Elwood Brehmer

Mental Health Trust Authority transfers $41M after audit

Alaska Mental Health Trust Authority leaders have repaid $41.3 million to the core of the group’s investments to comply with state laws, but continue to insist the initial decisions to use the money elsewhere were justified according to a follow-up report from the state’s auditor. The 60-page report signed by Legislative Auditor Kris Curtis also concluded that trust leaders continued to pay for land development activities totaling $4.7 million out of the trust’s cash principal through March of this year despite a June 2018 audit that deemed the practice inappropriate. Those development expenses included $1.1 million to facilitate a much-publicized Southeast Alaska land exchange and $3 million for mineral exploration at the trust’s Icy Cape property, according to the most recent audit. It is dated July 6 but was released by the Legislative Budget and Audit Committee following an Aug. 27 meeting. The 2018 audit determined the trustees interpreted state regulations as providing them the authority to invest cash principal outside of the Alaska Permanent Fund Corp., which invests the Mental Health Trust assets on behalf of the authority as required by state law. Curtis wrote in the 2018 audit that the decision to use the $39.5 million on seven commercial real estate investments and $1.8 million on property investments for the authority’s programs “appear to be well-intentioned, driven by a desire to maximize revenue for use by beneficiaries” of the authority, despite being outside the bounds of the law. The Alaska Mental Health Trust Authority is an independent, state-owned corporation that utilizes its assets to better the lives of its beneficiaries, who are Alaskans with mental health and addiction challenges. The trust’s investments managed by the Permanent Fund Corp. totaled $704.7 million as of July 31, according to spokeswoman Allison Biastock. A 1994 legal settlement and corresponding legislation directed the state to allocate $200 million for the Mental Health Trust. That money, along with one-time revenues from development activities on trust land — land sales, oil, gas and mineral extraction and 85 percent of timber sale proceeds — was to be handed over to the Permanent Fund Corp., which comingles the Trust assets with its Fund investments. From state fiscal years 2009-17, the Mental Health Trust Authority invested in seven commercial real estate properties in Anchorage, Cordova and the Lower 48 through the Trust Land Office, which is tasked with managing the authority’s roughly 1 million acres of land holdings in the state. Six of the properties were mortgaged and, according to the 2018 audit, portions of those proceeds were used for further real estate investments. The authority can use recurring revenue from land leases or easements more liberally. The money in question came from such one-time revenue streams, according to the 2018 audit. AMHTA Board Chair Christopher Cooke wrote in a formal response included in the recent report that the trustees generally agree with Curtis’ recommendations to consider selling commercial properties managed by the Trust Land Office add more structure to how the trust’s funds are handled, but do not concur with some of the conclusions behind that advice. Cooke wrote in the 9-page response that the trustees believe their “financial practices are lawful, aligned with the rights and fiduciary responsibilities of the board of trustees, consistent with generally accepted standards in the financial industry, and conducted in the best interest of Trust beneficiaries per the 1994 settlement.” The board regularly considers liquidating properties and will continue to do so, according to Cooke, who also noted that the authority gets an annual “hold/sell” recommendation from its real estate advisory firm Harvest Capital Partners. He wrote further that while the authority transferred the $41.3 million for the APFC-managed investments, the trustees stand by their decision to select the Trust Land Office to manage the properties. “The TLO is fully capable of managing seven real estate assets in five cities in a manner that suits the Trust Authority’s objectives,” Cooke wrote in response to the audit. “Our external real estate advisor, Harvest, has confirmed that the TLO is capable of fulfilling this responsibility.” Elwood Brehmer can be reached at [email protected]

House sends $1,100 dividend back to Senate

Progress is being made two weeks into the special session to settle this year’s PFD but many House Republicans insist that it will come at the expense of a so-far elusive long-term solution to the state’s financial imbalance. House Bill 3003 containing appropriations for Permanent Fund dividends of approximately $1,100 per eligible Alaskan passed the House Aug on a 24-16 vote with all of the opposition coming from members of the House minority Republican caucus. Rep. Kevin McCabe, R-Big Lake, stressed in floor debate that most members of the Republican caucus compromised by backing Gov. Mike Dunleavy’s “50-50” plan to use half of the available Permanent Fund earnings in a year on PFDs because it would result in dividends starting at about $2,350, which is still far less than what the currently disregarded statutory formula calls for of more than $3,000. “I’m a full PFD guy,” McCabe said. “The $2,350 was our compromise. It was a huge compromise for us and it was met, I think, with a slap in the face.” McCabe was an active member of the bicameral Comprehensive Fiscal Plan Working Group that produced a series of recommendations before the special session to steer other lawmakers towards solutions durable enough not just for the unforeseeable events of the future but also to pass the Alaska Legislature. Nikiski Republican Rep. Ben Carpenter, also a member of the fiscal plan committee, argued for voting for a bill to pay this year’s PFD before tackling the big, underlying issues allows lawmakers to avoid the problem one more time in the 30-day special session that started Aug. 16. “What it doesn’t do and what we haven’t done is the very thing we were supposed to come down here for, which is to address a long-term fiscal plan,” Carpenter said of HB 3003. “We have to say ‘no’ to something in order to say ‘yes’ to something else.’ McCabe asked to move House Joint Resolution 7, the proposed amendment to the governor’s 50-50 Permanent Fund and dividend plan into the Constitution, out of the House Judiciary Committee via a floor vote that ultimately did not pass. HJR 7 was scheduled for a hearing Sept. 1 as of this writing and HB 3003 is on its way to the Senate for consideration. The $1,100 PFD matches what the budget conference committee negotiated in June. The Senate originally passed a PFD of approximately $2,300 by a narrow margin, with supporters saying it was the first step towards a compromise at the time. House legislators initially avoided the PFD in the budget, only approving a $525 per person dividend after refusing to approve a draw from the Constitutional Budget Reserve that requires a three-quarters vote of each body that the conference committee tied to other appropriations — including the $1,100 PFD — in an attempt to gain support. Dunleavy called the $525 PFD “a joke” shortly after vetoing it from the operating budget. Despite the tension in the House, Senate President Peter Micciche said in an interview prior to the HB 3003 vote that he still sees a path to a solution based on what the fiscal plan work group put together. The group reached consensus or offered conceptual options on how to fill the nearly $1 billion budget gap the 50-50 plan would leave as well as ways to settle the PFD but did not produce specific policies that could easily translate to legislation, as was suggested would happen when the group started meeting in early July. “I believe if those eight (in the fiscal plan group) were a body, they would’ve produced a product that could’ve gone to the governor’s desk. If those diametrically opposed eight legislators can get there, then by golly the rest of the Legislature can get there,” Micciche said. The work group had two members from each caucus of the Legislature, selected in part for their divergent philosophies regarding Alaska’s fiscal policy, according to legislative leaders. More lawmakers are now willing to invite tough votes than in the prior years of Alaska’s near-decade run of deficits simply due to the “evolution of the frustration of inaction,” according to Micciche, who said many legislators need to accept that they need vote for one thing on the expectation of another. “These issues need to be transparently discussed and available for people to process,” he said. “If the votes aren’t there, we need to work together but that’s not going to happen when all of the process is stymied by those who fear the outcome. I don’t fear the outcome.” House Republicans again voted against a CBR draw, which was once again partially tied to oil tax credit payments. HB 3003 sought to fund the $114 million minimum statutory oil and gas tax credit payment with $54 million from the General Fund and $60 million from the CBR. An initial $114 million tax credit appropriation died with the first failed CBR vote in late June. Paying off the tax credits, of which the state owes more than $700 million, has long been a priority of most Republican legislators. Elwood Brehmer can be reached at [email protected]

Dunleavy introduces $2,350 PFD in slow start to special session

The special legislative session billed for months by Gov. Mike Dunleavy and many legislators as the end to Alaska’s years of fundamental fiscal policy battles has started like most regular sessions do: very casually. Legislators spent the first week of the legislative session getting updates on the budget they passed less than two months ago in much the same fashion as they do shortly after they convene each January. However, the current special session is limited to 30 days, not the nearly four months lawmakers normally have to craft, debate and pass legislation, so the clock is truly ticking this time. Once again distracting legislators from the larger, existential fiscal issues of the role of the Permanent Fund in state government, including the future of the Permanent Fund dividend, what services the state should offer and whether or not Alaska should reinstate its first broad-based tax in more than four decades, is the size of this year’s PFD after Dunleavy vetoed the approximately $525 per person appropriation in the budget passed late last June. The fiscal year 2022 budget contained an appropriation for dividends of approximately $1,100 per eligible Alaskan but legislators failed to get three-quarter supermajority support from both chambers needed to draw from the dwindling Constitutional Budget Reserve Fund, which held just more than $1 billion as of July 31 and is the state’s primary savings account. Without the CBR votes, the PFD was cut to $525 because of budget language written by the conference committee. Dunleavy, who is pitching a plan to use half of available Permanent Fund earnings for PFDs starting at approximately $2,350, called the $525 dividends “a joke” shortly after vetoing them. Dunleavy submitted legislation to pay the larger dividend of $2,350 as well as fund popular scholarships and the state’s medical school partnership program with other western states known as WWAMI Aug. 19, the fourth day of the special session in Juneau. The scholarship and WWAMI funds were caught up in the failed CBR vote due to a once uncontroversial budget procedure known as the “reverse sweep,” which restores funds for many state programs that automatically transfer to the CBR on July 1, the start of each fiscal year. Because the governor called the special session, the Legislature can only work on the issues included in the governor’s proclamation. “Alaskans are still in recovery mode from the economic impacts of the pandemic. With this in mind, and following recent encouraging conversations with legislators, my administration put forth a vehicle for the Legislature to fund the PFD and student scholarships — two critical programs that directly impact Alaskans. We recognize there may be other appropriations the Legislature will consider as we work collaboratively to finalize the (fiscal year) ‘22 budget in this special session; but I am committed to ensuring Alaskans get a fair share of their resource wealth,” Dunleavy said, while invoking a phrase popularized by advocates for higher oil production taxes who are largely his political foes, in a statement from his office. Progress in the years of debates over the state’s fiscal policy has largely stalled since the Legislature passed Senate Bill 26 in 2018, which authorized a percent of market value draw on the Permanent Fund totaling about $3 billion per year and growing. It marked the first time the Fund had been used for anything other than paying dividends and operations at the Alaska Permanent Fund Corp. Since then, the larger fiscal policy issues have spilled over into the annual budget process with legislators routinely leveraging budget items to gain support for their view on taxes or the dividend. The special session Dunleavy called in June for legislators to discuss the future of the PFD was consumed with debates over the size of this year’s PFD that slowed the budget process to a crawl. Elwood Brehmer can be reached at [email protected]

Analysis suggests another billion-barrel North Slope prospect

A junior Australian outfit that has been exploring the North Slope for years has likely hit more than 1 billion barrels of oil in a formation that has quickly become the go-to target in the basin. 88 Energy has tapped into a reservoir estimated to hold more than 1.6 billion barrels of light oil with its Merlin-1 well drilled last winter in the southeast corner of the National Petroleum Reserve-Alaska, according to an independent analysis of the well conducted by Australian firm ERCE. Drilled last winter to a relatively shallow depth of 5,267 feet, the Merlin well intersected several oil-bearing sequences of Nanushuk sands, the long overlooked formation first identified in 2014 by the Repsol-Armstrong Energy partnership in the large Pikka project now being developed by Oil Search. The recoverable oil resource is currently estimated at 652 million barrels ConocoPhillips has also repeated the Nanushuk success in the NPR-A, as the formation is the basis for its now-stalled $6 billion Willow project and several other satellite prospects in the area. 88 Energy Director Ashley Gilbert said in an Aug. 16 statement that the company is thrilled by the results of the well warranting further seismic exploration as well as a nearby appraisal well on tap for next winter. 88 Energy officials have dubbed their work in the NPR-A Project Peregrine, which is located about 40 miles south of ConocoPhillips Willow prospect. The general location of the small explorer’s work in the NPR-A is representative of the mostly north-south trend of Nanushuk plays, according to North Slope oil experts. The latest announcement also builds on statements the company made in April, shortly after the drilling was complete but before a thorough analysis of the well samples could be conducted. “This is the best well we’ve drilled on the North Slope of Alaska to-date, with light oil detected in the Nanushuk across three separate horizons. Whilst we have a lot more work to do, the Merlin-1 well has confirmed an active petroleum system in the Peregrine acreage,” Gilbert said. 88 Energy holds more than 247,000 acres on the North Slope — including through its subsidiaries — mostly around the edges of other industry activity. The company has participated in drilling several exploration wells on the southern portion of the Slope in recent years with mixed results. The Merlin-1 well intersected 41 feet of net pay with light oil contacted across three sandstone intervals, according to the company. The target for appraisal well scheduled for early next year is likely to be drilled east of the first Merlin well where 88 Energy has identified the shelf break for the play and thicker and higher quality reservoirs are expected. Umiat While 88 Energy leaders are eager to better delineate their Peregrine prospect with another Merlin well next winter, they said in a statement earlier this month that Bureau of Land Management regulators had approved a request to defer drilling in the nearby long-dormant Umiat Unit. The 24-month drilling deferral approved by BLM officials who manage the NPR-A will allow 88 leaders to study ways to integrate development of the field with the Peregrine project and the company’s other Icewine and Yukon prospects to the east near the Dalton Highway, according to a company statement. It will also allow the company to utilize more data from the nearby Merlin well and consider a tie-in to ConocoPhillips Willow facilities — if and when they are developed — according to 88 leaders. The revised schedule calls for 88 to drill at least one well into the field by September 2023 instead of a deadline of Aug. 31, 2021, for the work. Adjacent to the southern edge of the Peregrine acreage, the Umiat prospect for decades has been known to hold oil but its extremely remote location far from other North Slope oil fields has hampered the economics of development. The Umiat leases that have changed hands were formally put in unit status in September 2019 at the request of former owners Malamute Energy and Renaissance Umiat, who sold it to 88 subsidiary Emerald House in January. Alaska Oil and Gas Conservation Commission officials on Aug. 19 issued a $40,000 civil fine to Emerald House for changing its work plan to plug and abandon the Umiat-18 well last spring. According to the AOGCC enforcement order, Emerald House leaders acknowledged to the state regulators that they deviated from the work plan approved by the three-member commission, but did so because of operational challenges due to the COVID-19 pandemic and communications challenges stemming from the remote location, among other unspecified problems. Emerald House leaders could not be reached in time for this story. Elwood Brehmer can be reached at [email protected]

Federal judge blocks Willow permits

The largest North Slope oil project in decades faces an uncertain future after a federal judge issued an order Aug. 18 throwing out the government’s environmental review of the planned work. U.S. District Court of Alaska Judge Sharon Gleason ruled in a 110-page order that Bureau of Land Management and U.S. Fish and Wildlife officials under the Trump administration failed to adequately account for foreign carbon emissions stemming from ConocoPhillips’ $6 billion Willow project and did not provide sufficient specificity regarding how the developments impacts to polar bears would be mitigated. The ruling stems from two similar but separate lawsuits filed late last year by state and national environmental groups and the Sovereign Inupiat for a Living Arctic, a North Slope Alaska Native organization, challenging the conclusions in the environmental impact statement, or EIS, for Willow that was approved last October. Gleason’s ruling applies to both lawsuits. “The permits and approvals granted to ConocoPhillips disregarded local health concerns, required public processes, and the law, and (Wednesday’s) court ruling corrects that. It would be unconscionable to allow Willow to move forward when its authorizations were founded on an illegal and deficient environmental analysis that fails to lay out and address impacts to wetlands, water, land, animals and people,” Bridget Psarianos, an attorney for the Anchorage-based nonprofit firm Trustees for Alaska that is representing the Sovereign Inupiat Alaska-based conservation groups in one of the lawsuits. The ruling was met with disdain by Alaska Republicans who see Willow, which is located in the federal National Petroleum Reserve-Alaska, as a hub development that would likely spur additional oil exploration and development in the mostly untapped western portion of the North Slope. Gov. Mike Dunleavy called it simply a “horrible decision” in a statement from his office. “Make no mistake, today’s ruling from a federal judge trying to shelve a major oil project on American soil does one thing: outsources production to dictatorships and terrorist organizations,” Dunleavy said. State administration officials and the members of Alaska’s all-Republican congressional delegation celebrated in late May when Interior Department leaders in the Biden administration decided to defend the Willow EIS after extensive lobbying from the Alaska officials. An Interior spokesperson wrote via email that the department is currently analyzing Gleason’s ruling to determine a path forward. ConocoPhillips Alaska spokeswoman Rebecca Boys wrote in an emailed response to questions that the company, which intervened on behalf of BLM in the suits, is also reviewing the ruling and its subsequent options. ConocoPhillips stock fell approximately 5 percent in the hours immediately following the court order. Regardless of what avenue the company and Interior leaders ultimately decide to take in response, it appears almost certain that Gleason’s decision will at least considerably slow the progress of the construction work on Willow that was otherwise on track to start in earnest this coming winter. As currently proposed, the Willow master development plan calls for the eventual construction of five drill sites stretching north-south over approximately 20 miles in the northeast corner of the federal petroleum reserve. ConocoPhillips also has two other nearby developments in the NPR-A but the Willow project would be several times larger than the single-drill site Greater Mooses Tooth-1 and 2 projects extending from the Alpine field. Full build-out of Willow is estimated at a cost of up to $6 billion, according to the company, with first oil expected during the 2025-26 winter prior to Wednesday’s ruling. The project’s oil production is expected to approach 160,000 barrels per day at its peak. Overall, the project is expected to produce about 590 million barrels over 30 years. Gleason initially ruled in February against a preliminary injunction motion attempting to stop ConocoPhillips from opening a gravel mine and building a 2.8-mile road from its smaller Greater Mooses Tooth-2 oil project, which is also under construction and is expected to start producing oil late this year, concluding the work was not likely to “irreparably injure” the population of south Beaufort Sea polar bears that are protected under the Endangered Species Act before she can rule on the broader merits of the combined lawsuits. However, the conservation and Alaska Native groups were successful in stopping the work with an appeal to the U.S. 9th Circuit Court of Appeals, which granted the injunction and sent the case back to Gleason. The 9th Circuit panel also disagreed with Gleason’s prior conclusion that the lawsuits were likely filed too late to be heard based on statutory limits in the 1976 Naval Petroleum Reserves Production Act. She deferred to the 9th Circuit decision regarding the time limit on legal challenges in Wednesday’s order, also determining that BLM officials did not sufficiently justify their rationale for not estimating the project’s likely contribution to foreign greenhouse gas emissions in-part due to another recent 9th Circuit decision that vacated another North Slope oil project approval by the Trump administration. In that instance, the 9th Circuit ruled that the Bureau of Ocean Energy Management’s approval for Hilcorp Energy’s offshore Liberty prospect was “counterintuitive,” in that the agency concluded that not developing the oil would result in more foreign greenhouse gas emissions. In that case, BOEM officials claimed they could not reasonably estimate the overall downstream emissions from the project because of a lack of reliable data. Gleason wrote that BLM largely relied on the same reasons of “a negligible impact and a purported lack of information on foreign energy consumption and emissions patterns” that the 9th Circuit rejected in the Liberty case for not conducting the emissions analysis. As for the polar bears, the EIS contains “a substantive discussion of the cumulative impacts on marine mammals, and specifically addresses polar bears,” according to Gleason, which supported the Fish and Wildlife Service’s biological opinion that Willow would be unlikely to adversely change critical bear habitat. Despite that, the agency’s insistence that any potential impacts to bear habitat would be mitigated with yet-to-be-determined measures falls short, she wrote, again, partly because of the Liberty decision. “In Liberty, the Ninth Circuit made clear that the (incidental take statement) must specify the mitigation measures, which is precisely what the (Endangered Species Act) and the applicable regulation regarding incidental take statements provides,” Gleason wrote. “The ITS cannot reference future unspecified measures to comply with that statutory directive.” Elwood Brehmer can be reached at [email protected]

Another special session underway without elusive fiscal plan

Gov. Mike Dunleavy called it “Groundhog Day” in an Aug. 16 briefing, while others might prefer “déjà vu all over again,” but the bottom line is the Alaska Legislature has convened for another special session in Juneau yet again with no clear path to solving the state’s persistent fiscal imbalance. On the same day that Dunleavy emphasized to reporters the ability of the Permanent Fund to provide for the state without the need of taxes, the Legislature’s bicameral Comprehensive Fiscal Plan Working Group unanimously recommended new revenue measures to generate between $500 million and $775 million per year. According to the group’s four-page report, members could not reach consensus on what specific type of tax they would be willing to see the state implement but they generally urged “adoption of a broad-based revenue measure, in addition to other revenue measures, as a part of a comprehensive solution.” Lawmakers serving on the special committee that uniquely gave each caucus equal representation also agreed that special fiscal measures relating to the Permanent Fund should also be part of the state’s eventual solution but were split on what it should be. A key component of Dunleavy’s plan to constitutionally direct half of the Permanent Fund’s annual available earnings of more than $3 billion towards dividends with the other half going to other state programs is a separate, one-time, $3 billion appropriation from the Fund to cover near-term budget shortfalls. Department of Revenue officials project annual deficits starting at $826 million next fiscal year that should decrease to less than $100 million by 2029 under the governor’s plan. Some work group members supported a single “bridge” appropriation from the Permanent Fund’s Earnings Reserve Account to cover the expected deficits, while others pushed for a “stair step” dividend that gradually grows to the full amount called for under a new, constitutionally guaranteed PFD, according to the report. Dunleavy stressed that the $3 billion bridge appropriation to the Constitutional Budget Reserve can be made now because of the gaudy returns achieved by Alaska Permanent Fund Corp. managers of late. The Fund had an unaudited value of $82.4 billion as of Aug. 13; it generated a return of 29.7 percent in state fiscal year 2021 that ended June 30. Revenue Commissioner Lucinda Mahoney previously told the working group that Dunleavy could support a broad sales tax if such a bill would get through the Legislature. “If this fund were still around $65 billion I think there would be more of a case (for taxes), but at $82 billion-plus, in Alaska’s time of need like we haven’t seen in decades, if forever, and all the needs that the people have, all the needs that businesses have, all the needs that government has, the solution’s contained right here,” Dunleavy said, referencing a chart showing the Permanent Fund’s growth over the past year. He told reporters Aug. 16 that his administration has presented numerous models of taxes to legislators in an effort to help them make decisions, but any tax bill that they approve will need corresponding assurances for limiting spending. “If it comes to my desk without an appropriation limit, a constitutional appropriation limit, I don’t see how it’s going to work,” Dunleavy said of prospective tax legislation. Enough legislators have consistently opposed the type of ad-hoc draw from the Fund that Dunleavy is proposing to make it unclear whether he could generate support for it with other concessions. Legislators have also generally acknowledged that there is not currently enough support for the 50-50 plan to get the two-thirds majority votes needed in both the House and the Senate to send a constitutional amendment to the voters. Legislative leaders vowed the working group’s recommendations — of which there are 12 — would directly translate to legislation in the special session; however, there are few recommendations specific enough to quickly convert to legislation that could be passed in the 30-day special session that is now underway. Additionally complicating matters is the unresolved issue of this year’s PFD, which currently doesn’t exist after Dunleavy vetoed the appropriation in the state budget for 2021 dividends of approximately $525, calling it “a joke” after signing the budget. A stalemate over the PFD pushed lawmakers to within days of a government shutdown before the budget passed with the $525 per person appropriation; a proposal for an $1,100 dividend failed when it didn’t garner the required three-quarters vote from both chambers of the Legislature after being tied spending from the Constitutional Budget Reserve. Dunleavy said his administration would submit a spending bill soon to deal with this year’s PFD. Elwood Brehmer can be reached at [email protected]

AIDEA board approved foreclosure sale for failed Mustang project

Leaders of the state development bank approved a plan Aug. 12 to offload the foreclosed North Slope oil project where it has to date invested more than $70 million. With little discussion, the Alaska Industrial Development and Export Authority board of directors unanimously passed a resolution directing management to seek out a buyer for the partially complete Mustang oil project that faces “severe financial difficulties,” according to the resolution. AIDEA CEO Alan Weitzner said authority officials have been working with the creditors to Singapore-based Caracol Petroleum and its operating subsidiary, Anchorage-based Brooks Range Petroleum Corp., to optimize the Mustang project for a sale, which is currently in a cold shutdown, since foreclosing on it last December. The authority is actually selling Mustang Holding LLC, a company established to hold the foreclosed assets formerly run by Brooks Range, according to Weitzner. “It would be and has been proposed as a competitive sale process where we will engage with parties directly on these foreclosed assets and their interest in the field and be able to address their proposals and questions as they come,” he told the AIDEA board. AIDEA initially invested $70 million in two holding companies set up for the development of a road to the small oil prospect and its processing facilities. The Mustang field is adjacent to the southern portion of ConocoPhillips’ large Kuparuk River field and also near the Nanushuk oil project being developed by Oil Search. The field is estimated to hold about 22 million barrels of oil and could peak at production rates of about 12,000 barrels per day when fully developed. Brooks Range drilled test wells at Mustang in 2011 and 2012 that led AIDEA in December 2012 to make a $20 million investment in Mustang Road LLC. The $20 million funded the lion’s share of work to build a five-mile access road and a 19-acre drilling and facility pad. The gravel road and pad — in which AIDEA was an 80 percent owner — were finished in April 2013. At the time, Brooks Range leaders said they wanted to have the field in production by fall 2014 and credited incentives in the just-passed and industry-supported oil production tax structure under Senate Bill 21 for improving the economics of the project and spurring it forward. In April 2014, AIDEA committed another $50 million equity investment in the $225 million Mustang oil processing facility through MOC1. AIDEA held a 96 percent stake in the holding company as Brooks Range’s owners matched the authority’s equity with a $1 million investment of their own. By February 2016, management for the authority and Brooks Range agreed to put Mustang in “warm standby” as oil prices in the $30 per barrel range hampered the ability to secure other financing options. AIDEA leaders later attempted to jumpstart development by restructuring its investments into multiple iterations of a loan to Caracol that required the owner company to commit at least $60 million to the project by April 2019. Brooks Range eventually produced a small amount of oil from a single well at Mustang in November 2019 with temporary, modular facilities under new leadership, but it was not sustained. Caracol missed its first quarterly $3.1 million loan payment to AIDEA in late 2019 as well, which started pushing authority officials toward foreclosure last year. AIDEA Chief Investment Officer Morgan Neff noted that the project could still net the state upwards of $200 million in taxes and royalties if it is fully developed. The Mustang resolution also included a $500,000 increase to the authority’s budget for managing the project’s infrastructure this year. Ness said the increase from approximately $1.6 million to $2.1 million largely stems from unexpected remediation of the gravel pad and property tax payments to the North Slope Borough, which recently valued Mustang at $4.3 million, according to AIDEA. The local property tax bill for Mustang is $77,388 per year. Elwood Brehmer can be reached at [email protected]

Lawsuit against former Furie owners seeks $100M

A lawsuit seeking more than $100 million from the former owners and executives of a once bankrupt Cook Inlet natural gas producer leads with allegations of defrauding investors and ends with claims of inflated reserve estimates and twice-committed state tax credits. Filed Aug. 6 in the Texas District Court of Harris County by the Virginia-based firm Clingman and Hanger Management, the litigation trustee in the bankruptcy case for Furie Operating Alaska, the suit names as defendants former Furie leaders Kay Rieck, Lars Degenhardt, David Elder, Thomas Hord, and Theodor van Stephoudtas well as companies owned by other ex-Furie executives who allegedly benefited from the schemes. Rieck, described in the complaint as the “de facto head of Furie,” and other defendants roughly between 2013 and 2018 executed “a brazen scheme to divert Furie’s cash (provided by outside lenders) to entities secretly owned by them,” the suit alleges. “Together, (Rieck and others) caused Furie to drill for fictitious gas using a company they secretly owned, sell gas at a loss to Owned-owned entities and pledge/transfer valuable tax credits to Owned-owned entities without consideration. At the same time, the defendants artificially inflated Furie’s ‘proved’ gas reserves estimates so they could continue drawing compensation from Furie,” the complaint states. Former Furie executives for whom the Journal could find contact information did not return calls in time for this story. A response to the complaint has not yet been filed in Harris County, according to court records. According to the complaint, the malfeasance largely started after the company invested hundreds of millions of dollars into drilling work and facilities that included the Julius R platform in the offshore Kitchen Lights field. It was the first new Cook Inlet platform in decades when it was installed in 2015. Attorneys for the litigation trustee in Furie’s 2019 Chapter 11 bankruptcy case claim Rieck and several of the defendants consistently formed new businesses and partnerships to stall creditors and regulators. For example, David Elder, once Furie’s chief financial officer, also filled the same role for Furie Drilling LLC, Furie Operating LLC, Furie Petroleum Co. LLC and Advanced Funding Capital LLC. Rieck is listed in the complaint as a German national living in the United Arab Emirates. He owned Deutsche Oel und Gas, a reported member of Furie. The company drilled its first exploration wells in Cook Inlet in 2011 and 2012 but mostly came up empty in their search for natural gas. The KLU-3 well drilled in 2013, however, struck commercial quantities of gas and spurred Furie’s subsequent development, according to the complaint and Journal reports from the time. Furie leaders followed their 2013 discovery with an aggressive drilling campaign for a small explorer while also installing the Julius R platform and an onshore production facility. A 2013 independent audit of the reserves discovered with the KLU-3 well concluded Furie had found nearly 60 billion cubic feet of gas with a net present value of $54 million. A reserve audit performed weeks later by Sierra Pine Resources International LLC, also a defendant in the suit, concluded Furie had 276 billion cubic feet of undeveloped gas worth roughly $315 million. Current Furie CEO and owner John Hendrix, who purchased the company out of bankruptcy for $5 million last year, estimated the development cost of the platform to be in the $200 million range. Then Furie Vice President Bruce Webb — also the public face of the company at the time — told the Journal in 2015 that approximately $500 million was invested by Furie in the Kitchen Lights Unit once the platform work was complete. Webb sued Furie in June 2018 alleging a hostile work environment, retaliation and bad-faith business dealings in a complaint that outlines similar business arrangements as the Aug. 10 filing. Webb dropped the suit in U.S. District Court of Alaska roughly two months later before attorneys for Furie formally responded to the lawsuit. According to the latest complaint, Furie originally borrowed $160 million from Energy Capital Partners in 2014 to build the platform, a gathering line and other gas production facilities but overspent its budget on the work by about $175 million, which was covered with another Energy Capital loan as well as one from ING Bank that was backed by State of Alaska tax credits earned for drilling and development work. Furie leaders in 2016 attempted to use tax credit certificates already held by Energy Capital and ING to secure a bond offering of up to $170 million but generated no revenue from the offering. The complaint also alleges Rieck used tax credit transfers that were supposed to be recorded with the state but weren’t as equity at his banks. Furie’s current owner Hendrix emphasized in an emailed statement that the new iteration of the company he leads is not impacted by the latest lawsuit. Longtime Alaska oil and gas attorney and industry analyst Brad Keithley wrote in an emailed response to questions about the case that he found three potential fraud claims for the State of Alaska to pursue if state officials believe they can recoup some of the tax credit money the state sent to Furie over the years. Company leaders claimed to be owed $103 million in unpaid tax credits when they filed bankruptcy in 2019 but it’s unclear exactly how much the state paid the company in total because of taxpayer confidentiality laws. Furie leaders largely blamed the unpaid credits — first partially vetoed by Gov. Bill Walker in 2015 — for the company’s struggles leading up to the bankruptcy filing. The company also had significant gas production issues in the winter and early spring of 2019 that kept it from meeting its contractual obligations to gas buyers. If the allegations are accurate, Furie likely committed fraud on the state by claiming reimbursable drilling costs incurred in a bad-faith effort; breached the implied obligation of good faith and fair dealing; and fraudulently sought tax credits for drilling costs beyond its actual expenses, according to Keithley. A major question for state attorneys, however, is whether or not the U.S.-based defendants have assets worthy of pursuing, he wrote. When asked about the suit and whether or not Department of Law officials believe the state could recoup tax credit funds based on the allegations, Law spokeswoman Grace Lee wrote via email that the attorney general’s office represented the state in Furie’s bankruptcy proceedings and “reserved all rights to audit and nullify tax credits that were not appropriately applied for under state law.” Elwood Brehmer can be reached at [email protected]

Port terminal project to open by year-end

If all continues going largely according to plan, the first major piece of a long-sought and badly needed overhaul to the Port of Alaska will be in service by year-end, according to officials. Construction crews are in their second year of work on the new petroleum and cement terminal, or PCT, located south of most of the city-owned port’s existing docks at a cost of about $200 million. “It’s on time and on budget,” spokesman Jim Jager said in an interview. The workers were able to drive the necessary support pilings into the sea floor before Cook Inlet’s endangered Beluga whales started frequenting the water near the port as they feed on late-summer salmon returning to nearby streams, according to Jager. The new PCT will replace a petroleum offloading terminal originally built in 1965 that sustained significant damage in the November 2018 earthquake, according to port officials. Handling jet fuel shipments for the world-scale cargo traffic at nearby Ted Stevens Anchorage International Airport is a primary line of business for the port. Representatives for fuel-handling companies and cement suppliers initially balked at tariff increases for offloading their products at the port proposed in 2019 and meant to fund the PCT work, contending the rate hikes could disrupt the highly competitive cargo business and would increase the cost of construction materials in the state. However, the Anchorage Assembly unanimously approved scaled-back tariff increases in late December 2019 shortly before PCT work began the following spring. Port and city officials repeatedly stressed through the months-long debate that the PCT needed to be done first, and soon, to start a flow of complex logistics and shuffling at the docks that would allow the port to remain open in the midst of a near total rebuild before inspectors deem the current facilities unsafe. The PCT also marks the first construction of new dock facilities at the aging port since 2010 when severe damage to installed sheet pile was discovered and the original port expansion project was halted. That project cost roughly $300 million of municipal, state and federal money with left little to show for it. Under the current Port of Alaska Modernization Program schedule, crews will begin attempting to stabilize the shoreline on the northern portion of the port grounds in the next couple years and start replacing the port administration building, which sits on the docks, next year. Design and permitting for replacing the port’s two general cargo docks — that carry the vast majority of consumer goods entering the state — will continue until 2024. Replacement work on Terminal 1 used by Matson is tentatively set for 2025, with construction starting on Terminal 2 used primarily by TOTE Maritime in 2028 under the current schedule. While much of the remaining work planned at the port is unfunded, the national focus on infrastructure development and rehabilitation will almost certainly result in additional federal funding avenues for port officials to follow. The U.S. Maritime Administration, which the city is currently suing for its role in leading the prior failed port expansion project, also awarded port officials a $25 million grant for the PCT in November 2019 that helped mitigate the tariff hikes. “We see lots of opportunities to pursue money for the Port Modernization Program,” Jager said of the Infrastructure Investment and Jobs Act that passed the Senate Aug. 10. According to figures provided by staff to Sen. Lisa Murkowski, who participated in negotiations with President Joe Biden on the bill that currently adds about $550 billion in new infrastructure spending over five years, includes $2.25 billion in new funding nationwide for the Port Infrastructure Development Program among its many funding provisions. Elwood Brehmer can be reached at [email protected]

Hydropower tax credits gaining bipartisan momentum

Federal legislation aimed at improving the nation’s hydropower infrastructure and led by members of the Alaska congressional delegation also has rare support from some of the leading industry and environmental players in the realm. Sens. Lisa Murkowski and Maria Cantwell, D-Washington, submitted the Maintaining and Enhancing Hydroelectric and River Restoration Act to the Senate June 24. Rep. Don Young and Reps. Annie Kuster, D-New Hampshire; Brian Fitzpatrick, R-Pennsylvania; and Suzan DelBene, D-Washington, introduced a mirror bill by the same name to the House July 16. At the core of the legislation is a 30 percent tax credit for investments in dam safety, environmental, such as fish passage, and corresponding grid resiliency improvements for hydro facility owners. The tax credit would also extend to wholesale dam removal projects. According to data compiled by a coalition of the bills’ backers, which includes the National Hydropower Association, the American Society of Civil Engineers, American Rivers and the Association of State Dam Safety Officials among others, the roughly 90,000 dams across the country average nearly 60 years old and the tax incentives should accelerate the rehabilitation and removal. Approximately 2,500 of those dams currently produce power. Young and Murkowski emphasized in separate statements that the legislation could lead to additional hydropower development in Alaska that directly displaces diesel-fired power relied upon in rural communities across the state. A particularly key provision for Alaska would allow nonprofit hydro facility owners, such as electric cooperatives, and municipal-owned utilities that are common across the state to capture the tax credit through a direct payment from the federal government that would cover up to 30 percent of an eligible investment. Overall, the legislation provides for up to $4.7 billion in tax credits for dam and grid improvements and another $4.5 billion in eligible tax credits for dam removals, according to the coalition of supporters. Duff Mitchell, executive director of the Alaska Independent Power Producers Association and a member of the National Hydropower Association’s legislative committee said the legislation is the result of an “uncommon dialogue” in which the leaders of historically opposed hydro and environmental interest groups debated ways to address the growing issues of aging infrastructure that often doesn’t meet what’s accepted today environmentally such as fish passage. “I think it’s a good bill for the industry; it’s good for recreation, the environment and grid resiliency. It’s a well thought out bill that supports our fish as well because it incentivizes dam owners to do the right thing,” Mitchell said of providing credits for environmental rehabilitation measures such as improving fish ladders or installing new turbines designed to mitigate impacts to aquatic life. He projected the benefits for Alaska to be in the “hundreds of millions of dollars” if the legislation passes. Homer Electric Association’s Grant Lake project on the Kenai Peninsula is one that stands to immediately benefit from the legislation, he added. Located in the mountains just east of Moose Pass, the 5 megawatt capacity hydropower project would utilize what HEA leaders describe as a three-foot “weir” at the outlet of Grant Lake to raise the water level, noting that the lake is not salmon habitat because of a downstream barrier falls in the outlet creek. HEA General Manager Brad Janorschke said in an interview that he believes the legislation would be “very applicable” to Grant Lake, which the utility secured a Federal Energy Regulatory Commission construction license for in August 2019. “We are still full-speed ahead on that project,” he said, while also acknowledging that despite having the qualities for a good hydro development, the economics of the estimated $58 million Grant Lake hydro facility are still cloudy, as is the case with many similar projects across the state. “We are really hopeful over the next 12 months that some legislation does pass in D.C.,” Janorschke said. As for seeing one of the bills through — never a small task even with support from the administration — Murkowski and Young’s co-sponsors appear to be in positions to at least jumpstart activity on the measures. Young’s spokesman Zack Brown noted that Washington’s Rep. DelBene is a member of the Ways and Means Committee where the House version currently resides and Young has a good working relationship with ranking Ways and Means Republican Kevin Brady of Texas. “There is no doubt that buy-in on hydropower from the administration is certainly helpful, especially for committee Democrats who would be needed to get this bill approved,” Brown wrote in an email. According to staff for Cantwell, the Washington Democrat recently received a renewed commitment from Senate Finance chair Ron Wyden, D-Oregon, who originally committed to including it in a committee markup last spring before, as often happens, the bill was delayed. This time, it’s likely to be included in the clean energy portion of the roughly $3.5 trillion — and highly partisan — budget reconciliation package Democrats are starting to push in the Senate, according to Cantwell’s office. Murkowski, who previously worked closely with Cantwell while they led the Energy and Natural Resources Committee for their parties, was highly critical of Democrats’ reconciliation spending plan in an Aug. 10, calling it a “blunt instrument.” She said Cantwell is in a good position as a majority member of Senate Finance to keep the hydro bill alive, but she won’t be voting for the budget reconciliation bill Democrats appear to be developing regardless of what’s attached. She also highlighted that Senate rules limit what can be included in a budget reconciliation package and some riders are rejected for not meeting the requirements, per the Senate parliamentarian. “There’s no way that I will be a ‘yes’ vote on the reconciliation measure when you’re talking close to $4 trillion all over the board,” Murkowski said. “The fact that there may be a bill in there that I think is good policy — that’s one small measure in a basket of initiatives that is almost unlimited in scope and spending.” Elwood Brehmer can be reached at [email protected]

Revenue Dept. presents options to close deficit under 50-50 plan

It’s a long way between here and new taxes, but Gov. Mike Dunleavy’s administration has taken the initial step towards generating the new revenue many in the Legislature have said is needed to pay for the “50-50” dividend plan he put forth earlier this year. Revenue Commissioner Lucinda Mahoney presented members of the Legislature’s joint Comprehensive Fiscal Plan Working Group with 10 conceptual options for oil tax changes and a state sales tax proposal she said Dunleavy could support along with other ideas such as legalized gambling or utilizing the state’s forests in carbon offset programs for generating state revenue. “We are trying to present you with many different options as well as options related to spending so that we can collaborate and come together on a fiscal plan,” Mahoney said during an Aug. 5 meeting that continued on Aug. 10 because of technical difficulties. Mahoney said the administration would like to “accelerate” the typical timeline for any tax changes to capture as much revenue in fiscal year 2022, which started July 1. “That helps us, first of all, balance the budget but it also starts building up reserves,” she said. The Legislature is set to convene Aug. 16 in Juneau after the leaders of all four caucuses requested more time from the governor to work on long-term budget solutions. The session was first set to begin Aug. 2. Topping the administration’s list of revenue suggestions is a cutting the maximum per-barrel tax credit oil companies are allowed to claim to $5 per barrel from the current $8 per barrel credit. Lowering the high end of the sliding scale per barrel credit, which is $8 per barrel at prices averaging less than $80, to $5 at market prices of less than $80 per barrel would generate between approximately $165 million and $330 million annually over the next five full fiscal years, according to Revenue’s calculations. Many Democrats have long pushed for wholly eliminating the per-barrel credit, which effectively reduces the 35 percent base production tax at prices less than $150 per barrel, and Senate President Peter Micciche has been among the Republicans of late to propose changing the credit along with possibly reducing the base production tax rate. The administration’s informal proposal would also include lowering the high-end price at which the credits phase out from $150 to $120 per barrel. Mahoney also laid out scenarios for statewide sales taxes of 4 percent that, depending on the exemptions, could raise between $600 million and nearly $1.3 billion per year. “We are looking at something broad and low with few exemptions,” she said. Revenue officials have also unofficially added $373 million to the oil revenue outlook for the current fiscal year and $176 million to the state’s projected 2023 total revenue based on mid-July prices in oil futures markets, according to Mahoney. The department now anticipates the price for Alaska North Slope crude will average $72 per barrel in 2022 and $67 next year, compared to the spring forecast prices of $64 and $62 per barrel, respectively. The new anticipated oil revenue means the state would have near-term deficits in the $800 million per year range if the Legislature approves Dunleavy’s plan to utilize half of the annual $3 billion-plus draw on the Permanent Fund for dividends, and half for government services, a split first proposed by his 2018 election opponent Mark Begich. Some lawmakers have questioned the administration’s prior revenue projections and statements that new taxes aren’t necessary given expected improvements in the state’s fiscal picture, claiming the actual deficits are likely to be in the $1 billion per year range or more if currently strong oil and financial markets decline. It’s also unclear how the tax concepts mesh with the governor’s proposal for a constitutional amendment requiring voter approval of all new state taxes. Elwood Brehmer can be reached at [email protected]

ANC cargo booms as supply chains shift

Some of the same supply chain challenges that are driving prices higher for everything from appliances to coffee beans are also pushing the Anchorage airport’s cargo business to new heights. Long one of the world’s most popular stops for freighter jets, Ted Stevens Anchorage International Airport moved up a spot to be the fourth-busiest cargo hub on the planet last year. The logistical problems that started more than a year ago with pandemic-induced shutdowns and business restrictions continue to ripple across the globe, according to Bill Popp, CEO of the Anchorage Economic Development Corp., which has studied and championed the air cargo activity at the city’s airport. “We’re seeing this shift in tonnage and this fairly significant spike in tonnage (through Anchorage) is because of what has been just a disastrous entanglement for West Coast U.S. and Asian ports,” Popp said in an interview. “Air cargo is becoming the option of choice for desperate retailers.” Logistics firms are regularly reporting quotes of $16,000 and greater to move a container across the Pacific via cargo ship; that’s for a 30- to 45-day trip that ran in the $1,500 range pre-pandemic, according to Popp. The increase in cargo is not unique to Anchorage, but the rate of the increase is. According to data from the Airports Council International, the aggregate tonnage among the world’s top 10 busiest cargo airports increased 3 percent in 2020, while the landings at Anchorage were up 15 percent year-over-year to more than 3.1 million tons of cargo. Anchorage overtook the UPS hub of Louisville, Ky., which saw a 4.6 percent growth in cargo business last year, for the fourth spot behind the Shanghai, Hong Kong and Memphis, Tenn., airports. In the first half of this year, cargo throughput was up 23 percent over 2020 at 1.73 million metric tons, according to Anchorage airport leaders. While Anchorage’s cargo business isn’t likely to keep growing at such a pace, it isn’t expected to stop growing anytime soon, either. AEDC is projecting 8 percent growth this year overall and annual tonnage increases in the 2 percent range thereafter. That’s in part because the current global and domestic logistic challenges aren’t likely to be overcome anytime soon. The pandemic also encouraged many more Baby Boomers to retire than otherwise would have, Popp said, which has exacerbated pre-existing labor shortages among truckers, longshoremen and other trades. “It was a system that was stressed to begin with and the ramifications of COVID go well beyond the shutdowns from outbreaks of the disease,” Popp said. It has all caused a significant increase in furniture, of all things, on the jumbo jets making a refueling stop in Anchorage. “How does that make sense?” he wondered. As more cargo continues to arrive from the air, developers are finally working to capture the benefits of when it’s on the ground. The man the airport is named after secured unique trade exemptions for Anchorage, Fairbanks and the Port of Anchorage in 2004 that allows cargo landed in the state on its way to and from the Lower 48 to be shuffled among planes and carriers at that time without being subject to federal regulations. Historically, Anchorage has simply been a refueling stop for the vast majority of carriers as stopping to refuel allows them to carry more cargo on trans-Pacific flights. The ability to freely transfer cargo between planes and carriers for years has been touted by airport leaders and others as a way for shippers to greatly increase the efficiency of their operations but it hasn’t been until now that air carriers, logistics firms and developers have all sought to utilize the exemptions at a large scale. Plans for up to five large projects collectively totaling approximately $700 million, according to AEDC, are in the works and two development groups have signed long-term leases at the airport in an ostensible commitment to develop. Rob Gillam, CEO of McKinley Capital, the Anchorage-based investment firm that is the majority owner in the 700,000 square-foot Alaska Cargo and Cold Storage, or ACCS, project, said in an interview that the logistics industry has been slow to capture the potential of Anchorage’s opportunities partly due to the fact that it takes a long time to change a complex system. Additionally, cargo airlines operating in a highly competitive industry are commensurately tight-lipped, meaning it’s often difficult to determine what’s being shipped now and what might be in the future to plan ground facilities accordingly. “If they don’t open the door they don’t have to tell you what’s on the plane, “Gillam said. “It could’ve been an empty airplane; it could’ve been an airplane filled with bricks or filled with iPads.” He also noted that there is an inherent hesitancy toward being the guinea pig in a major business venture. “Somebody has to go first. There’s no doubt in the economic value of cargo through Anchorage,” Gillam said. “No doubt.” The ACCS project is currently in the permitting stage and is envisioned as a three-phase development, he added. Anchorage Airport Director Jim Szczesniak said in an interview that airport officials have changed the focus of their efforts to market the airport’s potential from carriers and logistics firms to the developers that would actually invest in the necessary facilities. “We wanted to help (developers) with their business case,” Szczesniak said. “From our perspective it’s not a ‘build it and they will come’ scenario. They’re already here so it’s a matter of making what we have here more efficient for their operations,” he said of the carriers. Popp added that “sometimes ideas can stare you in the face for a long time before they become recognizable,” and emerging market opportunities, such as shipping South American produce to Asia, should continue to benefit Anchorage with revenue to the airport but most importantly with new jobs potentially measured in the thousands. Gillam said facilities like ACCS not only require cargo handlers but also more support service providers, including aircraft ground crews and others. “We’re excited about the potential investment because that’s what we’re in the business of doing, but we’re really hopeful about the knock-on benefit to the Anchorage economy,” Gillam said. Elwood Brehmer can be reached at [email protected]skajournal.com.

Murkowski touts wins for Alaska in infrastructure bill; AK LNG left out

Sen. Lisa Murkowski was at the center of negotiations to craft the $550 billion infrastructure package that she says will make significant investments in Alaska, but it’s unclear at this point where one of the largest potential infrastructure projects in generations fits in. The Infrastructure Investment and Jobs Act includes roughly $400 billion in baseline formula spending for existing highway and airport programs among others, as well as roughly $550 billion in new spending that will largely go to existing federal grant and formula programs. Murkowski said the bipartisan package by 10 senators partly negotiated in direct talks with President Joe Biden focuses on rebuilding the country’s core physical infrastructure of roads, ports and bridges with additional investments in broadband and renewable energy and carbon capture technologies, for example. “It invests in legacy projects for the long-term,” Murkowski said in a July 30 call with Alaska reporters. “The overall benefit to a state like Alaska, I think, is going to be really, really considerable.” She acknowledged that hard numbers for the state’s share of the spending are difficult to calculate because so much of the funding is formula-driven. It won’t be doled out in lump sums. The bill currently under debate by the full Senate could have a particularly large impact in improving rural water and sanitation systems, according to Murkowski, who said it adds $180 million to Environmental Protection Agency drinking water and wastewater programs and $3.5 billion to the Indian Health Service for sanitation facilities nationwide. “This is really going to be a once-in-a-lifetime investment in sanitation facilities,” she said. The infrastructure spending bill also funds many of the programs established in Murkowski’s omnibus Energy Act of 2020, which passed late last year after six years of work. Absent from explicit inclusion in the bill is the state’s request for nearly $5 billion in federal funding to jumpstart construction of the Alaska LNG Project. In January Gov. Mike Dunleavy announced the state’s latest plan to fund the $38 billion Alaska LNG Project that centered on capturing federal infrastructure funding from a then-conceptual bill for 75 percent or about $4.5 billion, of the initial $5.9 billion phase one of the project to the first section of gas pipeline between the Point Thomson field and Fairbanks. The administration touted it as a way to improve air quality in the Interior — an ever-growing issue for the EPA — by replacing wood and oil burning with natural gas for home heating. The remaining portion of the overall 807-mile pipeline, the North Slope gas treatment plant and the Kenai LNG facility would be funded separately, according to Alaska Gasline Development Corp. officials. AGDC spokesman Tim Fitzpatrick wrote via email in response to questions about where Alaska LNG fits in the 2,700-page Infrastructure Investment and Jobs Act that the project “is clearly aligned with national climate, energy, and infrastructure objectives, and we’re closely watching the legislative process as we move this project forward.” Murkowski spokeswoman Karina Borger wrote that the senator was able to repeal a sunset provision from 2004 legislation that maintains the project’s access to up to $18 billion in federal loan guarantees when asked where the $5 billion request fit into the negotiations and subsequent legislation. Officials in the governor’s office said they requested an earmark for the project from the delegation but also noted the legislative process is not over. Senate leaders hope to move the bill to the House quickly, according to Murkowski. AGDC officials also insisted they didn’t expect a direct appropriation for the project and that it still has commercial interest without the prospect of a federal boost. AGDC leaders hope to secure commitments from developers, operators and investors in the LNG and gas treatment plants by this fall, with the project’s major financial agreements coming next year. In late June the Energy Department announced it would conduct a supplemental environmental impact statement on the project to determine its life-cycle impact greenhouse gas emissions. AGDC President Frank Richards said he believes the analysis will show the Alaska LNG Project would prevent up to 80 million tons of carbon emissions over its roughly 30-year life primarily by displacing coal for power generation in east Asian countries, long a selling point of the project for the state-owned corporation. Elwood Brehmer can be reached at [email protected]

Fate of the Furieous: Hendrix reflects on first year at Inlet producer

Retirement jobs are often meant to be time-fillers, an activity that is mostly enjoyable and provides some walking around money without unnecessary stress. They’re almost always part-time. John Hendrix, on the other hand, bought a bankrupt gas company. But it’s clearly more than a hobby. For him, it’s about what to do to not retire. “It’s fun,” Hendrix, 64, insisted in an interview. “If you’re an Alaskan and you’ve worked in oil and gas and you have an opportunity and you have one chance to strike, why not go for it? We made sure that we protected ourselves in regards to what we had in the bank — we could cover it, my wife and I — and we decided to go for it.” In a separate interview, his wife Candace Hendrix largely confirmed the simple enthusiasm that led to them buying Furie Operating Alaska last year. He learned of the opportunity through some consulting work he was doing for an area utility, according to Candace, who didn’t see much reason to object. “My daughter and I always felt like this was something John was meant to do,” she said. “I have a lot of faith in John because he is so high-energy and he’s capable of doing so many things at once. I knew it was risky…but we just couldn’t see John retire.” That mindset led the Hendrixes to bid on and ultimately win — with the help of a since bought-out silent partner — the Cook Inlet gas producer in a December 2019 bankruptcy auction. Disagreements between the parties involved in the complex bankruptcy stretched it out for nearly 11 months before the sale was complete. John took over as owner and CEO of the formerly Texas-based Furie in July 2020 under their new company Hex LLC. Furie leaders filed for bankruptcy in August 2019 when the company owed lenders approximately $440 million and while itself owed about $105 million in refundable tax credits from the State of Alaska, according to the bankruptcy petition. In 2015, Furie installed the Julius R platform over the Kitchen Lights gas field in the central portion of Cook Inlet at a cost of roughly $200 million, according to Hendrix; it was the first new development platform the Inlet built since the 1980s. However, the company’s financial challenges were significant; Furie absorbed a loss of $58.5 million in 2017 despite netting $25.4 million from gas sales, according to bankruptcy court filings. The situation worsened in 2018 when the company sold $42.8 million of natural gas but took a loss of nearly $152 million. Furie lost $21.4 million in the first quarter of 2019, when a freeze-up in a gas production pipeline kept the company from supplying Homer Electric Association and Enstar Natural Gas Co. with gas for more than a month. The hydrate freeze-up is what Hendrix and other industry experts familiar with the situation blame for ultimately pushing the company into bankruptcy. For one, it forced Furie leaders to buy approximately $17 million worth of gas from other Inlet producers to cover their supply contracts with regional utilities, he said. Getting back to basics About a month after taking over Furie, Hendrix told the Journal the company, which also sought to explore for oil under prior leadership, needed to get “back to basics” and focus revenue-generating natural gas production. Just more than a year in, optimizing Furie’s operations is for the most part going well, he said, reciting several instances in which he found what he concluded to be unnecessary or overly costly processes, equipment, or even operational approaches. He believes Furie’s onshore Nikiski gas processing facility is “way overbuilt” — he estimated it at about $50 million — for what the company was doing and currently does, for one. As a result, a generator meant to power the gas compressors can’t run full-bore as intended to maximize efficiency and is therefore ostensibly useless under normal operations. It currently costs about $50,000 per month to power the facility, according to Hendrix. “It’s cheaper for us, because the equipment is so inefficient — to buy electricity from Homer Electric than to generate it ourselves. So HEA buys our gas, (in periodic spot sales) generates electricity, and sells it back to us cheaper than we can do it,” Hendrix said. “We’re looking at a few things we need to do.” Furie leaders also recently added a desalinization unit to the Julius R platform so they could supply their own drinking water and cut out the steep delivery costs. “Every time a boat comes out it costs us between $12,000 and $22,000 one way, “ he said, later joking that he gave his operations crew an inspirational deadline to make sure the desalinizing unit is working. “I told them ‘we’re not delivering any more water after September.’” Alaska pride A petroleum engineer raised in Homer, Hendrix was general manager of Apache Corp.’s operations in Cook Inlet prior to becoming former Gov. Bill Walker’s oil and gas policy adviser in 2016. He wears his pride for Alaska on his sleeve and a major part of turning around Furie was overhauling its mostly imported workforce into one predominantly comprised of Alaskans, according to Hendrix. “We wanted to bring jobs to Alaskans and that’s what we’ve done. We’ve done everything we’ve said we were going to do and we’re proud of it,” he said. Since informing the small former Furie operations crew last fall that the company would no longer be paying for travel to and from Nikiski, Furie has gone from one Alaskan on payroll to nearly two dozen; one employee agreed to stay on under the new terms. It was that enthusiasm for Alaska and reinvesting in the Kenai Peninsula that coaxed Hendrix’s first hire, Kevin Smith, who is now Furie’s operations superintendent, out of comfortable retirement in Soldotna. The two were connected through mutual friends who thought they would work well together. “The thing that really hooked me was John wanted to make it local hire,” said Smith, who retired from BP when the British major sold its Alaska assets to Hilcorp in a deal that closed last year. “To be honest I really don’t want to work too much longer but I want to help him set this business up.” After having a pilot project to allow the company to discharge its produced water into the Inlet approved by state regulators, Furie has mostly alleviated the risk of future hydrate freezes aside from one minor event, according to Smith. “We definitely did our homework on all of that and were prepared so it wouldn’t take us down for a long time,” he explained. To that end, officials with Enstar Natural Gas Co., which holds Furie’s lone firm supply contract, said the producer has met all of its obligations under Hendrix’s ownership. Part of bringing Furie’s focus back to Alaska has also been an emphasis on using local, rather than Lower 48, vendors, Smith added. “We’ve had pretty good luck sourcing things; I’ve actually been mildly surprised,” he said. Hendrix emphasized the fundamental belief that hiring local in an industry such as oil and gas where employees are often transient can help workers gain a sense of pride in their jobs that translates to better performance, alluding to how the company now sends small but important samples 15 miles from the platform to shore via subsea pipeline instead of air. “They devised a way of sending water samples in for our produced water just like you use at the bank system. We put it inside a (pipeline) pig and we ship it to shore and get the sample delivered back at the facility. We don’t have to fly helicopters back and forth for samples. It cuts back on our production a little bit for the day but that kind of innovation is great,” he described, adding that the company’s total yearly helicopter charter bill is down from about $550,000 to $250,000 since he took over. “There’s just a lot of extra costs out there.” Tax hurdles The omnipresent hurdle to improving Furie’s position, according to Hendrix, has been the state, and specifically Alaska’s oil and gas property tax regime. As he explains it, Furie was purchased for $5 million in cash, with contingencies for former creditors, after first winning the auction with a $15 million bid. They put up $2.5 million and $5 million from the $7.5 million AIDEA loan that capitalized an account to provide initial operating cash for the company as required by Furie’s creditors, according to Hendrix. As part of the deal Furie must also pay $15 million to the creditors who currently hold $103 million in unpaid state exploration and development tax credits if the state does not pay them off by July 2025. “I’ve got to have development enough to pay the $15 million. We have to make sure that in due time — we’ve got that $15 million at a 7 percent note — that we’ve covered that by the year 2025. We have to set aside money for that and for future development but $1.6 million just came out so we’re back to square one,” he said. An AIDEA spokeswoman confirmed Hex’s loan is current. Hendrix noted that in addition to meeting its financial obligations, Furie went the last 12 months without a lost time injury or environmental incident as well. The $1.6 million is Furie’s annual oil and gas property tax bill from the state, according to Hendrix, and he can’t understand how it can be justified based on what the company was bought for last year. He claims state property tax assessors have valued Furie’s assets at $81.2 million. “I love this state. I want to support this state. I want to make sure that what we spend goes to the state, but I don’t want to be unfairly and unjustly tapped when we’re a struggling company coming out of bankruptcy,” Hendrix said. “What they had before was a lot of expenses they shouldn’t have had to pay, that’s some of why they went under before we picked them up. How in the hell do you buy something for $5 million and they assess just the tangible part at $81.2 million? It was a fair auction; anyone could come in and bid on it and we won the bid.” The crux of the issue is the state’s longtime method for valuing often unique oil and gas facilities in the state. Revenue officials could not speak directly to Furie’s taxes, but offered general information on the Tax Division’s process for assessing oil and gas facilities, which at the highest level relies on replacement cost valuation minus depreciation. That means the relatively new Julius R platform — built in 2015 — and the onshore facility still carry significant value. Former Furie officials estimated the value of the company’s assets at between $10 million and $50 million in their initial bankruptcy filings. “If I grow the company to where it’s worth $81 million I’m willing to pay it,” Hendrix said. “You would not put that platform out there for the resources out there today and that’s our problem with the property taxes. The question back is always, ‘well, what would you pay to do it now?’ and we wouldn’t do it.” After having an appeal to the little-known State Assessment Appeal Board rejected last spring, Hendrix said he sees no other option but to sue the state over the matter. “It’s going to cost us a lot of money and it’s going to impact our future on how we spend money, how we employ people but it’s another baseline foundational thing that we have to fix,” Hendrix said of the taxes. “Can you imagine paying 33 percent property tax on something you just bought? How do you make money? How do you employ people? “They’re treating our gathering line like it’s the Trans-Alaska Pipeline; it’s not, it’s a 10-inch pipeline that’s 15 miles long.” Despite the tax issue, and his clear frustration with it, Furie’s first solvent year has largely gone well, according to the Hendrixes. “He feels good about it,” Candace said. “Even when it’s stressful he still feels like it was the right decision; he’s just so happy to be back in Alaska.” Smith described it with the perspective of a 40-year Peninsula resident. “A guy from Homer, from East End road just bought a platform out in the Inlet,” he said. “That’s pretty cool.” Elwood Brehmer can be reached at [email protected]

ConocoPhillips posts strong 2Q result, to resume Kuparuk drilling

The resurgence in energy demand has treated ConocoPhillips well as the upstream-focused oil major posted a second quarter profit of nearly $2.1 billion, according to an Aug. 3 earnings report. In Alaska, ConocoPhillips netted $371 million, more than double the company’s first quarter profit of $179 million in the state. ConocoPhillips also reported tax and royalty payments of $279 million to the State of Alaska during the quarter. Year-to-date, ConocoPhillips Alaska has paid an estimated $506 million in taxes and royalties to the state, according to the release. The companywide earnings are also more than double a first quarter profit of $982 million and break down to $1.55 per share. Houston-based major previously announced it will pay a quarterly dividend of 43 cents per share on Sept. 1. ConocoPhillips stock was trading up approximately 3 percent in the $56.50 per share range near the end of the day following the morning earnings release. The company’s overall profit was on the back of more than $10.2 billion in revenue, down slightly from $10.5 billion in the first quarter but a vast improvement over the $6 billion it generated in the fourth quarter last year, which was its best revenue period in 2020. CEO Ryan Lance said in a prepared statement that ConocoPhillips came out of the pandemic-induced oil market crash and the integration of Lower 48 producer Concho Resources with a durable business plan. “We have a stronger, more flexible asset base and greater underlying efficiency resulting from the Concho acquisition and the restructuring work we’ve performed throughout our company,” Lance said. In February, ConocoPhillips Alaska leaders said they would cut approximately 100 jobs from its workforce of roughly 1,100 in the state as part of a companywide restructuring after the $9.7 billion Concho purchase. With drilling rigs active again on the North Slope, President Erec Isaacson said in a separate statement that the company’s motto so far this year has been “getting back to work.” ConocoPhillips put $228 million towards capital projects on the North Slope in the second quarter, which represented 18 percent of the company’s global capital spend for the period, according to Alaska segment leaders. Year-to-date capital spending totals $463 million. As is the case in many industries these days, the results are virtually incomparable to the second quarter of 2020 when oil prices bottomed out globally — Alaska North Slope crude went negative for a day — and production was cut industry-wide. ConocoPhillips reported an average Alaska oil price of $63.93 in the second quarter this year, the highest price in two years. The company’s North Slope oil production averaged 184,000 barrels per day during the period, down slightly from 190,000 barrels per day to start the year, which is a common theme in the warmer months. Kuparuk plan approved ConocoPhillips is planning to get back to drilling in its oldest North Slope field, according to the 2021 Kuparuk River Unit work plan approved July 23 by state Division of Oil and Gas Director Tom Stokes. Along with the now-common caveat for COVID-impacted work and market conditions, ConocoPhillips Alaska “assumes a return to regular operating condition,” the 2021 Kuparuk River plan of development, or POD, states. The 2021 plan covers the August 2021 through July 2022 time period. Drilling at Kuparuk will resume this quarter with the startup of a workover rig, likely followed by the restart of a coil tubing rig in the fourth quarter. Rotary drilling is scheduled to resume next spring, according to the POD. The initial work will focus on reviving wells currently shut-in for mechanical problems or low production with sidetracks or new bottom-hole locations, the plan states. A maintenance turnaround is also scheduled for next summer. The company suspended drilling Slope-wide at the onset of the pandemic in April 2020 and restarted drilling at some of its other fields and development projects late last year. ConocoPhillips produced an average of 91,400 barrels of oil per day from Kuparuk in calendar year 2020, down from 104,700 barrels per day in 2019. The company expects to produce about half of the oil not produced from Kuparuk when it curtailed North Slope production last year at the bottom of the price depression over the next three years and the rest forgone oil will be recovered over subsequent remaining life of the mature field, according to the POD. Elwood Brehmer can be reached at [email protected]

Permanent Fund ends fiscal year topping $81B

The 2021 fiscal year results are in and the Permanent Fund is the big winner. Alaska’s primary revenue source ended June with a total value of nearly $81.1 billion after starting the year at $65.3 billion. The 24 percent growth in the Fund over the fiscal year was on the back of nearly unprecedented overall investment returns, which totaled 26.5 percent for the year through May 31, the most recent performance figures available from the Alaska Permanent Fund Corp. The corporation has achieved full-year returns greater than 20 percent just three times in the history of the fund, the greatest being a 25.6 percent return in 1985, according to APFC records. The Fund had an unaudited value of $81.3 billion on July 27. Its monthly reported value bottomed out at just more than $60 billion during the early days of the domestic pandemic in March 2020. As of June 30, the constitutionally protected corpus portion of the fund alone exceeded $60.1 billion; the remaining approximately $20 billion was in the Earnings Reserve Account, which lawmakers can spend. Royalty deposits, investment gains and legislative appropriations have caused the corpus to grow by nearly 50 percent since March 2020 and another $4 billion legislative transfer from the ERA to the corpus this month will add further to the un-spendable portion of the Fund. Gov. Mike Dunleavy intended to veto a $4 billion ERA-to-corpus transfer approved in the state budget passed by the Legislature and announced as much in a press briefing and materials from his office. However, the veto was mistakenly absent from the final enacted version of the budget and Dunleavy decided against further pressing the issue when legislative leaders rejected his request to change the final budget. The veto issue would become a moot point if the Legislature, and eventually voters, would approve the portion of Dunleavy’s constitutional amendment proposal to combine the ERA and corpus into a single, more traditional endowment-like account. The structural change to the Fund generally has support amongst legislators who prioritize adhering to the 5 percent annual draw limit over dividend appropriations, but it remains unclear if the governor’s broader Permanent Fund and dividend proposal, which includes a $3 billion draw in excess of the 5 percent limit, will gain traction in the upcoming special session set for August. The draw has covered about 70 percent of the state budget since being approved in 2018. Regardless of the long-term outcome of the proposed constitutional changes to the fund, the $4 billion transfer will leave approximately $9.3 billion in unobligated, realized earnings available for appropriation. Department of Revenue officials have generally said the state should try to maintain an ERA balance several times larger than the $3 billion-plus annual draw as a buffer against years of poor investment returns. The current impressive returns have been driven by a continued strong run in stocks. Public equities accounting for 38 percent of the fund’s investment portfolio generated returns of 47.1 percent in the fist 11 months of the fiscal year, though gains have been more modest in recent months. The Dow Jones Industrial Average increased 38 percent over the same period. Matching the fund’s public equity performance was its private equity and special opportunities portfolio — approximately 18 percent of the fund’s portfolio at 14.7 billion — which netted an 11-month return of 47.5 percent. Fund managers expect to gradually step-down the public equity allocation from 39 percent today to 33 percent of the Fund by the end of 2025, according to a chart published by the APFC. Fixed income investments are similarly planned to be a smaller portion of the fund, expected to go from 21 percent to 18 percent of the fund’s portfolio. Those allocations are likely to shift to private equity and real estate, which are planned to go from 15 percent and 7 percent of the fund to 19 percent and 12 percent, respectively. The allocations of other asset classes such as private income, and absolute return are expected to remain steady. About 2 percent of the Fund is consistently held in cash. APFC spokeswoman Paulyn Swanson wrote in an emailed response to questions about the asset allocation changes that the corporation's investment team has taken an active approach to rebalancing the public equities portfolio during the market run-up and the future target allocations were first approved by the APFC trustees in May 2020. Chief Investment Officer Marcus Frampton also said in an emailed statement that the multi-year increases in private investment allocations are indicative of the time it takes for those investments to begin generating corresponding returns. "The reduction in public equities over time reflects the growth in these private asset classes as opposed to a reaction to (the) current market environment for stocks or a desire to lock in gains from recent market moves," Frampton said. Elwood Brehmer can be reached at [email protected]

Payroll aid pushes Alaska Air to first profit since pandemic

Alaska Airlines is back in the black, but not without significant help. The airline’s Seattle-based parent company, Alaska Air Group Inc., officially posted a $397 million profit in the second quarter that compares extremely favorably against the $214 million loss in the pandemic-restricted second quarter of 2020. The profit came after five consecutive quarters of losses that totaled nearly $1.5 billion. “The results we published this quarter show we are successfully rebuilding our company and returning to profitability,” CEO Ben Minicucci said in a July 22 earnings call. However, Air Group’s second quarter profit was also the direct result of the $664 million in CARES Act Payroll Support Program grants and loans the company received during the period. Congress appropriated a second, $16 billion round of PSP aid for airlines as part of the second round of broader pandemic aid spending late last year. Without the federal aid, special items and fuel hedging adjustments, Alaska Air Group reported a net loss of $38 million in the second quarter; that is still a vast improvement over where the airline company, which owns Alaska and regional Horizon Air, has been. The reported $397 million profit translates to earnings of $3.15 per share; the $38 million loss equates to 30 cents per share, according to the quarterly earnings report. Air Group stock closed July 26 trading at $60.65 per share, up 7 percent from a pre-report price of $56.33 per share. Company executives repeatedly emphasized how both operational and financial metrics improved month-to-month during the quarter when compared to 2019. Chief Commercial Officer Andrew Harrison called June “a turning point” for Alaska. “Margins improved significantly during the quarter,” Minicucci said. “We exited March with a 41 percent loss and ended June with a pretax income of 14 percent.” The turnaround is mostly due to a surge in summer leisure travel, according to Minicucci, who added that Air Group leaders expect their business to return to 2019 levels next summer, though activity at Alaska’s SeaTac hub is pretty much there already. They also expect to produce “double-digit margins” in the third quarter and “high-single digit margins” to end the year, he said, crediting the company’s disciplined approach to deploying capacity has helped control costs as revenue returns. To that end, Alaska is likely to temporarily put back into service 10 Airbus aircraft acquired in the Virgin America purchase, a move that could also insulate the airline from scheduling disruptions if delivery of the new Boeing 737s Alaska has traditionally flown is delayed. “Our measured deployment of capital allows us to maximize financial results while allowing our operations to scale up successfully,” said Minicucci, who took over the lead role April 1 following the retirement of former CEO Brad Tilden. Total flight capacity for the quarter was 21 percent less than spring 2019 levels but load factors, or how full a flight is, increased from 70 percent in April to 86 percent in June and are expected to stay in that range for the rest of the summer, according to Harrison. The company’s overall revenue per available seat miles offered was off just 5 percent from 2019 by June because of the larger passenger volumes after starting the quarter down 25 percent, Harrison said. Air Group averaged 19,001 employees during the quarter, up 20 percent from a year ago but still well off the company’s pre-pandemic workforce of more than 22,000. The rebound in travel demand has pushed Alaska leaders to ask some employees to fill other short-staffed roles in the operation, notably ground activities such as baggage handling. Minicucci commended the airline’s employees for supporting each other and striving to “take care of our guests no matter what it takes.” Alaska spokesman Tim Thompson wrote via email that in Alaska, most of the airline’s employees that were on leave during the pandemic have been called back and a small number will return to work before the end of the year. Alaska currently has 1,825 employees across the state and is hiring in some workgroups, according to Thompson. Flying more with fewer empty seats allowed Air Group to nearly double its revenue from the first quarter — when it lost $131 million — to more than $1.5 billion while nonfuel expenses increased just 9 percent from the first quarter. Chief Financial Officer Shane Tackett noted that while much of the $840 million in cash flow generated during the quarter was the direct result of federal aid, $351 million of it was from company operations. “Our results are solidly among the best in the industry,” Tackett said, adding that Air Group has accelerated its debt payoff plan and paid off $570 million in the second quarter. The company’s debt-to-capitalization ratio stood at 56 percent on June 30, down five points from the start of the year. Travel credits have accounted for an outsized portion of the recent bookings, according to Tackett. Customers used approximately $185 million worth of ticket credits in the second quarter, while the pre-pandemic average was about $40 million per quarter, he said. Elwood Brehmer can be reached at [email protected]

DNR keeps ‘quiet period’ with water rights revisions pending

Mum’s the word from Department of Natural Resources officials regarding their plan to fundamentally change the state’s water rights system. House Fisheries Committee chair Rep. Geran Tarr, D-Anchorage, said DNR representatives declined to attend a July 27 hearing on the agency’s proposed changes to in-stream flow reservations and other water regulations because she was told they are in a “quiet period” while they respond to public comments from the extended period that closed April 2. Tops among the changes first suggested by the Division of Mining, Land and Water in mid-January is adding new language to water reservation regulations stating that water reservation certificates currently issued to private parties would instead be held by DNR, which adjudicates water rights and reservation applications. Resource development advocates insist the change is needed so control of a public resource is kept within a public agency and to prevent opponents of a given project from attempting to impede development by chasing water rights. For their part, conservation groups insist the change would strip Alaskans of their rights to protect the fish — another public resource — in waters vulnerable to development. Alaska’s current system of water rights is generally viewed as one of the most open in the country; it allows anyone to apply for temporary water use authorizations as well as water reservation, or in-stream flow, rights to maintain sufficient stream flows for fish and other wildlife. Reviewing water reservation applications often takes DNR years in coordination with the departments of Fish and Game and Environmental Conservation, a situation Bob Shavelson, advocacy director for the Homer-based conservation group Cook Inletkeeper, said in the hearing is the result of traditionally pro-development state administrations prioritizing water rights, or use, authorizations over flow reservations to protect habitat. Currently, the Department of Fish and Game holds the vast majority of flow reservations; another handful is held by federal resource agencies such as the U.S. Fish and Wildlife Service. The Nature Conservancy is one of the few private entities to hold water reservations. It secured four flow reservations near the Pebble deposit in 2017. DNR officials also said during the public comment period that they could not comment specifically on the proposed regulations. At the time, they cited a section from the Administrative Procedures Act that state’s agency officials proposing a regulatory action “shall make a good faith effort to answer, before the end of the comment period, a question that is relevant to the proposed action, if the question is received in writing or at least 10 days before the end of the public comment period.” The section of the APA goes on to state that common questions can be answered in a consolidated form on the Alaska Online Public Notice System. State officials have historically discussed proposed regulatory changes and officials in other agencies have as well during the Dunleavy administration. Water Section Chief Tom Barrett said more broadly that flow reservations are “significant” in that they can impact other water users in a January interview. He added that the state is not trying to withhold water rights for any one group, noting the DNR commissioner — who approves water reservations — currently has the discretion to discontinue them as well. According to such answers posted by Mining, Land and Water officials, the changes are meant to better distinguish water reservations from more traditional water right appropriations. “Traditional water right certificates are issued to persons for a specific beneficial use. Reservations of water are a reserved level or flow that is reserved for a specific public purpose, not the sole use or benefit of the applicant.” Barrett wrote via email to the Journal on July 27 that it’s unclear exactly when DNR leaders plan to finalize the water regulations but it probably won’t happen for several months. The proposed regulations are a continuation of an attempt by former Gov. Sean Parnell’s administration to overhaul the water reservation structure, according to Shavelson. House Bill 77, which drew strong public opposition and died in the Senate in early 2014, would have limited water reservations to public agencies among many other revisions to state resource policies. While development advocates have long advocated for changes to Alaska’s water use regulations and statutes, one of the state’s largest pro-development lobbying groups is against the current regulations proposed by the Dunleavy administration because they don’t go far enough. Natural resources attorney Eric Fjelstad testified on behalf of the Resource Development Council for Alaska that the new proposed language also gives the in-stream flow reservation applicant legal standing to manage the reservation, even if DNR is technically the certificate holder. “We think (in-stream flow reservations) should be a limited tool held by DNR and state subdivisions,” Fjelstad said. The state’s multilayered process for permitting large development projects addresses the concerns of many who are concerned about the impacts of development on water bodies and fish, notably salmon and the place for instream flow reservations is in a more subtle situation, according to Fjelstad. He suggested several small water withdrawals along a stream or river is a more likely scenario to result in cumulative damage to the watershed and its inhabitants. “If you don’t have that large project permitting you can have water withdrawals that aren’t accounted for,” he said. RDC Executive Director Marleanna Hall wrote in official comments to DNR that giving legal standing to private parties potentially managing in-stream flow reservations “an even more powerful tool for those who oppose development from Alaska. This provision should be removed from the regulations.” Shavelson contended the insistence by RDC and other development advocates that private parties should not be able to hold in-stream flow reservations as a means for protecting fish habitat is inherently hypocritical because developers, and other private groups, can hold water rights and temporary water use authorizations to divert water out of a lake or stream. “A Canadian mining company could hold rights to take water out of a salmon stream but Alaskans couldn’t hold the reservation to keep water in the stream and that’s the crux of it,” Shavelson said. “The DNR proposal really takes a government knows best approach to water reservations.” He urged lawmakers to amend the Alaska Water Use Act to mandate DNR to apply a corresponding water reservation sufficient to preserve fish and wildlife populations — which varies in each water body — to counter each water withdrawal authorization. “This would be the Alaska Legislature looking at the Water Use Act and making some simple but common sense changes,” Shavelson said. Elwood Brehmer can be reached at [email protected]

Fiscal solution slow to emerge on eve of special session

The gang of eight lawmakers tasked with breaking the ongoing deadlock over the state’s biggest fiscal decisions have gotten detailed Alaska history and finance lessons in recent meetings but have yet to directly confront the longstanding issues that continue to plague the state. The joint Comprehensive Fiscal Plan Working Group ramped up to near daily meetings in the week prior to the Aug. 2 start of the special session Gov. Mike Dunleavy called to solve Alaska’s structural fiscal imbalance and discussed the fundamental operations of the Alaska Permanent Fund Corp. as well as several existing proposals to revamp the Permanent Fund dividend. However, the discussions focusing on PFD-related legislation laid bare the fundamental dichotomy that has continued to stall lawmakers. When outlining House Bill 37 sponsored by Rep. Adam Wool, D-Fairbanks, which would tie the PFD to 10 percent of the annual 5 percent of market value draw on the Permanent Fund and 30 percent of state mineral royalties and result in near-term PFDs in the $1,000 per person range, Wool and others acknowledged the sticking points that emerged in the group members. Working group co-chair Rep. Jonathan Kreiss-Tomkins,D-Sitka, said debate between Wool and Rep. Kevin McCabe, R-Wasilla, over whether or not Alaskans are entitled to a certain level of dividend “effectively outlined the philosophical differences” that have dogged the Legislature since former Gov. Bill Walker first proposed changing the dividend calculation in 2016. McCabe insisted that income from the Permanent Fund “belongs to us (the public); it doesn’t belong to the state.” Wool countered that “the PFD is a budget item just like education and public safety,” a stance held by many legislators since the Alaska Supreme Court in 2017 upheld former Gov. Bill Walker’s partial veto of the dividend appropriation a year prior and effectively confirming the PFD’s position in the state operating budget. “At some point we’re going to have to solve this thing,” Kreiss-Tomkins said July 26. Legislative leaders said in the working group’s opening meeting in early July that they are relying on the bipartisan, bicameral group to formulate a plan that will be the base for legislation in the special session. It is a move intended to give substance to the group’s efforts after prior special committees failed to produce substantive results. The working group heard testimony July 27 from leaders of the Alaska Permanent Fund Corp.’s advisory firm Callan, who suggested the recent surge in commodity and labor prices is more likely the short-term consequence of disrupted supply chains attempting to match rapid economic recovery and will probably balance out, rather than lead to years of high inflation; that is a subtle key in attempting to preserve the long-term value of the Fund. Callan CEO Greg Allen told legislators that the firm’s official outlook is for inflation to average 2 percent per year, but it could be increased slightly to 2.25 percent. Some legislators, notably influential Senate Finance co-chair Sen. Bert Stedman, R-Sitka, and the Permanent Fund Defenders advocacy group led by former legislators Clem Tillion and Rick Halford, among others, have contended a 4 percent annual draw limit is more appropriate to protect against inflation eroding the value of returns and poor market years. Callan also projects there is about a 50 percent chance the Fund will fully maintain its real value over the next decade based on market forecasts and the investment makeup of the fund, according to Allen. The working group is scheduled to take public testimony on the numerous aspects of the state’s fiscal situation in Anchorage, Wasilla, Fairbanks and Juneau in the days leading into the 30-day special session, which will start Aug. 2 according to Dunleavy’s spokesman Jeff Turner, despite prior indications from legislators it could be pushed back to give the group more time. “It remains the governor’s intention to start the special session on Aug. 2. Determining the future of the Permanent Fund and the PFD are the rocks in the road that need to be moved to create a stable fiscal future for Alaskans,” Turner wrote July 27 via email. It appears the public testimony will be held without a formal proposal from the working group for individuals to evaluate. Kreiss-Tomkins said following the July 27 meeting that the group is holding internal discussions on how to build its plan, though nothing has been decided. Elwood Brehmer can be reached at [email protected]

Hilcorp files plans to restart Prudhoe drilling

Rigs will be likely drilling new wells again soon in one of the country’s largest oil fields if state regulators approve Hilcorp Energy’s amended annual work plans. Representatives for Hilcorp North Slope LLC filed a proposed amendment to the company’s plan of development for the western satellite fields to Prudhoe Bay July 15 with the state Division of Oil and Gas indicating leaders of Hilcorp and the other Prudhoe owners have agreed to drill up to six wells in the Orion participating area by next spring. The Orion participating area is in the far northwestern corner of the broad Prudhoe unit area. More specifically, Hilcorp plans to drill up to three producer wells and one injector from the field’s L-Pad and one producer and injector each from the Z-pad. Hilcorp North Slope also indicated drilling of up to four new wells in the Lisburne and Point McIntyre areas in its 2021 plan of development, or POD, for the Greater Point McIntyre regulatory sub-area that is in the eastern portion of the Prudhoe Bay Unit. Hilcorp North Slope is the subsidiary formed after its purchase of BP Exploration Inc. and is the operator position at Prudhoe Bay. The 2021 Greater Point McIntyre POD would take effect Oct. 1 and run through September 2022. Hilcorp representatives wrote in their multiple original 2021 PODs for the complex field — the first of which were submitted in January — that Hilcorp and the other Prudhoe Bay owners did not approve drilling this year because of pandemic-induced market conditions. At the time, it was presumed drilling would likely resume sometime next year. The company drilled 10 wells in Prudhoe early last year before nearly all discretionary work was stopped Slope-wide in April in response to the pandemic, according to the development plans. ConocoPhillips resumed its North Slope development drilling program late last year. Hilcorp Senior Alaska Vice President Luke Saugier wrote in an emailed statement that the company is pleased to have support from the other Prudhoe owners to drill several wells in the coming months. “The last year has been challenging but I’m proud of what our team has accomplished, including increasing production at Prudhoe Bay. We look forward to working with our Prudhoe Bay Partners, ConocoPhillips, ExxonMobil and Chevron, to continue to safely and responsibly develop Alaska’s natural resources,” Saugier wrote. Hilcorp increased production at Prudhoe by 4 percent to approximately 198,600 barrels per day in the first 11 months after closing its $5.6 billion deal to buy BP out of Alaska over the most recent comparable period, according to the latest production figures available from Alaska Oil and Gas Conservation Commission. While oil prices increased steadily through the first half of the year — prompting a quicker resumption of drilling at Prudhoe and of general activity industry-wide — the trend ended abruptly in recent days. The price of Alaska North Slope crude fell $4.90 on July 19 to $68.67 per barrel after hitting a nearly three-year high of $76.49 just four trading days earlier. Analysts are attributing the drop to an agreement among OPEC countries to boost production slightly and rising COVID-19 case counts in the U.S. and elsewhere. Elwood Brehmer can be reached at [email protected]

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