YEAR IN REVIEW: Budget battles, special sessions, plunging prices
The nosedive in crude oil prices continued through 2015, dipping to less than $40 per barrel. The effects on state revenues, and a ballooning budget deficit, dominated the year’s legislative session — and the special sessions that followed — as lawmakers wrangled over spending cuts.
Lawmakers failed to agree to the point that layoff notices were sent out in case of a state government shutdown were there to be no approved budget by July 1, the start of the fiscal year.
As the year ended, the new state revenue estimate and forecasts of even lower oil prices set the stage for a possible repeat of the 2015 session.
Two new elements are that Gov. Bill Walker has introduced a plan for a comprehensive overhaul of the state’s fiscal system, with proposals for a variety of new taxes and, most important, a restructuring of the Alaska Permanent Fund so that some of its income can help support state services.
The deficit for fiscal year 2016, paid for out of state cash reserves, was about $3.2 billion. The deficit for fiscal year 2017, the budget year beginning next July 1, was previously estimated at $2.7 billion last spring when the Legislature adjourned.
Now, with even lower oil prices, the deficit is expected to again exceed $3 billion.
In efforts to narrow the deficit, legislators trimmed the state budget by about $800 million, eliminating about 500 state jobs. However, about $550 million of this was a one-time savings achieved by reducing the state capital budget.
The capital budget was brought to a very low level of barely more than $100 million, sufficient mainly to fund the required state match for federal funds and certain critical state capital needs.
About $250 million was cut from the state operating budget.
A similarly-sized reduction may be difficult to achieve for the fiscal year 2017 budget because there is not much more, if any, that can be squeezed from the capital budget. Similar, or greater, cuts in the operating budget could begin to impair critical state services, but that may happen.
One bright spot is that federal funds for Alaska programs, those that are administered by state agencies but paid for by the federal government, appear to be holding steady at about $2.8 billion for this year and next.
These include funds for surface transportation projects like roads and airports, rural water and sewer projects and federal support for Medicaid, the state-federal health care program for low-income people.
So far the reductions in the state-funded portion of the budget appear not to have had substantial adverse impacts on Alaska’s economy. Employment, a key measure of the economy, is holding steady although some softening was apparent in the later months of 2015.
Surprisingly, oil and gas employment continued at record levels through 2015 despite the plunge in oil prices. That was mostly due to companies completing North Slope projects that had started prior to the price drop, however.
Two ConocoPhillips projects on the Slope, Drill Site 2S and CD-5, were completed in the latter half of the year. ExxonMobil was wrapping up work on its big Point Thomson gas condensate project as the year closed. Production there will begin soon.
— Tim Bradner
2. Alaska LNG Project
There were moments of concern, but substantial progress was made on the large Alaska LNG Project in 2015, at least on the technical work.
Outside the preliminary engineering, there were major changes as Gov. Walker replaced six of the seven members of the Alaska Gasline Development Corp. board of directors, obtained the resignation of its President and CEO Dan Faukse, and successfully sought an appropriation from the Legislature in a fall special session to buy out the interests of TransCanada Corp. in the project.
It’s too early to know the significance of the AGDC changes, however, because the project is being led, and managed, by the three major Slope producers who own the majority of the Alaska LNG Project.
The major part of the pre-front end engineering and design, or pre-FEED, was done during the year, although the final work must still be done. Pre-feed will be complete in mid-2016, and it will include a revised cost estimate.
The current estimate, of $45 billion to $65 billion, was done in 2012 based on conceptual planning and engineering. Pre-FEED engineering will allow a far more detailed estimate.
If the revised cost estimate is in the lower half of the range of the first estimate, the project will stand a good chance of being competitive against, for example, LNG made from cheap shale gas on the Gulf of Mexico.
If revised costs are higher, more toward $65 billion, competing with LNG from the Gulf of Mexico or elsewhere may be more difficult.
Alaska’s competitive advantage is that the ocean voyage to transport LNG is shorter than from the Gulf of Mexico, the Persian Gulf or Australia, the supply of gas on the North Slope is assured and well known, and that much of the production infrastructure is already in place.
The disadvantage is that an 800-mile pipeline must be built from the North Slope to Nikiski, on the Kenai Peninsula, the site of the proposed LNG plant.
Another challenge Alaska may face compared with its competitors is that the state’s pool of skilled labor is limited and importing workers in certain fields will add costs.
The U.S. Gulf does not face that problem, nor does the Persian Gulf. Australia, however, had had labor supply problems for its projects.
However, so far there are no signals there will be unpleasant surprises on costs.
Before he resigned, Fauske said, “These people are working continuously on cost estimates and so far we’ve had no indications things are not within the previous range.”
After the State of Alaska bought out TransCanada Corp.’s share of the Alaska LNG Project, it now owns a full 25 percent share of the project, potentially putting it on the hook for $13 billion or more in costs.
Meanwhile, negotiations on commercial agreements between the producer partners on Alaska LNG Project, with some of the most important of these involving the state, continued through 2015.
Hopefully these will be concluded in early 2016 in time for legislative ratification of some of the agreements in a special session that will follow the regular 2016 legislative session.
One critical agreement is a “gas balancing” compact among the producers that will set terms for assuring supply from one of two fields supplying gas if there is a production problem in one of them. A second critical agreement is on fixed state fiscal terms, mainly taxes, for gas to be produced. This is needed for buyers of the LNG who will want assurances that taxes won’t change over the life of long-term sales contracts.
BP and ExxonMobil sought and received permission from the Alaska Oil and Gas Conservation Commission for a higher offtake amount of gas from Prudhoe Bay in order to supply the Alaska LNG Project if and when major sales begin in the mid-2020s.
— Tim Bradner
3. Walker expands Medicaid; Legislature sues him
The fight over expanding Medicaid between Gov. Walker and Republican legislators went from the Capitol to the Anchorage Legislative Information Office to a courtroom this year.
Walker announced July 16 that he would accept $148.6 million from the federal government for expanding Medicaid to single, low-income Alaskans beginning Sept. 1, the end of a mandatory 45-day waiting period.
About 41,000 people became newly eligible for Medicaid, according to state Health Department estimates. How many actually enroll — the Health Department expects more than 20,000 — will ultimately determine whether the program saves or costs Alaska money as Walker claims it will.
Accepting and spending money by the State of Alaska typically requires the Legislature’s approval. However, because the Medicaid funding is federal dollars, covers 100 percent of the costs for newly enrolled, and does not involve the general fund, it could be done administratively according to legal opinions from Legislative Services.
The Republican-heavy joint Legislative Council voted 10-1 Aug. 18 to sue Walker over his use of executive authority to accept federal funds to expand the state Medicaid program. The legislators claim Walker was overstepping the bounds of his position by adding an optional group to the state’s Medicaid program — an action that would require their approval under state law.
The administration contends the new group is mandatory once the money is accepted.
A Superior Court judge denied Legislative Council’s request for a preliminary injunction, allowing expansion to proceed, but the case remains in state court.
At the same time, the Department of Health and Social Services was working with Xerox Corp. to resolve glitches and claims backlogs in its Medicaid payment system to providers, a fact that numerous legislators have noted in their opposition to expanding the already costly program.
The state and Xerox now claim that more than 90 percent of new claims are being processed on time.
— Elwood Brehmer
4. Shell quits Arctic; feds cancel lease sales
Citing disappointing results on its first — and only — well plus regulatory uncertainty, Shell’s abrupt departure from its Chukchi Sea exploration program in September cast a long shadow over the state’s oil and gas industry.
The company’s pullout was followed by a U.S. Department of the Interior announcement cancelling a planned 2016 lease sale in the Chukchi Sea, and a further announcement denying Shell and other companies holding federal offshore leases additional time on their leases.
That, in turn, was followed by Statoil’s announcement that it was abandoning its Alaskan Arctic offshore program and would also relinquish its leases back to the federal government, which Shell has not done. Shell’s Chukchi leases expire in 2020; the Beaufort leases expire in 2017.
ConocoPhillips, a third company with a big stake in Chukchi Sea leases, has made no announcement on its plans, but its Chukchi Sea leases also expire in 2020.
Shell’s departure after a hugely-expensive, multi-year $7 billion effort that included court battles, the grounding of one of its drill rigs during a storm in 2012, confrontations with Greenpeace, and the federal government’s cancellation of the Arctic lease sales has effectively chilled industry interest in the Chukchi Sea.
This is similar to the way the failure of “Mukluk,” a very costly offshore Beaufort Sea well drilled in the early 1980s, chilled industry interest in that region.
However, there is no doubt that the Chukchi Sea along with the Beaufort Sea are still highly prospective and , oil and gas discoveries have been made in both regions, although they were not commercial.
Someday the industry will be back exploring again.
At least two offshore discoveries have been made in the Beaufort in the area where Shell was exploring during its last Arctic foray in 2012, the Kuvlum find by ARCO Alaska and “Hammerhead,” an earlier find by Unocal. Though a well was partly drilled in 2012 it was not completed, and Shell chose not to return to the area in 2015 and focused on the Chukchi.
The Chukchi Sea, for its part, has multiple attractive targets including a discovery by Shell in the early 1990s at “Burger,” a prospect the company was testing with its 2015 well.
Federal geologists say the broad, shallow continental shelf stretching between Alaska and Russia contains sedimentary basins very favorable for oil and gas accumulations. The area is remote but the waters are shallow and, because of climate change, increasingly accessible.
Shell’s experience, however, will likely deter other companies for a period. From the 1970s through the 1990s companies safely drilled offshore wells in the federal Arctic waters.
However, new rules adopted by the federal government, such as requirements for an additional “standby” rig to be nearby and that an undersea oilspill capping system must be on hand, substantially raised the cost of exploration drilling.
In addition, there is a U.S. Fish and Wildlife Service rule that operating offshore rigs be at least 15 miles apart. This prevented Shell from efficiently using the two rigs it brought north in 2015. Only one rig was able to actually drill.
These accumulated costs mean that, on a practical basis, a Chukchi Sea well will cost about $1.2 billion.
— Tim Bradner
5. AIDEA expands, then refines Interior Energy Project
A year ago, the Alaska Industrial Development and Export Authority hit the reset button on the Interior Energy Project when it became apparent the first attempt to truck lower-cost natural gas from the North Slope wouldn’t pencil out.
Very quickly, the authority, or AIDEA, made a drastic move when it negotiated to purchase Fairbanks Natural Gas Co. and its sister companies for $54 million — a deal announced in late January that was spurred by direction from Gov. Bill Walker’s administration.
Simultaneously, Walker introduced legislation to allow the $332.5 million state financing package for the Interior Energy Project to be used to develop a source of gas from either Cook Inlet or the North Slope, the latter being the source the grants, loans and bonds were originally restricted to.
The plan to purchase Fairbanks’ small natural gas utility was met with criticism primarily from Southcentral Republicans in the Legislature, who argued the state should not buy a private business and thus get into a potentially competitive utility market.
Walker’s bill to expand the scope of project beyond the North Slope eventually passed as House Bill 105, but was the subject of unexpected and unsuccessful attempts by some Anchorage Republicans in the House to limit AIDEA’s ability to move the Interior Energy Project forward without legislative approval.
Bob Shefchik, formerly of the Interior Gas Utility, was chosen to lead the resurgent project.
In August, AIDEA announced it received 16 proposals from 13 private business respondents hoping to partner with the state’s effort to get natural gas to Interior residents at about $15 per thousand cubic feet, or mcf, of gas. Those options included nine from Cook Inlet and three from the North Slope in which LNG would be trucked, a small diameter pipeline from Cook Inlet, and other proposals to import LNG and propane.
The 16 were quickly narrowed to five: two from the Slope and three from the Inlet.
On Dec. 3, Shefchik announced that AIDEA had further narrowed its options to two: Spectrum LNG from the Slope and Salix Inc. from Cook Inlet. A final decision was delayed until late January as AIDEA’s project team further reviews the finalists’ plans Shefchik said were nearly even when evaluated by the authority’s project review committee.
Also in early December, the AIDEA board of directors reviewed plans to cut rates to Fairbanks Natural Gas’ residential customers by 13.5 percent, a function of changing from private ownership, with tax liabilities and higher profit margins, to being a public utility.
— Elwood Brehmer
6. Cannabis rules move along
The Last Frontier has a new industry in recreational marijuana, and 2015 witnessed the grind to set up the ground rules.
Personal use and possession of cannabis have been legal for decades thanks to the 1975 Ravin v. Alaska Supreme Court decision, but not cultivation or sale of recreational marijuana. The Ballot 2 Initiative, passed in November 2014, went in effect in February and made Alaska the fourth state in the U.S. to fully legalize the industry of recreational marijuana.
The initiative passed 53 percent to 47 percent, and the relatively narrow margin has led several municipalities to outlaw commercial marijuana; Ketchikan, Soldotna, and Palmer have all banned marijuana sales, while the Anchorage Assembly has moved slowly on its own dual licensing provisions.
The Legislature created a state Marijuana Control Board alongside the Alcoholic Beverage Control Board to craft cannabis business regulations. After an inaugural meeting in July, the board spent five grueling months drafting the operating requirements for commercial cultivation, sale, testing, and manufacturing.
The board’s most controversial final regulation put a limit on Outside investment. Only residents may be listed on a license, and only licensees may invest in an Alaska marijuana business. The board requires the same residency requirements as the Permanent Fund Dividend, including physical residency for a full calendar year.
The board also made an “onsite consumption allowance” retail stores can apply for, making Alaska the first state to allow some kind of marijuana café.
Currently, marijuana social clubs like Anchorage’s Pot Luck Events exist in a legal purgatory. They allow consumption and sharing on premises in exchange for a membership fee, but sell no marijuana directly.
Some including Marijuana Control Board director Cynthia Franklin define clubs as “public places,” in which marijuana consumption was hastily banned during the summer, but law enforcement hasn’t taken any action against Pot Luck Events or a Fairbanks club that opened doors in November. Soldotna club Green Rush Events closed in November, based on fears of law enforcement.
Sales aren’t legal until the board issues business licenses by May 24, 2016. Anchorage police charged Rocky Burns, Larry Stamper, Charlene Egbe, and Michael Crites with multiple felonies each for allegedly engaging in the sale and delivery of recreational marijuana prior to license issue. Trials will be held in January.
— DJ Summers
7. Obama pushes climate protection in Alaska visit
President Barack Obama made good on a promise to visit all 50 states when he landed in Anchorage Aug. 31.
During his three-day trip the president spoke at the State Department’s GLACIER Conference in Anchorage; toured Kenai Fjords National Park by way of Seward; became the first president to cross the Arctic Circle on a trip to Kotzebue; and got a taste of Southwest Alaska with a few hours in Dillingham.
While Obama saw many parts of Alaska, his trip to the state was clearly made with a singular objective: find and expose climate change.
The president, accompanied by Secretary of State John Kerry and Interior Secretary Sally Jewell, painted a grim picture of the future if the world does not take serious action to slow or stop climate change while speaking to an international gathering of Arctic delegations at the GLACIER Conference.
Alaska’s congressional delegation concluded his visit to be a failure because Obama did not address the feds’ roll in resource development in the state.
Gov. Walker flew with the president from Washington, D.C., to Anchorage with a singular focus of his own — opening the Arctic National Wildlife Refuge coastal plain to drilling for oil, despite Obama’s unequivocal opposition.
The president did, however, back spending approximately $1 billion on a new icebreaker for the U.S. Coast Guard while in Seward.
Also while in Seward, Obama took the time to film an episode of NBC’s celebrity adventure show Running Wild with Bear Grylls.
When in Anchorage, he held a fundraising dinner at the home of Alaska Dispatch News Publisher Alice Rogoff.
Alaska media had limited access to the president with no questions allowed; however, he conducted a lengthy interview with Rolling Stone magazine while in Kotzebue.
The United States also assumed the chair of the Arctic Council April 24. The Arctic Council is a nine-member, non-binding intergovernmental organization that seeks to address issues common amongst its member states. Former Alaska Lieutenant Gov. Fran Ulmer is a Special Advisor to Secretary Kerry in the State Department, which represents the U.S. on the Arctic Council.
— Elwood Brehmer
8. EPA water rule goes final, halted almost immediately by court
Congressional Republicans scored a victory Oct. 9 when the 6th Circuit Court of Appeals in Ohio halted nationwide implementation of the Clean Water Rule.
Also known as the waters of the U.S., or WOTUS, rule, the Environmental Protection Agency regulation aims to clarify the agency’s jurisdiction under the Clean Water Act passed in 1972, at least according to the Obama administration.
Opponents — primarily, but not exclusively Republicans in Congress — contend the rule is a power grab with the goal of expanding federal regulatory jurisdiction on isolated and intermittent water bodies.
A Government Accountability Office report released Dec. 14 found the EPA violated anti-lobbying and propaganda laws when it spent money to promote the Clean Water Rule on social media platforms.
The three-judge 6th Circuit panel did not issue its opinion based on EPA’s jurisdiction, rather, the panel found enough evidence to suspend the Clean Water Rule based on key parameters in the final rule that are not substantiated by adequate scientific conclusions and that the same parameters may not have been added to the Clean Water Rule in accordance with public comment regulations.
The original Clean Water Act often relies up case-by-case analysis of water bodies to determine jurisdiction.
Judge David McKeague wrote in the stay order that the clarification the Clean Water Rule tries to achieve “is long overdue,” but how the EPA reached its conclusions needs review.
The final rule deviated from draft versions by delineating some waters in and out of federal jurisdiction through “bright line” boundaries.”
The demarcations were added to the Clean Water Rule after the public comment period, possibly violating the Administrative Procedure Act, which requires that final rules must related to what is in the proposed rule.
Alaska’s congressional delegation welcomed the Circuit Court’s decision. Sens. Dan Sullivan and Lisa Murkowski and Rep. Don Young have characterized the Clean Water Rule as expansion of EPA jurisdiction outside of the boundaries set in law under the Clean Water Act.
Alaska holds more than 60 percent of the nation’s wetlands, which makes any changes to the Clean Water Act of particular significance in the state.
U.S. Army Corps of Engineers attorneys and senior officials also took umbrage with the changes to the rule in internal memos and legal analyses written this past spring. They argued not only that not only could the EPA be breaching procedural protocol, but also the agency could actually be reducing its jurisdiction with the arbitrary boundaries, putting water bodies that need protection at risk.
The Corps acts as an operational arm of the EPA, using the technical expertise of its engineers to review and rule on Clean Water Act Section 404 wetlands permits applied for by development projects.
The EPA has contended since proposing the draft rule in April 2014 that it would clarify jurisdictional ambiguity that exists under the Clean Water Act for some wetlands and water bodies. Its economic analysis of implementing the rule, published in May, concluded fewer waters would be under federal authority.
The Clean Water Rule took effect Aug. 28 in 37 states. Alaska and 12 other primarily western states challenged the regulation and received a preliminary injunction from a federal District Court in North Dakota, staving off implementation in those states, just one day before the rule took effect.
The court order prohibiting implementation was eventually expanded to all 50 states.
— Elwood Brehmer
9. Troop cuts proposed at JBER
Less than a year after staving off a proposal by the Air Force that would have moved fighter jets from Fairbanks to Anchorage, Alaska’s congressional delegation found itself fighting to keep Army troops in Anchorage in 2015.
U.S. Army officials announced in early July a plan to cut 2,600 soldiers from Joint Base Elmendorf-Richardson and another 75 soldiers from Fort Wainwright in Fairbanks likely by sometime in 2017.
The JBER reductions — from Fort Richardson’s 4th Airborne Combat Team of the 25th Infantry Division — would be part of an Army-wide contraction of 40,000 troops, a Department of Defense attempt to cut its budget in compliance with the 2011 Budget Control Act known as sequestration.
Alaska’s congressional delegation pushed back on the Army’s plan, arguing a troop drawdown in Alaska is exactly the wrong move as Russia and other nations increase their presence, militarily and otherwise, in the Arctic.
Sen. Dan Sullivan added an amendment to the National Defense Authorization Act passed by Congress in November that would have required the Army to detail its Operation Plan for the Arctic in hopes of proving the drawdown at JBER is ill-advised.
President Barack Obama ultimately vetoed the Defense bill for other reasons.
Anchorage officials said the proposed troop reduction, which would cut a little less than half of JBER’s active duty Army personnel, would hurt but not cause major economic damage to the city in the long run.
Army officials held well-attended community meetings in Anchorage and Fairbanks in February as part of a nationwide listening tour that covered 30 bases where troop reductions were a possibility.
— Elwood Brehmer
10. Alaska banks undergo leadership changes
The Alaska banking industry had a changing of the guard in 2015.
Former First National Bank Alaska President Daniel Hon Cuddy died May 12 at the age of 94, leaving behind a legacy of steadiness and sober financial principles that fostered one of the longest-standing and most resilient financial institutions in the state.
Cuddy’s history is as uniquely Alaskan as his bank, the highest-valued Alaska-owned bank in the state, which finished 2014 with $3.3 billion in assets and $32.6 million in income. He served as president for more than 60 years and most recently served as chairman of the board. Cuddy’s daughter Betsy Lawer serves as president.
In October, Northrim BanCorp founder, chairman, and former president Marc Langland announced his retirement at 74 years old, leaving a trail of pluck and forethought in the state’s darker moments that established the second largest Alaska-based bank with $1.5 billion in assets.
Northrim BanCorp President and CEO Joe Beedle will take over as chairman of the board for both and Northrim BanCorp and Northrim Bank. Chief Operating Officer and Northrim Bank President Joe Schierhorn will fill Langland’s seat on both the Bancorp and Northrim Bank’s boards and take over as CEO of Northrim Bank.
Brian Nerland will retire at year-end from KeyBank, the state’s fourth-largest bank by deposit market share with $924.3 million, and Commercial Banking Executive Lori McCaffrey will succeed him as Alaska market president.
With his retirement, Nerland will complete a 30-year career at KeyBank in Alaska and will transfer leadership to McCaffrey, whom he hired 20 years ago to work with him in commercial banking.