McGuire, a former member of a Colorado state task force formed to regulate marijuana. McGuire was in Alaska in early October talking about her experience with the implementation of the Colorado initiative, hosted by three Alaska business groups: the Alaska Chamber, the Alaska Support Industry Alliance and the Mat-Su Business Council. Rachel Petro, president of the Alaska Chamber, said a key concern for her is how loose the Alaska proposition is. Washington has taken a more measured approach, she said. Its law, adopted also in 2012, is 60 pages and provides for detailed regulatory controls. The Colorado law, in contrast, is only six pages, similar to the eight pages proposed for Alaska, she said. Revenue hasn’t materialized On tax revenues, a key argument for legalizing marijuana, McGuire said the Colorado measure has been a huge disappointment. Not only are tax collections woefully short — $130 million a year in revenue was predicted by promoters but collections so far this year are $20 million — and because Colorado’s law promises the first $40 million in collections to schools it appears revenues will not hit that mark and will also not cover costs of regulation, which will instead be borne by Colorado taxpayers. Tax collections are short because of apparent mass tax evasion by retail dispensers, she said. Estimated revenues in Alaska are $10 million to $15 million and costs are estimated at $7 million, but if Colorado’s experience is any guide these figures may be an illusion, said Petro. McGuire said here has also been a sharp rise in marijuana-related auto accidents and increased use by children. In an August 2014 report, the Office of National Drug Control Policy, an agency in the White House, said that Colorado traffic fatalities involving drivers testing positive for marijuana had increased from 7 percent of traffic fatalities to 16.5 percent. The data covers years in which marijuana was legal in Colorado for medical purposes. The 2012 legalization was not fully in effect. The was a similar trend, a 26 percent increase, in youth use of marijuana between 2009 and 2012, the three years following legalization of marijuana for medical uses. McGuire said post-2012 trends are more alarming: “Forty percent of 7th graders in Denver County schools say they have tried marijuana, and this is on a self-reporting survey, so the actual number is a lot higher.” Expanded use by young people is a concern because it is now established by research that regular marijuana use can lower childrens’ IQ by 8 percent to 9 percent, she said. Retail boom The explosion of the marijuana retail industry has also shocked local communities who find themselves largely unable to impose controls despite parts of the law that was to give them powers to prohibit sales, McGuire said. Colorado Springs, for example, has banned marijuana sales three times but pot retailers evade this through various loopholes. A “smoking lounge” in Colorado Springs charges a cover fee, for example, and gives away marijuana, which allows the operator to skirt restrictions that apply only to outlets directly selling the product. Denver has been largely unable to impose restrictions. “There are now more pot shops in Denver than there are Starbucks or McDonalds combined,” she said. Provisions in the Alaska ballot proposition, if it passes, will put small rural communities at a disadvantage in controlling marijuana, according to Dean Guaneli, a retired state prosecutor. “Ballot Measure 2 is publically touted as intended to regulate marijuana like alcohol. However, its provisions for ‘local control’ are far more limited than those that exist for control of alcohol,” Guaneli wrote in an analysis of the proposition. Alaska law allows unincorporated communities like small rural villages to limit alcohol being served, imported or possessed, but this will not apply to marijuana under the language of the ballot proposition, he wrote. The term “local government” includes only incorporated municipalities. “There is no provision in the ballot measure allowing unincorporated villages to adopt any kind of local control,” Guaneli wrote in his paper. At the Anchorage Chamber debate, Schulte said the Alaska proposition provides for the Legislature to establish rules marijuana sales and use, and state lawmakers can also repeal it after two years. Colorado has disadvantages because its legalization is a constitutional amendment, which means any substantial change must be approved by voters. In an interview with the Journal, McGuire said the most infuriating experience for her as a member of Colorado’s marijuana regulation task force was trying to get controls in place to discourage retail sales to children. She was shocked to see a strong pushback from the new marijuana industry over proposals for special packaging rules. “They fought everything we proposed, claiming it would bankrupt them,” she said. State officials finally had to settle for a simple label warning that marijuana was not to be sold to children, and for the marijuana products like cookies to be contained in plastic zip-lock type bags, which can be transparent. Schulte, in his talk at the Anchorage Chamber, admitted that the retailing of marijuana-packed gummy bears and popsicles in Colorado was a mistake for the industry, and that retailers were harshly criticized by peers. Marijuana marketing will be a business, he said, and targeting young people who are legally not able to buy the drug doesn’t make sense. Schulte said he doesn’t think it will happen. Kristina Woolston, who argued against the proposal at the Anchorage Chamber, says the sheer availability of pot in greater quantities will lead to increased youth consumption. Woolston, spokeswoman for the campaign opposing the ballot proposition, said she also opposes the proposal because it was written by out-of-state marijuana business groups who are also financing the campaign. “Follow the money. Ninety-eight percent of the funds supporting this are from out-of-state. Funds opposing it are 100 percent from Alaskans,” she said. “This is part of a national state-by-state strategic plan by the marijuana industry. So much effort is being put into Alaska because the proponents can’t afford to lose a state election, and break the momentum, after the wins in Colorado and Washington.” Workplace rules Alaska employers, meanwhile, are getting worried about whether their rules to prohibit marijuana in the workplace will stand up if they are legally attacked, said Renee Schofield, CEO of TSS-Safety, a Ketchikan-based company that does drug testing for employers. Schofield is also the chair of the Alaska Chamber. The ballot proposal says employers will be able to “restrict” marijuana use in the workplace but this wording is not strong enough, Schofield said. Lawsuits may be coming that will argue the law is not explicit in “prohibiting” marijuana, she said. McGuire said attorneys for the Marijuana Project in Colorado have already said they interpret “restricting” as not “prohibiting,” although there is no court test yet. Industries that work under federal safety laws, such as trucking, pipelines and airline pilots, operate under strict federal rules that are not affected by state legalizations, but any business not under federal Department of Transportation safety laws will have only its own company policies to fall back on, Schofield said. “You need to have a strong workplace drug policy in place and being enforced uniformly, with no exceptions,” so there is no opening for a lawsuit, she said. “You don’t want to become a test case. You need to communicate with your employees regularly about this. This sounds small now and many employers enforce their plans in a hit-or-miss fashion, but this is critical.” If Colorado’s experience is any guide, Alaska will see a spike in the number of job-applicant employees flunking drug tests, trying to evade testing procedures and refusing tests, she said. This will complicate employers’ attempts to hire qualified workers. McGuire said the number of people testing positive for marijuana in Colorado job drug tests increased six-fold after legalization went into effect. Petro, the Alaska Chamber president, said Alaska’s ballot measure is looser than Colorado’s in many respects. For example, the Alaska proposition includes specific reference to legalization of processed and potent marijuana products under the definition of marijuana. Colorado’s law does not go that far, she said. There are enough concerns because of more potent strains of marijuana now on the market, but the Alaska ballot proposition would also legalize more concentrated marijuana products and processing procedures, such as the making of “Hash-oil” a concentrate of THC that is ingested. McGuire said many in the public view marijuana as benign based on the less concentrated varieties available years ago, but there are powerful strains available today. “In the 1960s and 1970s we usually saw marijuana with a THC content of 2 percent to 3 percent. Now we routinely see 12 percent to 15 percent, but our (Colorado) law enforcement people telling us that they are see marijuana with 20 percent to 27 percent THC content,” McGuire said. Hash oil processing can bump this up to products with 50 percent THC, even as high as 80 percent, she said. Police and drug-testing firms also face challenges in even the detection of marijuana content in the body as well as measures of impairment, which are less well established for marijuana. With alcohol, experience shows breathalyzer tests give results that are parallel alcohol content in the bloodstream, but there is no simple, easy-to-administer marijuana test available now that police can use at the roadside. Blood testing for marijuana is more complicated and takes time. It is required only in the case of Colorado fatalities, McGuire said. Schofield said there are easy-to-administer procedures for marijuana tests involving oral fluids that are promising but these are still in the experimental stage and are not ready for wide use. Scofield said one of the most chilling aspects of an expanded smoking of marijuana is the issue of second-hand smoke exposure, particularly for children exposed to parents smoking at home. “We know that marijuana has 2.5 times the carcinogen content of ordinary tobacco,” she said. It also puts marijuana into the bodies of even very young children, however. “It’s not uncommon in our drug-testing business to see very young children testing positive for marijuana based on exposure to their parents’ smoke,” she said. This will only increase if there is widespread availability of the drug, based on hospital data from other states. The federal report cited data on spikes in emergency room visits for children accidentally ingesting marijuana after Colorado’s legalization in 2012, and a similar trend is seen in parents’ calls to poison centers for children needing intervention between 2005 and 2011 in states where marijuana was becoming legal for medical use. Calls were up by 30 percent in states with legalized marijuana compared with states that did not legalize medical use of the drug, according to the report.

Hilcorp to 'hit ground running' on North Slope

Hilcorp Energy will move aggressively to ramp up production at three North Slope fields it will be operating in early January. “We will hit the ground running on Jan. 1,” Hilcorp CEO Greg Lalicker said. The company expects to close its acquisition of three North Slope producing assets and a share of the undeveloped Liberty field from BP before the end of the year, Lalicker told the Alaska Support Industry Alliance in a briefing Oct. 9. “Our goal is to get the (North Slope field) rates up as quickly as possible. BP has already moved a rig into the Milne Point,” one of the fields Hilcorp will be operating. BP said it is selling the fields, which are small producers, in order to focus on development in the large Prudhoe Bay field, which it will still operate, and to work on the large North Slope gas project. When the purchase closes Hilcorp will own 50 percent of the onshore Milne Point field and 100 percent of two small offshore fields, Northstar and Endicott. Hilcorp will be operator of all three fields. About 200 former BP workers and contractors now employed in the fields being purchased will work for Hilcorp. The company also has an option on acquiring 50 percent of Liberty, an undeveloped oil offshore oil deposit in federal waters five offshore, with BP retaining the remaining 50 percent. When the sale is completed about 35 percent of Hilcorp’s assets will be in Alaska with the remainder in Texas and Louisiana, the company’s traditional operating areas. The Northstar and Liberty purchases aren’t final until the transfer of federal outer continental shelf leases are approved by the U.S. Bureau of Ocean Energy Management. That is expected in November. In his presentation Lalicker referred to Liberty as an option. “We’re still trying to figure out whether there are viable development scenarios. We have a team working on it,” Lalicker said. John Barnes, Hilcorp’s Alaska manager, said, “We are looking at all the options that have been put forward in the past, and trying to figure out a way forward on Liberty.” In the past BP has considered building an artificial gravel island and a submerged pipeline to shore, as its did at the small Northstar field, along with drilling into the Liberty reservoir with long-distance horizontal wells from a drill rig on shore. Lalicker also commented on Hilcorp’s operations in Cook Inlet, where the company is the largest oil and gas producer. Overall, things are going well but it will still be a while before the investment will pay out, he said. Hilcorp’s oil production is now approaching 14,000 barrels per day, more than double the 6,000 b/d the properties were producing in 2012 when they were acquired from Chevron, Lalicker said. About 170,000 thousand cubic feet of gas per day is also being produced. However, the investment overall is still under water. The company, which is privately-held, paid $879 million to Chevron and Marathon Oil Co. in 2012 and 2013 to acquire the mature producing fields in the Inlet. About $890 million has been invested since the acquisitions in new drilling and production facility upgrades, Lalicker told the Alliance. Another $360 million has been spent in operations since the takeover. Revenues have so far totaled $1.529 billion, leaving Hilcorp about $600 million in the red so far, he said. “With the track we’re on we still see six or seven years before payout on this, and we think we still need to invest another $1 billion to $2 billion,” Lalicker said. Still, Hilcorp’s Cook Inlet play is turning out to be “pretty good,” so far, although the slide of crude oil prices in recent weeks is a concern. Lalicker also said Hilcorp is also studying a possible redevelopment of shut-in oil wells on the Baker platform, which was hit Oct. 3 by a fire in the living quarters. One gas production well was active at the time, which was shut-in, and four crewmembers were evacuated. The fire appears to have been caused by an overheated space heater in the living quarters that overheated and short-circuited, although that conclusion is not yet official, Lalicker said. The living quarters unit on the platform were constructed in 1965.

Great Bear to resume winter exploration program

Great Bear Petroleum will be back drilling this winter on the North Slope. The company still hopes to prove up its concept that the huge shale formations of the North Slope, the source rock for large oil fields now producing, still hold oil that can be produced as it has in the Bakken shale of North Dakota and the Eagleford of Texas. Great Bear plans three exploration wells this winter, targeting multiple conventional and unconventional reservoirs south of the large producing fields on the Slope, the company’s CEO, Ed Duncan, said in an interview. The company holds 550,000 acres of state oil and gas leases along broad east-west “fairways” of oil-prone source rock formations and conventional reservoir zones like the Ivishak, Kuparuk and Brookian intervals, Duncan said. These conventional zones have been proven to be productive elsewhere on the North Slope: the Ivishak at Prudhoe Bay, the Kuparuk at the Kuparuk River field, and the Brookian-tye deposits at other locations. Great Bear drilled two stratigraphic test wells in 2012 in the shale formations, but a planned horizontal section of one well and a flow test was not done. “Since then, exhaustive geochemical and geologic analyses have been completed by our regional team of world class consultants Ken Bird, Les Magoon and Allegra Hosford Scheirer,” Duncan said. “Extensive three-dimensional seismic surveys completed over the last three years have enabled the company to plan our exploration with more precision.” The new wells will be one to three miles west of the earlier drill sites tested. They will drill through the Shublik shale and into the upper Ivishak while also targeting shallower seismically defined conventional prospectivity in the Kuparuk and Brookian intervals, Duncan said.  The Shublik shale formation lies at about 11,700 feet, which is the principal source of the oil now being produced in the large fields like Prudhoe Bay and Kuparuk, he said. “However, additional oil prone source formations, the Kingak and lower Brookian Hue/HRZ, will also be tested along with conventional oil prospects that lie within and above the oil prone source rocks. All of the prospects, unconventional and conventional, are now better defined from our 3-D seismic,” Duncan said. The 3-D has allowed Great Bear to map out, with great precision, an extensive inventory of conventional prospects while also analyzing the fault and fracture orientation in all potential productive zones of interest. “Our seismic data allows us to reduce risk on the presence of hydrocarbons within the mapped trap geometries. In some formations we can also reasonably discern the presence of both oil and gas,” Duncan said. More 3-D seismic is planned this winter after successful programs in 2012, 2013 and 2014. Earlier seismic focused on the central and eastern blocks of leases close to the Dalton Highway and in areas that Great Bear had mapped liquids fairways in the source rock intervals. Of high interest to Great Bear, Duncan said, is the regionally extensive lower Brookian Torok-equivalent play. The Torok is an oil formation that is widespread across the central North Slope. “We expect this to be a hybrid play of conventional and unconventional oil,” Duncan said. Conventional oil development will compliment shale oil development, which has huge potential on the North Slope, he said. So far the company has spent about $160 million on its Alaskan exploration with planned 2015 activity adding about $100 million in additional capital expenditure, Duncan said. No long term flow tests were conducted in the 2012 drilling but oil samples were collected from the Kuparuk Formation and extracted from core confirming the presence of oil in the Shublik, Kingak and Hue/HRZ shales. Geochemical analysis also showed the oil to have been generated in “fairways” of thermal maturity similar to the highly productive volatile liquids fairway being produced from the Eagleford shale formation in Texas, Duncan said. If the Shublik oil can be commercially produced it is expected to be in the mid-30s in terms of API gravity with less than 1 percent sulfur content, he said. For the 2015 winter drilling, Great Bear has contracted with Nabors Alaska Drilling to use the company’s Nabors 106 drill rig. The three tests planned this winter will be on ice pads reached by short segment of snow roads from the nearby Dalton Highway, a gravel road. Great Bear may continue drilling next summer on gravel pads adjacent to the Dalton Highway that the company has previously built. Exploration drilling on the Slope is normally done in winter when the ground freezes and cross-tundra travel is possible. However, if drill sites are on gravel pads, which will protect the tundra surface and permafrost from thaw, state agencies will permit exploration drilling in the summer, too. Great Bear has six permitted, year-round accessible drilling locations along the Dalton Highway. State officials have said shale development has great potential but also faces complex issues in permitting and finding sufficient local water sources for hydraulic fracturing. Duncan said Great Bear has contracted the consulting firm HDR, Inc. to complete a regional aquifer study that illustrates substantial volumes of non-potable “brackish” water exist under its leases that is of satisfactory quality and in excess of any volume required to support contemplated operations.  Water is used in great qualities in hydraulic fracturing. Great Bear collected regional LiDAR over the core of its leasehold in 2012 and 2014 that has provided highly detailed surface elevation and lake bathymetric data. Great Bear is using the LiDAR and aquifer studies to plan its long-term operations, Duncan said.

No decision yet to repair Inlet platform

Hilcorp Energy workers have boarded the Baker offshore platform in Cook Inlet and have established that electrical systems and tankage are undamaged from an Oct. 3 fire, a company spokeswoman said. No decision has been made by Hilcorp on repairing the damage and restoring gas production, Hilcorp spokeswoman Lori Nelson said. At the time of the fire the platform was producing 5 million cubic feet of gas daily and selling to Enstar Natural Gas Co. Fire broke out in living quarters on the platform early Oct. 3, causing the four personnel to be evaluated by a U.S. Coast Guard helicopter. “The crew (which boarded the platform) have been able to verify that all safety systems were working as they were supposed to and that all electrical systems are safeguarded,” Nelson said. Electricians have restarted the generator on the platform and have gotten navigation lights working, she said. This allowed Hilcorp to release the oil service vessel Clean Ocean that was being kept near the facility to provide support. U.S. Coast Guard overflights over the weekend showed no anomalies, Nelson said. Initial on-board assessments also showed no oil and gas process equipment was affected. The cause of the fire has not been officially determined, she said. The Baker platform was installed in 1965 by Amoco Production Co. along with three other platforms in Cook Inlet’s Middle Ground Shoal field. Oil production began the following year. The platforms were the first to be installed in the Inlet. Amoco sold the facilities to Union Oil of California in 1990. Union Oil was subsequently acquired by Chevron Corp. Oil production at Baker halted in 2003 when it declined to an average of 515 barrels per day. Chevron plugged and abandoned 25 oil producing wells at Baker in 2012, putting the platform in “lighthouse” mode pending decisions on final abandonment and removal. Baker is at the northern end of Middle Ground Shoal. The Dillon platform, at the south end of the field, was also deactivated but two platforms, Platforms A and C, are still operating in the central part of Middle Ground Shoal, owned by XTO Energy. Hilcorp acquired Baker and Dillon as part of the acquisition of Chevron’s Cook Inlet assets in 2012, and in 2013 redeveloped one of Baker’s wells as a gas producer. Texas-based Hilcorp specializes in acquiring and aggressively redeveloping aged and declining petroleum properties. Since acquiring Chevron’s assets, and those of Marathon Oil Co. in 2013, Hilcorp has been the principal contributor in a broad renaissance of Cook Inlet production, effectively ending a feared regional gas shortage. Cook Inlet oil production has also nearly doubled to more than 16,000 barrels per day. Earlier this year Hilcorp and BP Exploration Alaska announced a deal for Hilcorp to acquire two small North Slope fields and 50 percent of two other fields for $1.2 billion. There are 13 offshore oil and gas platforms in the Inlet. Ten are operated by Hilcorp, including Anna, Baker, Bruce, Dillon, Dolly Varden, Granite Point, Grayling, King Salmon and Steelhead. Of these, all but Baker and Dillon are still operating. XTO operates two platforms, A and C, and Cook Inlet Energy LLC operates the Osprey platform. A new gas production platform will be installed in the Inlet in 2015 by Furie Operating Alaska.

North Slope prices down $20/barrel since July

Bogged down in multiple-year, multi-billion dollar state budget deficits, Alaskans have been nervously watching North Slope oil production and hoping for an uptick. They’ve largely forgotten about oil prices, the other side of the state oil revenue equation. The news is not good, at least for the budget. For consumers, however, it’s good news because it means lower fuel prices, although those prices are usually “sticky,” meaning they don’t fall as quickly as crude oil. Alaska North Slope crude oil prices have been declining steadily since July, from about $111 per barrel in early July to about $91 per barrel on Oct. 3. A drop in oil prices costs the state treasury in lost revenue, state Revenue Commissioner Angela Rodell says, and this would basically add to the expected $1.4 billion budget deficit that is projected for the fiscal year. That estimate of the deficit assumes a $104 per barrel average price for fiscal year 2015, which began July 1. However, some good news is that state revenues are better off under the state’s new oil production tax, the More Alaska Production Act upheld by voters in the Aug. 19 primary, than they would have been under the previous state oil tax, known as ACES. “We are much better protected under MAPA than we would have been at these oil prices,” Rodell said. MAPA has a fixed tax rate of 35 percent while the tax rate under ACES fluctuated with changes in oil values and as oil prices drop the ACES tax rate would have dropped quickly. At $90 per barrel, ACES would bring in about $3.08 billion. Under MAPA, revenues would be $3.22 billion, according to an analysis by the Revenue Department. Rodell said oil production on the Slope is also picking up after it had dropped off during the annual summer maintenance season for North Slope facilities. “You can see production picking up steam, and that’s comforting as well,” she said. What’s pushing down oil prices is more oil supply, particularly in the U.S., and lackluster demand for oil on world markets. The stronger U.S. dollar, which is the currency used for oil trading, is also a factor, Rodell said. As for the selling price of North Slope oil, Rodell said that more lighter-grade Bakken shale oil is showing up in California, and that is undercutting the market for Alaska on the west coast. ConocoPhillips’ shipment of a cargo of Alaska North Slope oil to Korea rather than the U.S. west coast is another signal. Despite the longer sailing distance from Valdez to South Korea — about three times longer — the company said the higher margin for oil it would get compared with the west coast more than offset the higher cost of shipping. “California is starting to use Bakken oil, and we’ve seen greater demand for it, but it’s important to note all the indices are converging,” to Alaska’s disadvantage. “Brent (crude oil) is down, WTI is basically holding, and ANS has come down. Our oil is priced off Brent as a waterborne cargo. There’s also the slowdown in Asia demand, particularly in China,” Rodell said. Greg Sharenow, executive vice president at Pacific Investment Co., voiced similar views in comments Bloomberg News. “You’re seeing pretty good in oil supply and that’s weighing on the market,” Sharenow told Bloomberg. The International Energy Agency has meanwhile reduced its outlook for oil demand growth, and also cited increased exports from Libya and U.S. domestic production. Bloomberg also reported that oil production by 12 producing nations in the Organization of Petroleum Exporting Countries, or OPEC, rose by 413,000 barrels per day to 30.93 million barrels per day in September, the highest level for OPEC in the last year. Significantly, Saudi Arabia, a key producer in the OPEC group, has declined to cut production to shore up prices and instead cut its price by $1 a barrel, a signal that the Saudis are more focused for now on maintaining market share than propping up prices. The last time Saudi Arabia decided to go for market share over sustaining prices, at least in a significant way, was in the late 1990s. The move caused a cascade of oil price drops as producers competed to lower prices and maintain market. The end result was a drop in oil prices, including Alaska’s, to about $9 per barrel in 1998.

Budget crunch biggest challenge for bush caucus in 2015

The biggest challenge facing rural legislators in 2015 will be the tightening of state revenues and pressures to cut budgets, says Rep. Bryce Edgmon, D-Dillingham, who headed the House “bush caucus” in the 2013-14 state Legislative session. Rural lawmakers on the House and Senate Finance committees will have to keep an eagle eye on the budgets to ensure that, if reductions have to be made, rural programs aren’t singled out unfairly. “It’s our biggest challenge,” Edgmon said in an interview with the Journal. Edgmon is addressing the annual Alaska Federation of Natives convention in Anchorage on the morning of Oct. 24 at the Dena’ina Civic & Convention Center, elaborating on the budget and other concerns. “From 2005 to 2012 we had surplus revenues and we were able to take state agency budgets and many rural programs up to where they should have been. But in the last two years we’ve seen a pullback in spending,” he said, due to declining revenues caused mainly by a long-term drop in oil production. The pressure on budgets is likely to continue because crude oil prices are now also declining, dropping to the $95 per barrel in mid-September. The Department of Revenue had forecast an average price of $106 per barrel for the fiscal year. If prices are less than that, it will increase a budget deficit that is already predicted to be $1.3 billion. Programs that are vital to rural areas, and which must be watched, include state weatherization assistance and emergency heating oil programs along with funding for rural water and sewer programs. Water and sewer programs, which build safe water systems and sewage disposal systems in villages, are jointly funded with the federal government, but federal funds have been gradually cut over several years. State funds have not increased to fill the gap and the net result is that there is less money now going into rural water and sewer projects. In addition, mainly federal programs like the Denali Commission, which has been active in rural funding, have been cut back. The problem is not just to finish the installation of safe water and sewage systems in villages that are still on “honey buckets” but to upgrade and even replace community systems that are now aging. Energy is another important concern for rural legislators. Although the Alaska Energy Authority’s Rural Energy Fund, which provides matching grants for mainly small renewable energy projects, is statewide in scope, many REF projects are in small communities. Several are now built and operating and they are making a difference in displacing high-cost diesel. More projects are on the drawing boards, moving neared to construction, and the REF program must continue to be supported, Edgmon said. The Legislature typically funds $20 million to $25 million per year in matching grants for projects. In the 2014 legislative session, $22 million in REF projects were approved. Rural legislators must also keep an eye on the state’s Power Cost Equalization program which helps level out the high cost of electricity in small Alaska communities to a level near what is paid in the large cities. PCE support is now paid from earnings of an endowment fund, which has been very successful, Edgmon said. It is something that is working well and should not be tampered with, he said. Education funding is also something that must be watched. The education funding bill that passed the Legislature in 2014 during a five-day extended session provided for two studies that could be important for rural Alaska. One will involve a new look at the K-12 school foundation distribution formula. Some urban legislators argue the formula is outdated and does not grant enough state money for urban schools where there are special needs. The concern in any formula change is that it could be to the disadvantage of rural school districts. A second study will look at funding of education in general, with an eye toward how economies in schools can be achieved statewide given that the state is in for a period of tightened revenues. Again, this will have to be watched as to how any recommendations might affect rural schools. Village Public Safety Officer, or VPSO, program is also important. There are currently 121 authorized positions but not all of these are filled. A new part of the program will allow some VPSOs to carry firearms, and these officers must be trained in the proper use of weapons, which will require funds. The state Department of Public Safety had estimated that there might be 20 requests for armed VPSOs from communities and that the department could absorb these training costs. However, if there are requests for more the program would require additional funds for training. On a broader level, Edgmon said that the priorities of the bush caucus typically overlap with those of most other small communities, particularly in coastal areas. “The House bush caucus is bipartisan. We have Republican as well as Democratic members. We meet regularly during the legislative session and we have a planning session to set priorities at the outset,” Edgmon said. While there is no “bush caucus” in the Senate there is a loose “coastal caucus” of coastal Senate districts, including Southeast. Many of the issues that affect small rural communities also affect coastal towns, so there is a natural alignment of interests that often emerge. In many respects the coastal and bush caucuses represent small town Alaska, Edgmon said. In the interview, Edgmon steered clear of any discussion of legislative organization, but it’s commonly known that with Interior and Southcentral lawmakers in the majority and in control, rural lawmakers have to work harder to persuade their urban colleagues on bush priorities. In the Legislative session that ended this year, in which Republicans controlled the Senate and House, experienced rural legislators like Sen. Lyman Hoffman, D-Bethel, were no longer in the leadership. In previous Legislatures, there was a more even Republican-Democrat balance in the Senate and a bipartisan coalition leadership emerged. That allowed Hoffman to continue as co-chair of the Senate Finance Committee, a post he had held previously. The outcome of a few very competitive state Senate races could affect the organization of that body. If Democrats pick up one or two Senate seats it could narrow the previous Republican control and make it more likely that a coalition organization will emerge in that body. That would likely give rural senators more leverage on budgets and other matters. The state House, meanwhile, is likely to remain under the control of “railbelt” (Interior/Southcentral) legislators, but if Democrats make some gains in the November elections it could result in the seats on the House Finance Committee allocated to Minority members under the House rules. If there were three minority seats rather than two seats it could make a difference on an 11-member House Finance Committee. Rural Democrats are typically joined in the Republican House Majority because it’s the best way to protect rural programs, so there are typically rural Democrats on House Finance because they are part of the Majority. Edgmon has been on the Finance Committee four year, along with Rep. Neal Foster, D-Nome.

Judge orders state to remedy Native language assistance

A federal judge has scolded the state Division of Elections over the state’s poor assistance to voters who speak Native languages. The state has promised to better in the upcoming November general election to comply with her order. Yup’ik and Gwich’in-speaking Alaskans sued the state over inadequate translation efforts. The two languages are historically unwritten, so the majority of the assistance in those two languages is oral. Alaska U.S. District Court Judge Sharon Gleason issued an order Sept. 22 for the state to provide oral translations to be available in audio as well written translations. She ordered the Division of Elections to retain Native language experts to affirm the accuracy of the translations, and by Sept. 26 to distribute a pre-election announcement to be read by local outreach workers over village VHF radios. By Oct. 3, the division will have new translated public service announcements on the elections as well as a pre-election poster advertising the availability of language assistance and “Can I Help?” buttons in the local languages to be worn by poll workers. By Oct. 10, audio translations of ballot information including the neutral summaries of ballot measures, pro/con statements and candidate statements, are to be available. All of the materials will be provided to the plaintiffs’ attorney, also by Oct. 10, and the division will incorporate their feedback to the maximum extent possible, Gleason ordered. The judge also ordered that training sessions for poll workers be held and that the division will file a report with the court by Oct. 28 detailing its compliance. Voting rights have long been a sensitive issue in Alaska. The U.S. Department of Justice monitored Alaska elections for several years because the state constitution originally had an English-language test for voters (it was taken out of the constitution in 1970) and because primary elections held in early fall created barriers in voting in many villages where many people are out doing subsistence harvesting at that time. The lawsuit in Gleason’s court was filed over the state’s methods of providing language assistance, however. The Native American Rights Fund and two national law firms filed suit in the Alaska U.S. District Court in 2013 on behalf of four tribal councils and two individuals, arguing that the state’s efforts to provide language assistance in several villages violated the language assistance provisions of the federal Voting Rights Act and voting guarantees of the 14th and 15th Amendments to the U.S. Constitution.  On Sept. 3, Gleason agreed that the state had violated the Voting Rights Act and ordered that the situation be remedied, but reserved judgment on the constitutional claims. Gleason said she will rule on those later, after the November elections. The violations noted by Gleason fell into three categories: that the state had failed to adequately inform voters that language assistance is available; a failure to adequately prepare outreach workers to provide language assistance to voters, and a failure to address dialect differences. In 2010, the state settled a similar lawsuit filed by voters in the Bethel region (Nick, et al. v. Bethel, et al.) Despite that settlement, the evidence presented during a nine-day trial in June and July 2014 showed that the state had made a decision to provide only limited language assistance to Native voters in three regions immediately adjacent to Bethel, according to a statement issued Sept. 3 by the Native American Rights Fund. In her September ruling, Gleason found the state had failed to provide limited-English proficient Alaska Native voters with voting information substantially equivalent to what voters receive in English, which was a violation of the Voting Rights Act, she said. In her Sept. 3 hearing, Gleason said, “I do find that the plaintiffs have demonstrated by a preponderance of the evidence that the Division’s (Division of Elections) standards, practices and procedures that are in place for the three census areas (involved in the lawsuit) are not designed to transmit substantially equivalent information in the applicable minority language,” to Alaska Natives in the three census areas. During the hearing, Gleason explained Section 203 of the federal Voting Rights Act that, “requires that in certain designated areas of the country that have a high percentage of limited English proficient voters, that whenever the state provides any registration or voting information in English, the state must also provide the same information in the language of the applicable minority group to voters in those areas.” Gleason’s remarks are in the transcript of the proceeding.  In cases where the minority language is written this requirement can met by having a written translation, but Gleason also noted the so-called “Stevens Proviso,” inserted in the act by Alaska’s former Sen. Ted Stevens, that provides in the case of Alaska Native languages that are unwritten the state is only required to provide oral instructions or assistance. “That’s the provisio that has caused considerable litigation here,” Gleason said, because while it is clear that written materials in the minority language would satisfy the law, “the provision is far less clear for the languages at issue here.” The state had been relying on “outreach workers” but this was insufficient, the judge said, because these workers were asked only to provide limited information and not to translate what is in the official election pamphlet the state sends out to voters, which is in English. In Dillingham, the judge said, the outreach worker was “on call” but not physically present at the polling stations, while the public service announcement that had been broadcast said the workers would be present to provide language assistance. Gleason found that except in 2008, when the state translated two of four ballot questions, no Gwich’in translations have been provided in the Yukon-Koyukuk region beyond what individual translators might communicate. Also, no Gwich’in audio translations were provided on touch-screen voting units. The judge did credit the division for efforts to translate the complex Ballot Measure 1 voted on this past Aug. 19 regarding the effort to repeal oil tax reform. The state is attempting to remedy this, at Gleason’s order, by providing bilingual outreach and poll workers in a number of named villages in the Dillingham and Wade Hampton census areas (in Bristol Bay and the Yukon Kuskowkim regions) where different dialects of Yup’ik are spoken, and the Gwich’in speaking villages of Arctic Village and Venetie of Interior Alaska. In addition, the U.S. Justice Department has identified 16 additional villages in the Yukon-Koyukuk area that meet the criteria for language-assistance in the Voting Rights Act. Previously, the state had also provided bilingual assistance only in the Central Yup’ik dialect. The court has now ordered service to be provided in separate Yup’ik dialect spoken in Dillingham and Togiak. Besides having one or two people available to provide assistance, depending on the size of the community, the state will require public service announcements through the local VHF radio in the village’s language and dialect. Section 203 of the Voting Rights Act makes it clear that assistance in the polls must be available in the covered language, and that just having a person available in the community is not enough. Bilingual assistance will also be provided in very small communities that have no polling places but where absentee voting locations are provided. The translating can be time-consuming, so having more people available to provide assistance is important. It can be challenging for voters, even English language speakers, to understand complex issues that are often on the ballot. At the trial in the lawsuit last summer, there was testimony that it took as long as 20 minutes for a Native language-speaking voter to listen to one ballot measure being explained and more than 30 minutes to complete the ballot on a touch-screen voting unit. One particularly difficult provision on the Aug. 19 primary election ballot was Ballot Measure 1, a complex proposal which dealt with a possible repeal of a state oil and gas tax law. The ballot information had three pages of text. Lt. Gov. Mead Treadwell, who is in charge of the Division of Elections, said the state will expand language assistance to comply with Gleason’s order. “I know the Division of Elections worked to comply with federal laws on language assistance as we understood them,” Treadwell said a statement after Gleason handed down her order in early September. “We will work expeditiously to comply (with the order) and any additional measures that may be forthcoming in the court’s written opinion. In the meantime, Alaska’s Native and non-Native voters need to know that the Division of Elections is committed to ballot access. We will continue to work with Alaska Native leaders and others to improve, and I view the (judge’s) decision as an opportunity to expand our efforts.” Treadwell also pointed out that the plaintiffs in the case never contacted the division to indicate any problems with the language assistance being provided. Also, despite having observed elections in Alaska, the U.S. Department of Justice never contacted the state with its interpretation of the law, nor did they institute their own action or intervene in the proceedings, Treadwell said. The Elections Division had made a number of improvements since the 2012 elections, the lieutenant governor said. These include adding 128 new absentee voting locations statewide, more than doubling the locations available in 2012. Absentee voting by online ballot delivery, fax and mail is available statewide for all voters. More than 7,000 Alaska voters used the online absentee delivery and voting system in 2012, and more are expected to use it in 2014.

Chukchi analysis still on track

The U.S. Bureau of Ocean Energy Management is moving step-by-step through a revised environmental analysis of Chukchi Sea offshore oil and gas development and expects to remain in schedule for a draft supplemental environmental impact statement, or SEIS, to be complete by late October. The agency filed a report with the U.S. District Court in Anchorage Sept. 22 detailing its progress in compliance with a court order that bimonthly reports be filed. The EIS being revised was one prepared six years ago for a Chukchi Sea OCS lease sale held in 2008. Shell Oil, ConocoPhillips and other companies bid more than $2 billion for leases. However, an Alaska tribal group, the Native Village of Point Hope along with several environmental groups, filed suit challenging the government’s estimates of the size of a possible discovery and therefore the effects of an oil spill. The 9th Circuit Court of Appeals sided with the plaintiffs and remanded the complaint back to Alaska U.S. District Court Judge Ralph Beistline, who ordered the relevant parts of the EIS to be redone. In its Sept. 22 report to the court, BOEM stated that once the draft SEIS is issued public hearings will be scheduled and probably held in late November and December. A final version of the SEIS is to be published in late February with a record of decision to be issued by March 2015 under the current schedule. Shell is planning a return to the Chukchi Sea in 2015 with an expanded exploration program involving two drill vessels, the drillship Noble Discoverer and the semi-submersible Polar Pioneer. Approval of the new SEIS and resolution of the lawsuit by next spring are critical to Shell in the company’s decision to mobilize for drilling, and to be in the Chukchi Sea in the summer open-water season. Until the EIS dispute is resolved there is a legal cloud over the 2008 lease sale and the leases issued by the federal government to Shell and other companies. Until the legal issues are cleared Shell cannot drill. In its report, BOEM detailed steps that have been accomplished. An oil and gas exploration scenario for the SEIS has been completed and has been reviewed by other federal, Alaska state and local government agencies. An analysis of an oil spill rate associated with that scenario has also been completed, as well as computer runs of a possible spill trajectory. The agency is now working on its analysis of environmental effects of an oil spill based on the development scenario, according to the report. The external reviews of BOEM’s work by other agencies, and details of the work, remain confidential until publication of the draft SEIS in October, a BOEM spokesman said. In 2008, BOEM’s predecessor agency, the U.S. Minerals Management Service, used an assumption of a one billion barrel oil discovery in the Chukchi Sea as the basis for its oil spill impact assessment. The plaintiffs in the lawsuit claimed the estimate was too low, and that a higher number should be used as a basis for environmental assessments and oil spill impact projections. It is this assumption that BOEM is focusing on, among others, in the revision of the SEIS now underway. The assumed discovery by the government in a lease sale is different than the “worst possible discharge” calculated by a company proposing a exploration well on a specific prospect. In that case the company has geologic and, most likely, seismic data and can make an informed judgment about a size of a possible discovery. If there were a blowout during drilling the size of the discovery could influence the rate of discharge and a spill. In a lease sale, however, there would ordinarily have been no drilling, or at least little drilling, and the government can usually make only hypothetical assumptions about possible discoveries. This is what led to the one-billion-barrel assumption in the 2008 EIS for the Chukchi Sea sale. The 9th Circuit ruled 2-1 that this was an “arbitrary and capricious” estimate. In a related development, Shell’s revised exploration plan for the Chukchi Sea filed earlier this year details some operational changes compared with what has been proposed to the government for the 2012 drilling. BOEM published the revised exploration plan on its website, so the information is now public. The agency said the plan has not yet been approved. If Shell is able to move ahead in 2015, the company will use two drill vessels instead of one, as in 2012, and this will require a more robust support program, according to the revised plan proposal. As in 2012, Shell plans to drill six wells all at the “Burger” prospect, where a discovery was made by Shell in the early 1990s. Both drill vessels, the drillship Noble Discoverer and the semi-submersible rig Polar Pioneer, will be drilling at Burger. The two vessels will be near enough to each other to lend assistance, if needed. Because there will be two drill vessels working, the expected number of visits to the rigs by offshore support vessels would be increased from 30 roundtrips during the season from 17, which would be the case with just one vessel. There would also be more vessels in the support fleet. There will also be added helicopters flights from support bases at Barrow and Wainwright, 40 roundtrip flights per week instead of 12. More support facilities will be needed in Barrow, according to the plan. In 2012, a 75-person camp facility was required. In 2015, if the drilling proceeds, an additional 40-person camp will be needed along with more hanger space for an additional helicopter. In Wainwright, additional yard space would be leased for storage of response equipment, the plan said. Another addition to the plan for 2015 is the use of a new-technology Remote Operating Vehicle, or ROV, that would be deployed from a dedicated support vessel. The ROV would sit on the sea floor to assist in excavation, using a number of implements to remove sediment to another location on the seafloor, according to the revised plan by Shell. Devices such as an excavator bucket, a rotating cutter, auger and rock hammer, could be used by the ROV, according to the plan.

Budget activist Keithley names House targets

Self-styled budget hawk Brad Keithley is naming names among legislators who he thinks aren’t doing enough to restrain state spending. Some of those being named are pushing back. Keithley is an attorney and oil and gas consultant who is concerned about looming fiscal problems for the state and has said he is putting $200,000 of his own money to help elect candidates who support a sustainable state budget. Keithley’s targets so far are incumbent Republican House members Gabrielle LeDoux and House Majority Leader Lance Pruitt and Anchorage Democrat Rep. Geran Tarr. The House Republican leadership, which includes Pruitt, talks about fiscal responsibility but then does not cut spending significantly, particularly in the operating budget, Keithley has said. Keithley is supporting Republican Anand Dubay in an open Anchorage House race and Libertarian candidate Caen Stevens in her race against the incumbent Tarr. He also said he intends to name candidates in state Senate races. In LeDoux’s race, in Anchorage House District 15, Keithley is supporting a Democrat, Laurie Hummel, who he says is more conservative than LeDoux on fiscal issues. The state is running record deficits and the best efforts of North Slope producers to hike oil production may not be enough to stave off the depletion of state cash reserves, Keithley said. He cites University of Alaska studies that show reserves, except for the Permanent Fund, could be depleted by 2023. Despite the university’s warnings, “In the last two years the state has actually gone backwards with the Legislature passing and the governor signing back-to-back the budget with the largest deficits in the state’s history and in the same period draining over a third of the state’s unrestricted savings,” Keithley said in a statement. He was referring to the transfer of $3 billion in state reserves to the public pension funds as well as the deficits, $1.7 billion last year and a projected $1.3 billion this year. On Pruitt, who is running for reelection in Anchorage House District 25, Keithley said, “As a member of the legislative leadership over the past two years Pruitt has led Alaska straight into the fiscal situation that, if not corrected, is heading toward a fiscal crisis, economic crash, income taxes and a diversion of Permanent Fund earnings.” Pruitt and LeDoux have some words in response to Keithley, however. Keithley’s criticism is, “nothing more than a thinly-veiled attempt to tarnish my strong, conservative fiscal record,” Pruitt said. He defended his record: “I am in favor of a sustainable budget — we must live within our means. I’ve co-sponsored legislation to stabilize our budget over time. Over the last two years, while I served as House Majority Leader, the House and Senate have done more in terms of bringing our fiscal house in order than the previous six years combined.” Pruitt cited the reduced state capital budget, down $1.5 billion over two years, and a prioritizing of state capital needs. On the payment to the pension fund, Pruitt said, “I do not believe in kicking the can further down the road (in addressing unfunded liability) for another generation.” The money paid now will reduce the liability and save money in the future. “To do anything else is irresponsible and one-sided,” he said. On LeDoux, Keithley said in his statement that, “LeDoux voted for the last two record budget deficits and while giving lip service to supporting lower budgets, appears comfortable with the procedures that led to them and if left unchecked, will continue to lead to others in the future.” LeDoux had strong words for Keithley, though: “Brad Keithley is a very intelligent man with a lot of money. He also has a reputation for bullying and taking advantage of women,” she said in a written response. “I am very proud of my legislative record and I don’t believe this has anything to do with fiscal responsibility. This is about a man who needs to be in the limelight to make himself look important.” On Tarr, a Democrat who is running for reelection in House District 19, Keithley said, “Tarr not only voted for budget-busting capital budgets the last two year but also supported amendments to the operating budgets that would have made the deficit even worse.” Tarr was not available for comment.

BP lays off staff after Hilcorp transaction

BP will be reducing its Alaska North Slope workforce by 475 as a part of the company’s sale of North Slope producing assets to Houston-based Hilcorp Energy and a restructuring of BP’s operations. Hilcorp, a major independent, operates mature fields in the U.S. Gulf coast states and in Cook Inlet. The company specializes in taking over mature producing fields from major companies and investing in their rejuvenation. Cook Inlet oil production has almost doubled since 2010, to about 16,000 barrels per day, since Hilcorp took over the Inlet assets of Chevron Corp. and Marathon Oil Co. “BP’s Alaska business will be smaller due to the previously announced sale of interest to Hilcorp in four North Slope oilfields, BP spokeswoman Dawn Patience said. The company now employs about 2,725 employees and contract workers, and at the end of the reduction the company will employ about 2,250, Patience said. About 200 of the 475 are expected to go to work for Hilcorp, however, so the overall reduction to the North Slope industry workforce would be 275. That must be viewed in context of record levels of industry employment on the Slope, however, as much as 15,000 in recent months according to data from the state Department of Labor and Workforce Development. Earlier this year, BP announced that it would sell 100 percent of two small offshore producing fields, Northstar and Endicott; 50 percent of the onshore Milne Point field, as well as 50 percent of Liberty, a small offshore field that is still planned for development. The sale is expected to close at the end of the year. Hilcorp would become operator of the Northstar, Milne Point and Endicott fields while BP previously stated it would remain as operator of the Liberty project. BP expects to submit a plan of development for Liberty to the U.S. Bureau of Ocean Energy Management late this year. The project is beyond Alaska’s three-mile territorial limit and is in the federally-owned Outer Continental Shelf that is managed by BOEM. BP would remain as a major owner, and operator, of the large Prudhoe Bay oilfield, which has substantial undeveloped resources. When the sale to Hilcorp was announced last spring BP said that it would affect about 250 of its employees and contract workers engaged in those fields, but that it was expected that most would be hired by Hilcorp, as will apparently now happen. The reductions will include BP employees as well as contract employees. The reduction of 475 represents about 17 percent of BP’s Alaska workforce, Patience said. The company will offer voluntary separation incentives including early retirement packages, Patience said. “BP will implement a process to allow employees to state their preferences in addition to offering early retirement and severance packages,” she said. Employees’ desires will be taken into account but BP must also take the business interest into account, she said. “I’m extremely disappointed in this action,” Gov. Sean Parnell said in a statement released from his office. “No one likes to see jobs reduced, and I am especially concerned about the disruption for families who work in the energy sector. When I spoke with BP Alaska President Janet Weiss today (Sept. 15), she assured me that BP remains on track for the new rigs planned for the North Slope and for new investment promised to Alaskans.” When the sale was announced in April, Weiss said the smaller fields being sold will allow BP to focus its efforts on full development of the Prudhoe field where there are substantial undeveloped resources. “BP remains committed to increasing BP’s activity at Prudhoe Bay as a result of oil tax reform,” Patience said. “This includes additional investment of $1 billion over the five years, including BP’s two additional drilling rigs, one in 2015 and a second in 2016.”

Parnell, Walker stake out ground over Alaska LNG Project

The Alaska governor’s race may well turn into as much of a brawl as the slugfest in the state’s U.S. Senate race. Incumbent Gov. Sean Parnell, who is running for reelection, and challenger Bill Walker, an independent, have staked out the natural gas pipeline and the Point Thomson gas field lawsuit as their first major battleground. The subjects are familiar to both. Parnell considers the gas pipeline, now in a $500 million pre-engineering phase, and the settlement of the complex lawsuit at Point Thomson, as signature achievements of his administration. Parnell points to a $4 billion gas condensate production project at Point Thomson, now in construction, as the first fruit of the lawsuit settlement. Walker, however, has a long history with gas pipeline efforts through his leadership of the Alaska Gasline Port Authority, a municipal group formed to build a gas pipeline to Valdez. Walker says now that he doesn’t care that the new pipeline plan is to Nikiski, near Kenai, and not his hometown of Valdez. However, in his first critical statement on the deal Parnell has struck with North Slope producers Walker said the deal is “fatally flawed,” in an interview with the Associated Press. Walker told the AP he wouldn’t say now he would pull out of the agreements Parnell’s administration has signed with North Slope producers BP, ConocoPhillips and ExxonMobil, as well as pipeline company TransCanada, but Walker said there wasn’t much he liked about the deal. His statements to the AP were contradictory, however. Walker said, “What I’ve said is that I will finish the project. I will not start over. I’m not interested in another start-over effort.” Then, he went on to say, “I’ll look into what’s been done so far and if it makes sense for there to be an off-ramp for the State of Alaska, I’ll do an off-ramp.” “We’ll have a structure that looks more like international structures done around the world,” he said, although he did not elaborate on what an alternative structure would be. Parnell immediately jumped on Walker’s statement. “It’s disappointing that Bill Walker would jeopardize the historic progress we’ve made on an Alaska gas pipeline project,” Parnell said in a Sept. 15 statement released through his campaign. “For the first time in history the state had brought the three major producers and pipeline builder TransCanada into alignment. The structure that has been negotiated gives the state full ownership and control of 25 percent of the pipeline and liquefaction facilities, and identifies off-ramps if Alaska’s needs are no longer met by the project. It also allows the state to continue if one or more of the major partners pull out.” Parnell expanded his criticism of Walker in an op-ed published by the Alaska Dispatch News. “When Bill Walker takes a position, he’s demonstrated a willingness to switch it,” Parnell wrote. “That risky behavior, the ‘speak first, think later’ mentality, in a potential governor chills private sector investment and can easily kill Alaska’s gasline project.” Walker also cited Alaska not being in the “driver’s seat” of the project as reasons for his objection, and said he is uncomfortable with the project being led by major companies who have other gas and LNG interests around the world. However, it may be that Walker’s alternative — or at least the proposal of the Alaska Gasline Port Authority — is a project almost totally led by the state. That would require Alaska putting up the bulk of the financing for the project, which seems unlikely given the limits to the state’s financial resources. Also, LNG buyers in Asia, which are sophisticated in the LNG business, are not likely to sign long-term “take or pay” gas purchase agreements with organizations that have no experience managing large, complex construction projects. Walker may also simply be unaware of what’s in the agreements on the gas project. For example, there are already “off-ramps” where the state can exit the deal beginning in 2016. Plus, the state does exercise an element of influence on the project beyond what the 25 percent stake would seem to indicate. For one thing, under the deal the state would be the second-largest owner of gas that is produced and shipped (ExxonMobil would have a slightly larger share of production) which gives the state real influence with the three private parties. More fundamentally, North Slope producers have also said several times that without the state’s participation, even as a minority owner, they will not move the project forward. That’s because “alignment” with the state, by having the state as a partner, is crucial to resolving knotty problems related to state fiscal terms on gas production. Without those being solved, the companies have said, they will not do the project. To this end, the key element on fiscal terms is the state’s agreement, as part of the deal, to taking its royalty and tax share of production in kind, or in the form of gas. The sale of the state’s share of gas, as LNG, solves a problem in administration of the royalty under a conventional structure where producers pay royalties to the state. Having the state take its share as gas and receiving revenues from the sale of that eliminates disagreements over royalties that became huge, costly disputes following the startup of oil production on the North Slope in 1977. In Senate Bill 138, the legislation passed by state legislators last spring, the approved the structure of the gas deal, the tax rate for the production tax share was set at 13 percent of gross value (the royalty share varies between 12.5 to 16 percent). The combination of the tax share and royalty share give the state 25 percent of the gas production. On the Point Thomson lawsuit, Walker attempted to file suit to block the settlement the state made with major Point Thomson lease owners led by ExxonMobil. His suit was dismissed by a state Superior Court but Walker appealed that to the state Supreme Court, which hasn’t said whether it will consider the appeal. The essence of the settlement was that ExxonMobil and the other lease owners agreed to a development program at the gas and condensate field (condensates are a natural gas liquid) as a partial settlement, allowing them to hold some leases that were in jeopardy through state litigation over the companies’ inaction in development. The full settlement, and restoration of all the disputed leases, would occur if the Point Thomson gas were committed to a gas pipeline, or if there were no gas pipeline to an expanded liquid condensate project or piping gas to Prudhoe Bay to aid oil production. Walker, in contrast, would have the state not settle and take back the leases, releasing them to another party. However, most natural resource attorneys feel that would have embroiled the ownership of the leases, and Point Thomson’s gas, in new lawsuits that would drag on for years. Because Point Thomson holds 25 percent of the gas needed for a gas pipeline, the uncertainty over ownership of that gas would seem to doom any progress on the gas project.  

Corps files document justifying CD-5 permit

The U.S. Army Corps of Engineers has provided an analysis to a federal court on its 2011 decision to approve a controversial permit for the ConocoPhillips CD-5 oil project on the North Slope now under construction. Environmental groups and  six villagers in the nearby community of Nuiqsut had filed suit against the Corps in Alaska U.S. District Court, claiming that the permit should be revoked because the Corps had not provided supplemental environmental impact statement, or SEIS, to cover changes in the project design since an original environmental impact statement was published in 2004. U.S. District Court Judge Sharon Gleason found for the plaintiffs that the Corps erred in not justifying its decision more thoroughly but declined to revoke the permit or stop construction. She instead accepted a proposal from the Corps that the agency would provide the necessary analysis. Two other federal agencies, the U.S. Environmental Protection Agency and the U.S. Fish and Wildlife Service, had also argued that an SEIS should have been done. At the time the permit application was being reviewed by the Corps in 2010, there were reports that EPA was considering invoking its Section 404(c) authority under the Clean Water Act to veto the permit if it was issued by the Corps, and took the position that an underground pipeline was preferable to cross the Colville River rather than a bridge. The company argued that the bridge would allow year-round access and the project would be uneconomic without it. The Corps originally denied the ConocoPhillips permit for a bridge, but the company appealed the decision administratively and the Corps reversed its decision, allowing construction to commence in 2013. The Corps of Engineers CD-5 document filed Sept. 12 stated there is no provision in federal law or regulations for an EIS to “time out,” or for the 2004 Alpine field development plan (which includes CD-5) to have become invalid by 2011, although the Corps did note that the Council on Environmental Quality recommends that additional analysis be done if an EIS is more than five years old. However, the CEQ’s “guidance” is not a requirement, the Corps said in its document prepared for the court. The agency also argued that changes in the project design including moving the location of a bridge across a Colville River channel, are not substantial enough to warrant an SEIS. The 2004 EIS document discussed a number of alternatives to the CD-5 project design that existed then and those are sufficiently broad to cover environmental effects of the changes that were made later in the design, according to the Corps. The change in bridge location, which was done at the request of the Nuiqsut village, also caused changes in the routing of roads for the project. Kuukpik Corp., the village corporation for Nuiqsut, worked cooperatively with ConocoPhillips and the Corps on the change in bridge location, according to the document submitted to the court. The changes in the project design between 2004 and 2011 included a downsized “footprint” of 58.5 acres compared with 62.16 acres in 2004; a change in the crossing of the Nigliq Channel of the Colville River that is three miles south of the original proposed crossing site; the road connecting the CD-5 production pad to the Alpine oil field infrastructure was realigned to the south, and lengthened, and the drill site pad was relocated. The redesign of the road included a narrowing to reduce the gravel footprint. The CD-5 pad was also increased in size from 9.1 acres in 2004 to 11.7 acres in 2011 to accommodate additional producing wells, from 23 in 2004 to 33 in the final plan. The pad was also moved 1.3 miles to the south and east. These changes, however, were done to better locate the pad on the reservoir and to avoid the need for a second drill pad in the future, the Corps said in its analysis. The Corps noted that it does not regulate the number of wells on a pad but only the footprint of the gravel laid down for the production pad, and in this case the alternatives studied in the 2004 EIS included larger pads as options. Another change between 2004 and 2011 was to substitute several small bridges for culverts in the road, but this has the effect of reducing the amount of gravel fill and the environmental impact, the Corps noted. The total amount of wetland acreage affected by the project did increase between the 2004 plan and the 2011 approved plan, from 13.4 acres to 58.5 acres. “Most of this change was due to the road realignment and increase in pad size,” the Corps said. The potential of a larger wetlands impact was also included in the alternatives in the 2004 EIS, according to the Corps filing. The environmental lawsuit against CD-5 has had the effect of splitting the Inupiat community at Nuiqsut. While the six Nuiqsut residents are listed as lead plaintiffs, Nuiqsut’s village corporation, Kuukpik Corp., has intervened in the case on the side of the Corps and ConocoPhillips, the developer. Kuukpik Corp. owns the surface lands where the CD-5 project is being built. Arctic Slope Regional Corp. of Barrow, the regional Native development corporation for the North Slope, also intervened on behalf of the corps and ConocoPhillips. ASRC owns the mineral rights at CD-5 and will receive royalties from oil production. According to people familiar with the land ownerships, Kuukpik will also receive a small overriding royalty through an agreement negotiated with ASRC because of the use of its surface lands. Gleason will now decide whether to accept the Corps’ filing, and whether it will render the Clean Water Act claims of the plaintiffs moot. Gleason stated in her original decision ordering the Corps to present the documentation for the permit that she would rule on the CWA claims after receiving the information.

Japan consortium hires firm to assess Port MacKenzie LNG plant

A small, upstart Japanese company is plugging away on its ambitious plan for a new medium-sized liquefied natural gas plant on upper Cook Inlet. Its goal is to beat North Slope producers in getting new Alaska LNG to Japan. REI Alaska Inc.’s proposed 1 million-ton per year plant is pint-sized compared with what the industry-led consortium plans across Cook Inlet at Nikiski, a giant plant exporting 17 million to 18 million tons per year. It’s not all that certain the producers’ big project will be built, however. REI thinks its smaller plant could not only be more affordable but can be built faster, with a completion by 2020 compared with 2024 for the Alaska LNG Project. The latest is that REI has signed a contract for an assessment of feasibility and technology choices with Houston-based KBR Inc., a major energy project engineering and construction management company. Current estimates for REI’s plant range between  $1 billion to $1.5 billion and KBR is now being asked to refine that, said Mary Ann Pease, an REI vice president and its Alaska general manager. REI proposes to build its LNG plant at Port MacKenzie, across Knik Arm from Anchorage. The project would be constructed on a privately-owned land tract adjacent to the port, which is owned by the Matanuska-Susitna Borough, Pease said. The company will have its own special-purpose dock at the site because federal rules will not allow the nearby multi-purpose dock at Port MacKenzie to load LNG ships, she said. The company is working with PND Engineers Inc. on the dock design. Rick Hernandez, KBR’s vice president for business development in its gas projects group, said, “We expect to work with REI over the next several months to help develop a project with costs and a technology they will be comfortable with. At the end of this we hope KBR will be the EPC (Engineering, procurement and construction) contractor.” REI’s plant would be similar in size to the existing ConcoPhillips plant at Nikiski. Like the ConocoPhillips plant, which is operating, the company would manufacture LNG with Cook Inlet natural gas. REI will not wait for a gas pipeline from the Slope, Pease said. REI’s consortium includes a group of Japanese municipal governments led by Hyogo Prefecture and several Japanese technology companies including Mitsubishi Gas Chemical and Toyo Engineering Co. Those entities want their own direct access to a source of imported LNG and do not want to be in the shadow of other, larger Japanese LNG importers like Tokyo Gas and Tokyo Electric, nor do they want to have to depend on a source of LNG controlled by major U.S. oil and gas companies, Pease said. Owning and controlling the LNG plant is a key element to the REI plan, she said. Getting more Alaska LNG to Japan four years earlier than the large project would deliver is important, but control of the project will give the consortium a better chance of negotiating lower LNG prices, she said. Many of REI’s backers would also be customers. If the large project is built, REI would also be able to later take advantage of the new 800-mile gas pipeline built by the North Slope producers. The pipeline is planned to come through the Matanuska-Susitna Borough before crossing Cook Inlet to Nikiski by one of two routes under consideration.    The Japanese company might be able to either buy gas from one of the major North Slope producers or purchase gas from another producer and arrange to have its gas shipped through the 42-inch pipeline. However, if the North Slope gas project is not built, the state’s backup plan, with a smaller project led by Alaska Gasline Development Corp., could also result in a North Slope pipeline. Until then, or even if no pipeline is built, there appears to be sufficient gas resources in Cook Inlet to meet REI’s gas supply needs for at least 20 years, according to studies the company has commissioned. Global Energy Consultancy LLC, a company retained by REI to assist it with Cook Inlet gas supply issues, estimates that proven and probable gas resources in Cook Inlet range between 2.7 to 3.1 trillion cubic feet. That is enough to supply 80 billion cubic feet of gas per year to the regional utilities and other gas users for 40 years and 55 billion cubic feet of gas per year to REI for 20 years, for its needs, according to the studies done by GEC, the consulting firm. The analysis assumes REI’s demand for gas would begin in 2019. Pease said REI has signed Memorandums of Understanding with several Cook Inlet producers and explorers who have discovered gas, but said negotiations on gas purchases will await the conclusions of the KBR study. “We want to feel more certain amount the economics before we move to the next step in securing a gas supply,” she said. Meanwhile, its new contract with KBR aligns the Japanese company with a U.S. engineering firm with a long pedigree. Headquartered in Houston, KBR is one of the world’s largest engineering, procurement, construction and services companies, employing approximately 27,000 people in more than 70 countries. The company works in hydrocarbons, power, industrial, civil infrastructure, minerals, government services and commercial sectors, according to information on its website. KBR’s heritage dates to 1901 with the formation of M.W. Kellogg as a small pipe fabrication business in New York. Kellogg developed, over decades, into a world-class engineering firm. Its expertise led to creation of new hydrocarbon technologies including the world’s first catalytic cracking facility, in 1942, and Europe’s first crude oil-based liquid ethylene cracking facility, in 1956. In the 1960s, Kellogg revolutionized fertilizer production through the creation of a new ammonia process, making possible rapid growth in global food production. The company was joined with Brown & Root, the major oil and gas construction company, to become Kellogg, Brown & Root, and in 2006 was separated under an initial public offering, to become a separate company, KBR Inc.

State insurers seek change to hold down premiums

The director of Alaska’s Division of Insurance says her agency is reviewing a request from health insurers Premera Blue Cross and Moda Health to adopt a “reinsurance mechanism” to hold down increases in premium costs in the individual Alaska health insurance market. “We’re not closing the door on this. We’re looking at it,” said Division of Insurance Director Lori Wing-Heier. “We’ve sent the proposal to a consultant for review to see if it can be done. It may also require legislation,” she said. Premera and Moda are the only companies selling policies for individuals in Alaska in the federal Affordable Care Act exchange and both are projecting heavy losses this year and next because of relatively small numbers of people in the group and a number of people with health problems that have imposed heavy costs. Prior to the Affordable Care Act, or ACA, becoming effective last January the high-risk people were covered under a state-sponsored high-risk pool, the Alaska Comprehensive Health Association, or ACHIA, which employed a reinsurance mechanism to cover losses. Under ACHIA, the premiums paid by those who were insured were high but paid only part of their costs. To cover the gap, the insurance was subsidized by all companies selling health insurance in Alaska through a fee assessment, known as reinsurance. When the Affordable Care Act became effective, many of those in the ACHIA high-risk pool signed up for one of the plans offered in the federal exchange for Alaska, where the premiums were lower. Even though they were now lumped in with 16,000 other individual Alaskans who had signed up for coverage, the total premiums paid by all weren’t enough to cover costs. Because those with medical problems were now outside of ACHIA, the reinsurance mechanism was no longer available to subsidize those with health problems. Wing-Heier said that Premera and Moda have suggested expanding the existing ACHIA reinsurance to cover the ACA individual insurance program, but she isn’t sure whether it is fair for all health insurance policies, including large group plans, to bear part of the cost of the individual policies with the new federal mandates. Also, the ACHIA board has yet to weigh in on the idea. Such a plan might be able to be done through regulation changes but it may also require changes in state statutes, she said. The problem exists in Alaska because the state has a small population. In Washington and Oregon, in contrast, hundreds of thousands of people have signed up for coverage in the ACA exchanges, enough to submerge the cost effects of people with health problems. In those states, premiums under the plan are projected to fall, in contrast to Alaska. The requirements for health coverage mandated under the ACA also imposed new costs, said Susan Bell, commissioner of Commerce and Economic Development. The Division of Insurance is within Bell’s department. “Obamacare requires that insurance plans meet a federally mandated threshold known as ‘essential health benefits,’ limiting consumer choice and raising costs by requiring that individuals purchase health plans covering a wide range of services, from wellness care to mental health and substance use disorder services,” Bell said in a statement. “Prior to implementation of the ACA, a consumer could choose which services and coverage they were willing to pay for. Because the mandates of the ACA were new and the insurers did not have any experience to draw from, they relied on assumptions to set their rates. As many predicted, those assumptions were too low, and the insurers took substantial losses.” Premera Blue Cross said it expects to lose $3.7 million in 2014. Even with a 37.5 percent premium rate increase it will lose another $5 million in 2015, the company said. Meanwhile, the issue has prompted criticism. Kevin McGee, chairman of the NAACP’s Anchorage chapter political action committee, said it isn’t clear how thoroughly the insurance division studied the rate increases or whether the requests were just signed off on by state officials. The non-partisan Kaiser Family Foundation has said that Alaska’s insurance rate review has the bare minimum standards for insurance oversight, McGee said. Gov. Sean Parnell was one of just a few governors in the country that failed to strengthen its insurance rate review process by taking advantage of federal funds offered through the ACA. “Parnell refused to strengthen rate review. When Parnell approved massive cost increases requested by health insurers, his administration failed to offer any analysis to justify the rate increases,” McGee said. Wing-Heier, however, said the insurance division has adequate resources to review the rate increase proposals.  

Balash heads to Japan with BP to market LNG

Marketing efforts for the Alaska LNG Project have formally started, passing another major milestone. State Natural Resources Commissioner Joe Balash accompanied BP officials to Asia on the first formal sales trip for the giant project. “These were BP’s meetings. They set them up and handled the invitations, and we were invited to come along,” Balash said. For the state, the trip’s purpose was to demonstrate the alignment between Alaska and the producer companies, Balash said in an interview before he departed. “There is a lot of confusion in Asia about Alaska and the opportunities here, so we felt it was important to do this with BP and for us to be seen standing alongside each other. It’s an important way of demonstrating alignment,” Balash said. Meetings were also to be held in Seoul with KOGAS, Korea’s natural gas company. KOGAS is the world’s largest LNG buyer as a single company but Japan imports more LNG overall, Balash said. BP’s meetings were just informational but state officials held separate meetings in Tokyo that produced a Memorandum of Cooperation between the state and METI, Japan’s Ministry of Economy, Trade and Industry. The memorandum sets out a framework for discussions between the state and the Japanese agency intended to facilitate negotiations between private buyers in Japan and the North Slope producers. It builds on an existing agreement the state signed last January with the Japan Bank for International Cooperation. JBIC is a public financial institution in Japan that plays an important role in financing Japanese foreign investments, and in this case helping secure LNG imports to Japan. The memorandum itself, signed by METI and Balash, representing the state, notes that, “The Alaska LNG Project has some comparative advantages to other potential suppliers of LNG including proximity, lack of security risks and avoidance of strategic shipping choke points.” The document also recognizes that Alaska has one of the world’s largest portfolios of undeveloped oil, gas, minerals and renewable resources, and that Alaska has historic status as a “foundation LNG supplier to Japan” through the ConocoPhillips Kenai LNG plant that provided, in 1969, the first shipments of LNG to Japan. The plant continues to ship LNG to Japan made from Cook Inlet natural gas. In the large project marketing, Balash said each of the producers will be making their own marketing trips for their share of LNG produced by the project. The companies cannot make joint trips because of anti-trust reasons, he said. The state also came to BP’s meeting because the company may be marketing the state’s gas, as LNG, along with its own. It is too early to say whether the state will accompany the other producers, ConocoPhillips and ExxonMobil, when they make marketing trips. It’s not yet certain the big project will actually be built. That decision will be made in 2018 or 2019 after further cost estimates, engineering and if permits are acquired. “It’s still early but we need to open a dialogue with the buyers,” he said.    “There are a lot of reasons why this project should be attractive to them (buyers), among them the geopolitical factors,” such as obtaining LNG from a secure sources that is also relatively close. Balash said that under the Heads of Agreement signed by the state, producing companies and TransCanada Corp. each of the three producers are obliged to negotiate the sale the state’s 25 percent share of LNG along with their own, and under the same contract terms. This isn’t for certain, but it’s what the producers have agreed to do if the state prefers. “We have some big decision to make, whether to ride along on their contracts or strike out on our own,” Balash said. That would require the state to set up its own LNG marketing group, and the marketing would be done without the benefit of the producers’ experience in selling LNG worldwide. “We’re in a position to be flexible, but we have to be careful about anti-trust issues,” the commissioner said, meaning that if the state asks the three producers to sell its LNG the information obtained on each company’s marketing will have to be kept confidential from the others, who would also be selling the state’s LNG as a part of their contracts. Joint ventures like the Alaska LNG Project don’t have to do things this way, Balash said. “Joint ventures sometimes choose to market as a project, but in that case they set up a separate company staffed by people usually loaned from the owner companies who have to cut their links,” to the sponsor companies, at least as it relates to the marketing. The main limitation to this is that the marketing group can only sell LNG from the jointly-owned project, so any advantages of negotiating for supply from several sources is lost. With the Alaska LNG Project, however, the decision was made to have each producer sell its own equity share of LNG, and to be responsible, if the state chooses, for the portion of their production that is the state’s royalty and tax share. Balash will also accompany BP officials to China to tour an LNG project, 30 percent owned by BP, that is also the world’s largest LNG trucking operation. The commissioner expects to learn a lot from visiting the operation. “We’re involved in Alaska in our Interior Energy Project, which involves trucking of LNG from the North Slope to Fairbanks. We hope to see this expanded to other communities,” Balash said.

FERC filing another important step for Alaska LNG Project

Step by step, the Alaska LNG Project is moving forward. The project made a big advance Sept. 5 with its application to the Federal Energy Regulatory Commission to begin a pre-filing process for the project.  Earlier this summer an application was submitted to the U.S. Department of Energy for a license to export liquefied natural gas, or LNG. Pre-Front End Engineering and Design work, or pre-FEED, which will cost about half a billion dollars, also got underway this summer. BP, ConocoPhillips, ExxonMobil, TransCanada Corp. and the Alaska Gasline Development Corp., who are partners in the project, announced the latest application, with FERC, on Sept. 8. The project includes an 800-mile pipeline, the LNG plant at Nikiski and a major gas processing plant that will be required on the North Slope. A smaller 60-mile gas pipeline connecting the Point Thomson gas and condensate field with Prudhoe Bay is also part of the project. The FERC pre-file sets the stage for environmental and technical reviews associated with siting, design and permitting for the project. Preliminary costs are estimated at $45 billion to $65 billion. About 16 million to 18 million tons of LNG would be exported yearly if the project is built, although the application to the Energy Department for an LNG export license asks permission to export up to 20 million tons per year. “We look forward to leveraging the extensive strengths of all the parties involved in the FERC pre-file process,” said Steve Butt of ExxonMobil, who is the Alaska LNG senior project manager. This is certainly one of the largest LNG export projects in the world, Butt said. There are some projects in the Middle East on a par with what is planned in Alaska. Whether those are larger or smaller depends on how the measurement is done, he said, but what makes Alaska different is the complex integration of all parts including the large-diameter pipeline and the two large plants at either end, each component a mega-project in itself. The filing included a proposed schedule for an environmental impact statement that would be completed in 2018 as well as two firms being recommended by the sponsor group to FERC to do the EIS, The federal agency will make the selection of an EIS contractor and will supervise the preparation of the document. Butt said he could not identify the two firms proposed to FERC for reasons of confidentiality. The pre-filing also sets out the proposed timeline for major regulatory filings for the project, including an application in September 2016 for the Natural Gas Act authorization from FERC. In the filing, FERC was also requested to issue the authorization by July 2018. The proposed schedule calls for the release of a draft EIS by October 2017, and the final document by March 2018. By that time the project sponsors will have completed the detailed Front-End Engineering and Design, or FEED, as well as updated cost estimates.  The process with FERC provides for 13 resource reports to be filed with the agency describing different parts of the project. Drafts of those are to be filed and will be shared with other federal and state agencies and the public. Meanwhile, the pre-FEED, a preliminary step on the project engineering, is now underway this summer following the state Legislature’s enactment of Senate Bill 138 last April that authorized state involvement in the project. The pre-FEED is to be completed in early 2016 along with an updated cost estimate. If the results of those are favorable, the sponsors will consider authorizing the full FEED in 2016 that will result in advanced engineering and a final cost estimate by 2018. The cost of the pre-FEED work is estimated at about $500 million while the more detailed FEED is expected to require an additional investment of more than $2 billion. The final goal is a favorable decision on the project and a start of construction in 2018 or 2019, which would enable the first commercial production of gas and shipments of LNG to be done in 2024. In other developments, the pre-filing document also identified some of the major contractors that have been hired so far. They include names that are familiar, including Michael Baker for pipeline work and Fluor and Worley Parsons for the design and engineering of the major industrial plants. Fugro and Moffay and Nichol have been retained to work on design and engineering of the dock and LNG loading facilities and other marine-related segments of the project. Det Norske Veritas has also been retained for marine-related segments. URS Corp., another contractor long established in Alaska, is also part of the team. Land acquired, right-of-way studied The filing also disclosed that the Alaska LNG Project has acquired 80 percent of the property needed for the LNG plant at Nikiski. More than 120 acres of fee land has been acquired, an additional 100 acres are under contract for purchase, and additional acreage is in the process of being acquired, the document stated. The goal is 250 acres for the plant. In an interview, Butt said the project group is still working to acquire access to more land for “lay-down” areas, where equipment and materials can be stored. “We’d like to have even more space and footprint, as a buffer,” around the large industrial plant construction, he said. “We’re working this as hard as we can.” The plant will be located in the Nikiski industrial area north of Kenai, near the Agrium Corp. fertilizer plant that is now closed. ConocoPhillips’ smaller LNG plant is in the same area, as is the Tesoro Corp. refinery. In terms of current activities, Steve Butt said the LNG project’s summer field season is winding down as the days grow shorter and cooler weather sets in. More than 250 people were employed this summer, mainly gathering data on the pipeline right-of-way from Livengood and Cook Inlet, Butt said. “We know quite a bit about Livengood north based on our previous work but we know less about Livengood south. We have put a lot of focus on the Talkeetna to Healy area,” Butt said. That is near Denali National Park. Butt said the project now plans to follow a route outside the park boundaries and east of the Nenana River. The pipe would be laid on high ground above and behind the hotels along the Parks Highway known as “glitter gulch,” he said. Alaska’s Congressional delegation did a lot of work toward securing a right-of-way for a gas pipeline through the eastern toe of the park but the Alaska LNG Project still sees enough complications with this that a route completely outside the park is now considered preferable, Butt said. As for the Susitna River, there are still two routes under consideration on both sides of the river, the route on the north side avoiding a river crossing. This is one of the more complicated parts of the pipeline because it will also involve the Cook Inlet crossing to Nikiski. “One of the advantages of having done our ‘pre-filing’ with FERC is that we will be able to officially engage with the regulatory agencies on our planning for this area,” Butt said. A field season for 2015 is also planned that will be “a bit larger” than the 2014 season, he said. The planning for this will be done in October and November. Under the project organization, the three North Slope producing companies, BP, ConocoPhillips and ExxonMobil will own about 75 percent of the project. TransCanada, a pipeline company, will own 25 percent of the 800-mile pipeline and large gas treatment plant on the Slope, with the producers owning the other 75 percent. Meanwhile, the state’s Alaska Gasline Development Corp. will own 25 percent of the LNG plant at Nikiski, with the producers again owning the remaining 75 percent. The state will be taking its royalty and taxes in the form of gas, about 25 percent of the North Slope gas production, and will contract with TransCanada to move the state’s gas through that company’s share of the pipeline. Similarly, the state’s AGDC will process the state-owned gas into LNG in its 25 percent share of the LNG plant at Nikiski.

Unsustainable operating budget threatens state savings

These are uncertain times for Alaska. Public spending is a big part of our economy and the state government is running billion-dollar-plus deficits. If things continue as they are, we could be out of cash in six or seven years. There is some good news: Oil production, which pays for 90 percent of our state budget, has been in long-term decline, but has recently stabilized, thanks to new efforts by North Slope oil operators. There are two parts to this equation, however. Revenue is one. Spending is the other. As oil revenues have declined the state budget has continued to grow. Gov. Sean Parnell and state legislators have dampened this spending, but the reduction isn’t enough to seriously dent the deficit and it may be temporary, and even illusory. The deficit was $1.7 billion last year and is projected at $1.38 billion in the current budget year. The parts of the budget that are really tough to control, such as the big “formula” programs that comprise about half of the operating budget, continue upward. It’s different for state capital spending, mostly for construction, because this typically cycles up and down depending on how much revenue is available in any year. If dollars are short, which they have been in the last couple of years, legislators and the governor rein in capital budgets, which they have done. However, cutting the operating budget is really tough, and there’s been less success with that. State operations spending has been on an uphill climb since 2000, increasing from about $2.2 billion in Fiscal 2000 to $6.4 billion in Fiscal 2014, the budget year that ended June 30, about 13 percent per year. Inflation would account for part of that, about 3 percent per year in Alaska, according to Gunnar Knapp, director of the Institute of Social and Economic Research at the University of Alaska Anchorage. Population growth — more people demanding more services — accounts for part of it, too. A lot of it is in the rising cost of public employee benefits, particularly health care, which is increasing at about 6 percent to 7 percent yearly, Knapp said. Health care costs are woven all through the state budget and particularly in Medicaid, the health care program for low income families and the disadvantaged, which is half paid for by the state. The increases have also come in lumps, sometimes at a low ebb and sometimes in surges, depending on circumstances and how successfully the governor at the time instituted fiscal controls. Gov. Frank Murkowski held growth of the operating budget to modest levels, at least compared with what was to come, from $2.3 billion to $2.8 billion for the years he was in office in 2002-06. Gov. Sarah Palin came into office with a $3.1 billion operating budget and left before her term was up in 2009 with a $4.7 billion operating budget. Sean Parnell took over as governor when Palin resigned (he was lieutenant governor) and tamped down the operating budget to $4.1 billion in fiscal year 2010. But in the four years following, operations spending grew to $6.4 billion for fiscal year 2014. The operations budget for fiscal year 2015, the state’s current financial year, is $5.7 billion, an approximate $727 million reduction. Much of that is a $600 million scheduled payment toward unfunded liability in state pension funds that was not appropriated in the fiscal year 2015 budget but made as part of the $3 billion transfer from state savings to the pension funds that legislators approved this past session. The annual payment, although reduced to $500 million a year, will return in 2016. The rest of the approximate $727 million reduced operations spending is essentially accounted for by one-time expenditures made in fiscal year 2014 that were not repeated in fiscal year 2015, such as funding for the state’s Alaska Gasline Development Corp. Funding for schools is up in the current year compared with last year but that is partly offset by decreases in agency operations. John Boucher, senior economist in the state’s Office of Management and Budget, said the governor has been trying to hold the line on operations spending growth through a variety of measures. Those include deleting positions in agencies when they are vacant for a period of time, exerting pressure in public employee bargaining as contract renewals are negotiated, putting limits on the amount of leave state employees can accrue and developing more efficient standards for state offices. Boucher spoke in a briefing to Commonwealth North, an Anchorage-based public policy group, which has a task force working on state budget problems. Tripling since 2000 The part of the budget funded with state dollars has been on an upward trajectory since 2000. There are federal funds spent through the budget but these are typically more stable because they are tied to paying a share of state-administered programs, for example highway and airport construction. The parts of the operating budget paid with state dollars are much more difficult to cut, at least politically, because they pay for public services such as education and health services, State Troopers, fish and game management plus the costs of overseeing the state’s huge state land and natural resource endowment.  All of this funding is protected by constituent groups, a good example being in education, where school activists descended on the state capital last spring to push for an increase in school funding, which they got. About half of the operating budget is for “formula” programs where spending is locked into formulas based on population counts or otherwise set out in statutes. State support for school districts, mostly through the School Foundation Program, is tied to student counts. If those go up, funding automatically increases. Medicaid is another of the large formula programs. The state’s share of Medicaid has increased because of reductions in the federal share, formerly 59 percent but now about 50 percent. “The shifting sands of the Medicaid match rate has been a significant issue for us in the last 10 years,” Boucher said. Several states get higher Medicaid reimbursements from the federal government, but not Alaska. That said, Alaska’s Medicaid program is also more generous than that of many other states, not only paying for a wider array of services but also making higher payments to health care providers. Federal law allows the state to make these decisions, and these are policy choices the Legislature made in years past. However, it’s a two-edged sword. The higher payments to providers means Alaska Medicaid patients are accepted by most physicians and health care clinics, thus getting quicker service, than in many other states where the reimbursement rates are lower and the services fewer. In school funding, the statewide student count has been fairly level in recent years but the amounts spent per student, through the school foundation program has been increasing for a variety of reasons. In 2006 the state’s per-pupil payments was $4,900. It is now $5,830. Separately from the school formula the Legislature has also expanded funding for special needs students in recent years. School funding statewide also bumped up when the Legislature approved new regional cost-differential factors to adjust school funding when local costs are high, such as in rural areas. Cost drivers There are other formula programs such as public assistance for the poor and for children’s services, to safeguard and prevent child abuse. Another spending category that is locked in is debt service on state general obligation, or GO, bonds. Alaska has been issuing more GO bonds in recent years mainly to fund transportation projects and the debt service on these is now about $200 million per year, Boucher said. A special program to reimburse oil and gas explorers though refundable tax credits must also be paid, and these cost about $400 million per year. If companies have oil and gas production and pay production taxes, they apply the tax credits to those but most exploring companies don’t have production, and so the state reimburses them directly for a share of the expenses. The theory behind this program is that the explorers will eventually find more oil and gas, bringing new tax and royalty income to the treasury. Health care costs drive a lot of increases. They are imbedded through all state agencies, school districts and municipal budgets through employee benefits. The average per-employee health benefit premium paid by the state has increased from $820 per month per employee in 2006 to $1,380 per month this year, amounts that are sobering but would look familiar to many private employers.  Boucher said that former Commissioner of Administration Becky Hultberg managed to stop the growth of premiums while she was in charge of state employee benefits. That may be just temporary, though. In prisons, the state picks up inmates’ medical costs, so higher health care drives up these costs too. Energy costs are also woven through all state budgets in terms of heating buildings and fueling school buses, the state equipment fleet and state ferries. They were a big factor helping push up budgets from 2007 on but the pressure has moderated since then as oil prices have dropped. Alaska also spends money on things that many other states don’t because of the state’s huge size, its sparse population and widely-scattered communities, and lack of infrastructure other states have had for years, like highways and interconnected electrical grids. The state ferry system, for example, is a vital transportation and economic link for coastal communities. It is heavily subsidized because passenger fees pay only 30 percent of the operating costs. Similarly, no other state must manage commercial, subsistence and sports fisheries across thousands of miles of coastline, and Alaska’s stellar record in managing sustainable fisheries, gaining worldwide admiration, reflects the monetary commitment several Legislatures and governors have made. One of the more troubling aspects of the budget picture is that neither the state administration nor the Legislature ensures that funding is in place for maintenance of new facilities when they are built, or even existing facilities. Worse, when oil prices plummeted in the late 1990s and budgets were severely crimped, all parts of the government, from state operating agencies to school districts to university, deferred maintenance to save money. Once delayed, the work was again and again postponed until the backlog reached over $1 billion, by some estimates. Parnell and the Legislature have been addressing this with annual appropriations through the capital budget to tackle the problem, but the backlog still exists. In the Commonwealth North briefing Boucher said there is still no tracking system in state government on deferred maintenance, although many agencies and the university have made progress on the problem.  However, there is no mechanism either that requires future maintenance and facility renewal to be budgeted for and planned when new state-funded buildings are erected, he acknowledged.

State seeks federal judgment in push for ANWR exploration

The State of Alaska has asked a U.S. Alaska District Court to issue a summary judgment in its lawsuit against the U.S. Department of the Interior over the federal agency’s rejection of a state plan to explore a part of the Arctic National Wildlife Refuge. The action was filed Sept. 8 in Anchorage. Judge Sharon Gleason will decide the issue. Gleason must allow the federal government and the intervenors in the case time to respond to the state’s petition and for the state to respond to those filings. The current court schedule calls for this to take about six weeks. After that Gleason would be in a position to rule on the state’s petition. In July 2013, the state submitted a plan to Interior to conduct a winter-only, three-dimensional seismic exploration program in the coastal plain of ANWR. Federal law allows exploration in parts of the refuge not classed as wilderness, although Congress must approve any development of an oil and gas discovery. In September, after an initial rejection of the petition, the director of the U.S. Fish and Wildlife denied the state’s application, relying on a 2001 opinion of the Interior Department’s solicitor issued in the waning days of the Clinton administration declaring the authority to allow exploration had expired. The state contested this, arguing that the plain reading of the 1980 Alaska National Interest Lands and Conservation Act, under which ANWR was created, allowed exploration, and further that the federal law says the department “shall” issue a permit if an application conformed to the Fish and Wildlife Service rules. The state had proposed a one-season winter seismic program in a part of ANWR’s coastal plain that is considered to have high potential. A limited 2-D, or two-dimensional, seismic program sponsored by industry was done in the coastal plain during the 1980s but the 3-D, or three-dimensional, seismic program proposed by the state would be of higher quality. It would allow the geologic evaluations of ANWR’s coastal plain done by the U.S. Geological Survey in the 1980s, and which used data from the 2-D survey, to be updated with the newer 3-D seismic technology now available. Modern 3-D seismic imaging and the advanced methods used to interpret the data also allows scientists to detect the actual presence of gas, and sometimes oil, fluids in underground reservoir rocks. That ability did not exist before. While drilling is still needed to confirm the presence of petroleum, and particularly whether it is a commercial-size deposit, the use of modern imaging technology has sharply increased the success rate of exploration drilling once that is undertaken No drilling is proposed in the state’s plan, at least so far, and any would require Congressional authorization. The proposal is also to fund the first year of 3-D seismic with state money and, if the results were encouraging, to seek partners for a second year. The motion filed by the state challenges the U.S. Fish and Wildlife Service’s refusal to consider the state’s proposal. In the motion, the state says, “Exploration of this area was mandated by the Alaska National Interest Lands and Conservation Act and is authorized by the plain language of law today. Conversely, the (President Barack) Obama administration has claimed that the Fish and Wildlife Service has no authority to review the state’s plan, and has therefore refused to consider it.” The key issue Gleason must decide is whether an agency solicitor’s opinion written more than 13 years ago overrides the federal statute as passed by Congress in 1980. In a statement, Gov. Sean Parnell said, “The state must pursue litigation with Washington to explore ANWR because the information that will be gained (by the seismic exploration) is invaluable to both Alaska and the United States as a whole. “Our legal position is strong, and the national interest is best served by understanding what hydrocarbon resources underlie the coastal plain, and how they could support our economic and energy security. We will not give the federal government a free pass to choke Alaska’s economic development.” Joining the case defending the Interior Department are Gwich’in Steering Committee, Resisting Environmental Destruction on Indigenous Lands, Alaska Wilderness League, Center for Biological Diversity, Defenders of Wildlife, Natural Resources Defense Council, Northern Alaska Environmental Center, Sierra Club and The Wilderness Society.

Individual insurance pool to see sharp premium hikes

Health insurers have filed for substantial increases in allowable premiums on individual non-subsidized health insurance plans issued through the federal Affordable Care Act, or ACA. Under state law the state Division of Insurance approves increases in health premiums. Permission for as much as a 37 percent increase in 2015 has been granted, according to the division. Premera Blue Cross of Alaska, one of two companies filing the request, said the increase is needed to cover large losses the company suffered in 2014 in its Alaska individual insurance plans. The extent of Premera’s losses are severe. “Between Jan. 1 and June 30, 2014 we had more than $7 million in medical claims from only 33 members (of the plans). That’s roughly one third of all the medical claims costs for the 7,000 members in the individual plans,” Premera said in a statement. “We’re currently paying an average of $723 (per member) in medical claims per month and receiving an average of $540 a month (per member) on premiums. We expect to lose $3.7 million in 2014 serving the individual market on those claims. “At the rate of those payments, the company would have to have a 71.5 percent average increase to break even in 2015. We have instead filed for and received approval for a 37.5 percent average rate increase,” the company said. Even with that increase Premera expects to lose $5 million in 2015, it said. The increases will generally not affect lower-income Alaskans receiving federal subsidies for their individual health insurance plans. The other company that filed for the increase is Moda Health. Premera and Moda Health are the only companies selling individual health insurance under the ACA plans. “The problem is really the very small size of the Alaska individual market and the fact that we’ve had a number of people with significant health issues joining the plan and not enough healthy people to spread those costs,” said Premera spokeswoman Melanie Coon. In contrast, states with large numbers of people in the individual plans are seeing decreases in premiums in 2015, Coon said. The average premium in Washington is expected to decline 1.9 percent, and in Oregon an 11.3 percent decrease is expected, she said. Those are average premiums filed by all insurers in those markets and not just Premera Blue Cross. Competition among many insurance companies selling the plans, in contrast to just two in Alaska, may also result in lower rates but the effect of that can’t be predicted yet, Coon said. More companies are signing up to sell insurance in 2015 than were selling in 2014, she said. What allowed the premiums to drop was simply the very large numbers of people signing up under the ACA metallic plans in those two states in sharp contrast to Alaska. In both Washington and Oregon there are several hundred thousand people in the plans, which makes them big enough to absorb the costs of people with health problems. About 16,000 Alaskans in total are covered under individual health insurance policies issued under the federal health care act, the state Division of Insurance said. Coon said about 7,000 of those are Premera’s customers. There are also a number of Alaskans with individual plans issued before Janurary 2014 that are “grandfathered” and not subject to the rate increases, for 2015 at least. What aggravated the situation is that a large number of people with serious health conditions who were formerly enrolled in the state and federal high-risk pools opted to drop that coverage and enroll in one of the ACA “metallic” plans where premiums would be lower. In the state high-risk pool the members paid premiums that were high but even those covered only part of the total costs of medical care. The remainder was paid, in effect subsidized, by all health insurance companies selling in Alaska through a “reinsurance” mechanism. Coon said Premera believes a similar reinsurance mechanism to cover losses in the Alaska individual health insurance market is solution, and that has been proposed to the Division of Insurance.

NordAq secures $90M investment to develop Alaska leases

A Chinese investment group has taken an investment position in NordAq Energy, an Anchorage-based independent oil and gas company working to develop gas discoveries in Cook Inlet and oil discoveries on the North Slope. NordAq and Chinanx Investment Group, of Beijing, made the announcement Sept. 9. This is the first equity investment by a Chinese company in a special oil and gas project although companies with links to China have bid recently in state oil and gas lease sales, according to the Alaska Department of Natural Resources. Chinese companies also have holdings in some Alaska mining projects. A favorable investment climate in the state created by recent changes in state oil and gas tax laws helped Chinanx make its final investment decision, both NordAq and Chinanx said. “These tax and credit policies were recently ratified by the people of Alaska (in the Aug. 19 vote against a repeal of the tax law) signaling to the financial markets that Alaskans are committed to a stable tax regime,” NordAq and Chinanx said. Under the deal, Chinanx will provide up to $90 million to fund the development of NordAq’s Alaska portfolio of assets, NordAq said. The first part of this, $20 million, was made available Sept. 9, according to the announcement. Chinanx will also provide a debt facility for up to $150 million in further financing. NordAq holds state and federal oil and gas leases in Alaska along with leases on private lands, particularly those of Cook Inlet Region Inc., or CIRI, the Southcentral Alaska Native regional corporation. The press release cited an estimated 1.2 billion barrels of potential recoverable oil and a potential 115 billion cubic feet of natural gas on leases held by NordAq. “We are delighted that Chinanx has chosen to make a significant investment not only in NordAq but in Alaska,” NordAq’s chairman, John Kidd, said in a statement. “The resource potential of Alaska is tremendous and this transaction highlights the prospectivity of the state.” Chinanx’s investment will also put its representatives on NordAq’s board. Doris Cheng, honorary chairman of Chinanx will become Vice Chairman of NordAq. “We are pleased to launch this partnership and to be joining NordAq for the next stage of its development. The first of its kind, this deal will help forge a closer union between China and Alaska, a region that is not only politically stable and close to Asia but is also highly prospective,” Cheng said in a statement. NordAq is working to develop a gas discovery on the Kenai Peninsula south of Anchorage but the development planning and permitting has is taking a long time because the project is within the Kenai National Wildlife Refuge. The subsurface mineral rights are owned by CIRI, but the surface lands are owned by the U.S. Fish and Wildlife Service. Because of that the project must adhere to an extensive rules to protect the refuge. The agency cannot prevent production but it can impose stipulations that guide development, U.S. Fish and Wildlife officials have said. On the North Slope, NordAq holds federal leases in the National Petroleum Reserve-Alaska where a previous company, FEX Alaska, made discoveries in exploration drilling. NordAq is still engaged in evaluating the acreage and in exploring other leases in the petroleum reserve and on state leases in state submerged lands north of NPR-A.

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