Elwood Brehmer

‘Middle Earth’ tax credit debate reaches Interior gas project

The tentacles of the debate over oil and gas tax credits have reached the state’s effort to expand access to natural gas in and around Fairbanks. On May 14, the Senate Finance Committee sent a letter to Gov. Bill Walker asking him to delay the sanctioning of the Interior Energy Project at least until Doyon Ltd. has drilling results from its exploration of the Nenana basin. The request comes as the Alaska Industrial Development and Export Authority is preparing to make a final investment decision later this summer on a plan to truck Cook Inlet-sourced LNG to the Fairbanks area. Walker wrote in a May 17 response that a projected IEP delay of about 60 days to wait for Doyon’s results isn’t unreasonable, but that he would have to determine if AIDEA can legally delay the project. In March, AIDEA selected Salix Inc., a subsidiary of the Washington-based energy utility group Avista Corp., as its preferred private project partner. Salix was the authority’s choice from more than a dozen responses to a request for proposals last summer. Doyon did not participate in the competitive bid process. Specifically, the Finance Committee letter notes the administration’s support for extending tax credits for exploration work done in the “Middle Earth” basins of Alaska, those areas other than the Slope and Cook Inlet, by a year to July 2017. Those credits are refundable for 80 percent of exploratory well costs up to $25 million per company per year. Fairbanks Republican Sen. Pete Kelly, a Finance co-chair, was the only committee member to not sign the letter that originated from the office of fellow Finance co-chair Sen. Anna MacKinnon, R-Eagle River. Currently, Doyon, the Interior Alaska Native regional corporation is searching for oil and gas in the Nenana basin about 60 miles southwest of Fairbanks. Ahtna Inc., another Alaska Native regional corporation, is similarly drilling for gas near Glennallen. The Middle Earth credits were set to expire in July of this year, but were ultimately extended to July 2017 in the final version of House Bill 247 that passed the Legislature June 6. By subsidizing both Doyon’s work and the Interior Energy Project, the state seems “to be competing against ourselves by supporting both projects,” the letter states. Fairbanks is likely the only significant market for Doyon, should the company make a commercially viable gas discovery, absent a large export pipeline to tap into. Sources familiar with the Nenana work say the state could end up spending $50 million or more to reimburse Doyon for its earned credits. The company drilled its first two exploration wells in the area searching for oil in 2009 and 2013. Doyon Lands and Resources Vice President Jim Mery said in an interview that a third test well was spudded late May 31 and should reach the suspected resources by late July. There is also potential to drill a second well on the same pad later this year to delineate any reservoir find, he said. Drilling results from the well likely won’t be available until mid-November at the earliest, according to Mery. “The chances of success we think are greater on gas compared to oil but oil is still a target substance that we’re pursuing,” he said. The company has put those chances of success at about 50 percent for gas and 20 percent for oil in testimony to the Legislature. MacKinnon emphasized in an interview that the committee supports getting lower cost energy to Fairbanks, but said Finance members occasionally mentioned Doyon’s efforts when discussing the Middle Earth credits and how it could all relate to the Interior Energy Project. “Why would we spend money incentivizing something if there’s no market?” she said. “What we’re looking for is return on investment.” Assigned by the Legislature in 2013 with the ambitious task of getting natural gas to Interior residents for a price of roughly $15 per thousand cubic feet, or mcf, the authority’s IEP team has expressed substantial confidence in its latest project plan. A prior effort to truck North Slope LNG to the region — as directed by the legislation providing financial backing to the project — fizzled in late 2014 due to burdensome construction costs for a Slope-based liquefaction plant. While progress is being made to meet the project’s price goal and get more natural gas to the region by early 2018, lower oil prices have all but eliminated the price delta between fuel oil and natural gas at $15 per mcf on an energy equivalent basis. This has challenged the project further because it is believed less residents will be willing to spend potentially thousands of dollars to convert their home heating systems to natural gas without immediate cost recovery, despite the air quality benefits gas would provide, and the six committee members cited that as well. “Not only would an IEP (final investment decision) at this time result in an investment unlikely to provide the intended price relief for several years at a minimum, it would also reduce the incentive for Doyon to execute their project,” the letter states. It’s believed Doyon could supply gas for “multiple dollars (per mcf) cheaper” than the IEP, MacKinnon said. That would be because the gas would simply flow via a 60-mile pipeline to utilities and not have to be converted to LNG, trucked north and then regasified before being ready for use. AIDEA has about $120 million invested in the project so far, according to its latest quarterly report to the Legislature. Of that, $52.7 million is in loans issued to utilities to fund distribution pipeline build out in Fairbanks and North Pole. Most of that work went on last year. The authority also purchased Fairbanks Natural Gas, the city’s small private gas utility, in 2015 for about $54 million. Plans are to transfer ownership of FNG and integrate it into the borough’s Interior Gas Utility. When that happens AIDEA will recoup its investment, according to authority leadership. Walker’s spokeswoman Katie Marquette said the administration is still evaluating the situation. “Ultimately, I know that your goal is the same as mine: to ensure that consumers in Fairbanks are provided the lowest possible price for clean burning natural gas,” the governor wrote to MacKinnon. “I look forward to continuing to work with you, and all members of the Senate to achieve that end.” AIDEA spokesman Karsten Rodvik wrote in an email that the authority is aware of the correspondence but is not in a position to comment. Detailed negotiations between Salix and the authority are progressing, but there is nothing binding between the two, Salix spokeswoman Jessie Wuerst said. “We are one piece of the supply chain (the LNG plant),” she said. “Where the gas supply comes from is up to AIDEA.” Oil prices hovered around $100 per barrel in 2013 when the legislation to fund the project with more than $330 million in state grants and low-interest financing passed with broad support from Legislators statewide. At those prices, fuel oil was near $4 per gallon in the Interior, or about twice the cost of $15 per mcf natural gas on an energy equivalent basis. Mery said Doyon could conceivably start supplying gas in late 2019 if commercially viable reserves are discovered this year and a sanctioning decision is made next summer. However, Doyon would face many of the same issues AIDEA has in keeping the Interior Energy Project afloat, Mery said, the main challenge being the lack of economies of scale. If Doyon finds gas and moves ahead, “one of the biggest variables is going to be the pipeline tariff and that’s going to be driven by volume, so the more (customers) the better,” he said. Elwood Brehmer can be reached at [email protected]

Walker to Legislature: Your job isn’t done yet

Gov. Bill Walker made it clear June 1 that he does not think legislators finished their work when the passed the state operating and capital budgets a day prior. That’s because the budgets are funded fully with draws on the Constitutional Budget Reserve savings account, or CBR, and not partially with the measured annual draw from the Permanent Fund Earnings Account he has pushed for since late last year. By passing the operating budget, however, legislators did avoid forcing the Department of Administration to send out required “pink slips” to state employees that would have been laid off during a government shutdown had a budget deal not been reached by June 30, the end of the current fiscal year. State employees must be notified 30 days prior to being laid off. “Layoff notices will not go out today based on what happened yesterday,” Walker said at the start of a press briefing. “That’s a good thing but it’s certainly a long way from being over.” Then, he, Revenue Commissioner Randy Hoffbeck and Budget Director Pat Pitney took legislators to task for the next half-hour. “Do we have to go broke before we fix Alaska? I guess that’s my question to the Legislature. Do we actually have to do that? Do we have to become Puerto Rico?” Walker said emphatically. Shortly after passing the budgets May 31 House Speaker Rep. Mike Chenault, R-Nikiski, said he hasn’t seen that the governor is “willing to work for” the tax increases and Permanent Fund restructuring plan that the administration has proposed. “I too am looking forward to the governor engaging,” said House Majority Leader Rep. Charisse Millett, R-Anchorage. “I think it’s time for his administration to come forward and have their modeling ready and have some of the issues that we’ve asked them for — have them ready so our members and their respective committees can get that information.” Walker said he and members of his administration have had more than 400 meetings with legislators and there have been at least 120 legislative committee hearings on the individual bills that collectively make up his New Sustainable Alaska Plan to balance the state budget by 2019. Subsequently, he said he was “offended” by the comments from legislators about the administration effort and Hoffbeck referred to them as “disingenuous,” though neither directly cited who made the comments they were referring to. “I’m offended by that because I’ve watched this team travel the state thousands of miles to sit down with community after community, group after group, legislative group after legislative group to present the plan,” Walker said. “So if somebody doesn’t understand the plan at this point or a legislator feels that we haven’t done enough I say they haven’t paid enough attention to what we’ve been doing.” He also reiterated that the administration has held two town hall-style meetings for legislators to brief them on the various aspects of the complex and comprehensive budget proposal. “When we presented this plan to (legislators) last December we said if there’s a better plan let it come forth. No other plan came forth. For many their plan was really just to take shots at pieces of our plan. That’s not a very good plan. We will continue until the very last day of the (special) session to engage with them in every way that’s appropriate. There’s nothing we won’t do at this point. It’s that critical,” Walker added. Republican-led majority leadership in both the House and Senate has said the personal income and industry tax increase proposals put forth by the administration are all but unpassable this year. Hoffbeck said that each individual tax increase will not have a major impact on the respective industries. With the income tax, the expected revenue from the overall tax package has been pegged at about $400 million per year. “The economics of these various industries (oil, fishing and mining) is driven by the commodity price. These taxes are not going to have a significant impact on these industries,” he said. Pitney contended that the operating budget compromise that was touted by leaders of both parties, with roughly $4.4 billion of unrestricted General Fund money, really just masks the larger problem. While legislators said the budget decreases the annual budget deficit from $3.8 billion to about $3.2 billion, the $600 million difference was made up with one-time draws of unspent funds from the current year’s budget and will come home to roost when the budgeting process starts over. “We haven’t significantly moved the budget dial and without a fiscal plan the CBR won’t be able to fund the budget in (fiscal year 2018),” Pitney said. The compromise that seemed to be reached on establishing a statutory annual draw from the earnings of the Permanent Fund — the centerpiece to the administration’s fiscal plan — would cut the deficit by about $1.8 billion. That money could be added to the general fund at any time in fiscal 2017, Pitney said, meaning the Legislature could still pass what has historically been viewed as an Alaskan political death nail to reduce the deficit by about half. House Finance co-chair Rep. Steve Thompson, R-Fairbanks, said the Permanent Fund bill — amended mid-session from the governor’s version to be identical in the House and Senate, seemingly indicating a workable compromise — would be taken up later in the week with small changes. “I hear a lot of discussion about ‘these are difficult decisions.’ Well, they may be politically difficult and challenging but they’re fiscally responsible and that’s why we were elected, to come and make these decisions,” Walker said. “I’ve heard lots of discussions about, ‘let’s get through the next election; we’ll do it after the next election.’ It’s time we stop talking about the upcoming election or reelection and start making decisions about what’s best for Alaska right now. I think Alaskans will embrace that kind of leadership — that kind of whatever it takes to get the job done.” Walker wouldn’t commit to saying he planned to call special sessions until the Permanent Fund bill passed but added, “When I say we need to get the job done this year, I mean this year.” On oil tax credits, an issue the industry has emphasized needs to be left alone as it struggles through a low-price period right along with the state, Walker said matter-of-factly, “Those that say they want status quo — status quo is not on the menu anymore for anyone.” Elwood Brehmer can be reached at [email protected]  

REI announces move to FEED for Cook Inlet gas project

Plans for a small-scale natural gas liquefaction and export facility at Port MacKenzie continue to move ahead despite current market challenges. Resources Energy Inc. Vice President Brian Murkowski said May 30 that the company plans to move the project into the front-end engineering and design, or FEED, stage within the next few months. Right now, work to minimize the cost of the 1 million ton per year LNG plant to less than $1 billion is ongoing, REI General Manager Mary Ann Pease said in an interview. Gas for the plant would be sourced from Cook Inlet. “Optimizing that cost and bringing it down as much as possible is the focus right now,” Pease said. “A billion dollars does not make a very economic project and the more we can refine that the better.” Original capital estimates for the plant were in the $1.2 billion to $1.8 billion range. Pease has said another $1 billion would be needed to purchase a gas supply for the plant. By comparison, the mega Alaska LNG Project to export North Slope natural gas is planned as a 20 million-ton per year project at a rough cost of more than $45 billion. The FEED should take roughly two years, at which point a final investment decision would be made, Murkowski said. Construction would then take about another two years to put start-up sometime in 2020 or 2021, he said. Local Japanese government officials from the Kyoto Prefecture and Maizuru City toured Port MacKenzie May 30 and said in a Matanuska-Susitna Borough release that they were impressed with the available space at the port as well as its ability to handle large vessels despite Cook Inlet’s extreme tidal fluctuations. They also met with Mat-Su Borough officials who have long pushed for development of the industrial port site across Knik Arm from Anchorage. Kyoto and Maizuru City are prospective purchasers of the LNG the plant would produce for municipal and industrial use. Pease said the Japanese delegation members continue to emphasize Alaska’s ability to reliably support the country’s energy security. Alaska’s location, less than a week’s sail from East Asia, is another benefit, she said. ConocoPhillips’ LNG plant in Nikiski started supplying the country with LNG in 1969 and REI hopes to continue that good relationship. This time though, the Japanese delegation is interested in investing in the entire supply chain and not just purchasing LNG, she said. Pease acknowledged the obvious challenges for any LNG export project these days, given the depressed spot market. In April LNG sold for as low as $4 per million British thermal units delivered to East Asia, by far the lowest prices in recent years, according to the Federal Energy Regulatory Commission. Just three years ago when REI began investigating Alaska as the location for a potential project the spot price for Asia LNG was nearly four times what it is today. Pease said the market is simply oversupplied, but also noted an LNG plant is a long-term project. “The primary focus right now is those continued good relationships (between Alaska and Japan) and reducing the cost — we’ve got to do that,” she said. While Southcentral Alaska has faced natural gas shortages from Cook Inlet over the past decade, Pease echoed what regional utility leaders have said now that the market has at least temporarily stabilized by saying a new large customer would be about the best thing to spur new development for the currently constrained natural gas market. She said all the technical data she has seen indicates ample reserves of gas still underneath the Inlet that just need a market. “I have no concern about the long-term availability of Cook Inlet gas as long as — and this is my caveat — as long as we have an industrial anchor tenant that will be here to continue the exploration and development and then production that needs to take place,” she said. If REI finishes the job it could be that market anchor, as 1 million tons of LNG equates to about 48 billion cubic feet of gas. That is more than half of the natural gas currently produced for use by Southcentral utilities each year.  

Analyst: Alaska in a bind on taxes, LNG

A leading international energy analyst did not paint a rosy picture for Alaska in a May 26 presentation to the state Oil and Gas Competitiveness Review Board. IHS Energy Senior Vice President Atul Arya said the state is one of only a few oil provinces worldwide discussing the possibility of raising taxes or cutting incentives during the prolonged downturn in oil markets. IHS Energy Inc. is a global energy industry consulting firm. The global movement was to begin increasing taxes, or government take, on the oil industry when oil prices first spiked above $100 per barrel in 2007, and Alaska followed suit. Since, the state has bucked general international policy trends by twice cutting taxes; first with new tax credits in the 2010 Cook Inlet Recovery Act and then by lessening production taxes at high prices when Senate Bill 21 passed in 2013. While initiated for very different reasons, both of those measures were enacted when oil prices were high — in the $100 per barrel range. Now, as legislators debate how far the state should scale back its industry tax credit program, a proposal first introduced by Gov. Bill Walker to reduce the state’s multi-billion-dollar budget deficit, others are holding pat or looking for ways to spur activity, Arya said. “What I find most interesting — in the most recent time, most everybody is creating incentives to help attract investments into their countries,” he said. “Even places like India and China, which are not really hotbeds of oil and gas activity, have done more to attract investors, and of course there are many other countries who are doing that in the last year or so.” Walker has said his administration’s plan to cut the state’s annual spend on oil and gas tax credits, which has grown to upwards of $700 million per year, is a necessary part of the larger fiscal restructuring the state must go through to stabilize its economy. At the same time, being able to determine its return on investment in the industry is paramount for Alaska, particularly when state dollars are scarce, according to Arya. Alaska’s latest oil debate over tax credits has been challenged for that information. The amount of credits the state pays to companies, oftentimes for the lion’s share of exploration and development costs, is by law confidential and available only to the Department of Revenue. The Oil and Gas Competitiveness Review Board was established in 2013 with the passage of SB 21 primarily to evaluate how state policies impact Alaska’s ability to attract investment in its flagship industry. The board consists of officials from several key state agencies and public members associated with the oil and gas industry. It is scheduled to issue a report by Jan. 15, 2017, on the state’s tax structure for all areas south of the North Slope. That report could go a long way in shaping future oil and gas taxes and credits for Cook Inlet depending on the outcome of the current tax credit debate, board members noted. Tough news for Alaska LNG With a dramatic return of high oil prices nowhere in sight, the light at the end of Alaska’s dark revenue tunnel is getting dimmer, at least according to Arya. “LNG, I have to say… is a bit of a fool’s gold right now. To think that LNG from Alaska can see the market; it’s just very challenging,” he said. Exporting the state’s plentiful North Slope natural gas through a pipeline and liquefaction project has long been a goal for countless Alaskans, and a top priority of Walker’s. Simply put, Arya believes there is just too much readily available natural gas from cheaper sources for Alaska’s gas to be competitive on the world market. He said the numbers are “startling” when one examines how much global gas supply there is. Global demand for LNG — at about 240 million tons in 2014 — will continue to grow to about 350 million tons by 2020 according to IHS, but so will liquefaction capacity. IHS expects LNG supply to exceed 400 million tons per year by 2020, with most of the new capacity coming from inexpensive sources in the Lower 48, Arya said. Natural gas producers in the rest of the country continue to turn profits even with prices around $2 per thousand cubic feet, or mcf, of gas, he said, because stiff competition has driven overhead reductions. The current proposed $45 billion-plus Alaska LNG Project to export Alaska’s gas to Asia, in which the state is a partner with BP, ConocoPhillips and ExxonMobil, faces an unavoidable problem — an expensive 800-mile pipeline. The project’s midstream transportation costs alone — the pipeline — have been estimated at about $8 per mcf of natural gas. When the Alaska LNG Project was conceived in late 2013, LNG delivered to Asian markets was selling for about $15 per million British thermal units, which roughly equivalent to natural gas on an mcf basis. Today, the Asian LNG spot price is about $4 per million Btu, according to the Federal Energy Regulatory Commission, or about half of the Alaska LNG Project’s estimated midstream costs. Alaska project proponents have emphasized the much shorter shipping time between Alaska and East Asia when compared with Lower 48 LNG exports coming mostly from the Gulf states, but whether logistics savings can overcome a major price gap remains to be seen. Arya said there is a window for Alaska LNG starting in 2023 and beyond; the best-case scenario for first production from AK LNG is around 2025. That is about the time many historic long-term LNG contracts with Japanese buyers are set to expire. However, new market forces will still make for challenging hurdles, he said. First, LNG contracts must be secured in the near-term before the many billions of dollars it will take to build the project can safely be invested. And securing lengthy contracts for the 25-year project could get increasingly difficult as the worldwide LNG glut affords buyers the option to pick and choose lower prices on shorter terms, making the LNG market look more and more like oil. Secondly, there is nothing stopping investors from favoring more Lower 48 LNG projects because they will likely continue to pencil out. “It’s going to be this interesting game of internal competition within the United States between the Lower 48 and Alaska to see who can come in for the next tranche of gas,” Arya said. Elwood Brehmer can be reached at [email protected]

Aviation Museum opens history of helicopters

Airplanes are so synonymous with Alaska the alliteration is unnecessary. But two iconic Alaskan families are quick to point out the state would not be what it is today without that “other” aircraft: the helicopter. Rex Bishop, 93, said in an interview at his South Anchorage home that he and ERA Helicopter founder Carl Brady, who passed away in 2005, used to argue about who brought the first helicopter to the state. “I guess Brady did,” Bishop said with a smirk. That first rotary flight took place in June 1948 out of Juneau. Brady had won a contract with the U.S. Topographic Survey to fly surveyors over the largely unmapped, then-territory, specifically Chichagof Island in Southeast. With the aid of Brady’s Bell 47 helicopter, the Chichagof survey took 33 days instead of the seven years that had been planned for “by foot,” said Marya Pillifant, a vice president with the Brady family’s Anchorage-based firm Benchmark Construction. Pillifant has also taken on the role of curator of the Brady family archives to support the Alaska Aviation Museum’s exhibit that opens June 4 chronicling Alaska’s nearly 70-year history of helicopters. Helicopters were key to those early surveys because they could do the one thing fixed wing aircraft couldn’t — and for the most part still can’t — hover. However, Brady found that his early Bell 47s, which he had flown for his agricultural pest control business in Washington, still didn’t completely fit the bill for working in the remote mountain wilderness. They had wheels. “When they were doing the survey work (Brady) found that a lot of the time you had to land the craft on ground that wasn’t flat — mountains, hills,” Alaska Aviation Museum Executive Director Jarod Hoogland said. “Helicopters, just like planes, had wheels that rotated and rolled so he actually pioneered the use of skids on helicopters. You think now of a classic helicopter and you think of it having skis or skids; you don’t think of it having wheels but that wasn’t the case then.” The first skids were fashioned out of plywood and Brady had them wired to his original pair of Bell’s, according to Hoogland. Shortly after Brady’s innovation manufacturers began putting skids on their new aircraft, he said. The Bradys credit Carl with being the first to put skids on helicopters. Bishop said he couldn’t unequivocally confirm the claim, but said it could certainly be true. The first Bell helicopters to come from the factory with skids were produced in 1951, a fact which supports the story. One of the original Bell 47s Brady brought to Alaska now hangs in the terminal at Ted Stevens Anchorage International Airport. Pillifant said ideally it would be on display at the Aviation Museum, but the logistics were too much to overcome. However, the museum’s location, just across the street from the airport at Lake Hood, makes it easy for visitors to see both in one trip if they wish. In 1956, Brady established Economy Helicopters’ first permanent office in Anchorage. A couple years later he merged the company with California-based Rotor Aids Inc. and the companies’ initials were melded to form ERA Helicopters, which today operates as the international aviation services company ERA Group Inc. headquartered in Houston. Bishop got into the helicopter business through his cousin Jim Ricklefs, who ran Rick Helicopters out of San Francisco. Through the late 1950s the pair trucked their Bell 47s to and from Alaska for summer work on the emerging Cook Inlet oil fields each year. “The helicopter industry really did a lot to help establish Alaska as a productive state simply because there were no roads up here, or runways,” Bishop said. That early shuttle business around Southcentral pitted Brady, who died in 2005 at the age of 86, and Bishop in direct and intense but cordial competition. “I stayed in business to keep Brady honest,” Bishop quipped. The competition was direct to the point that Bishop’s Alaska Helicopters — a wing of Alaska Airlines in its early years — was literally next door to ERA’s hangar in Anchorage. Ultimately, Bishop sold Alaska Helicopters to ERA in 1995. “I always appreciated Carl Brady and his company because he had a good strong company,” he said simply. This is just the small sample of the helicopter’s rich history in Alaska. The Alaska Aviation Museum will have the rest. Elwood Brehmer can be reached at [email protected]

Special session starts, facing same issues

Legislators approved a resolution May 24 to pick up where they left off, at least in regards to the bills Gov. Bill Walker put on their agenda when he called the special session. House Concurrent Resolution 401 reinstates the operating, capital and mental health program budgets as well as the Permanent Fund earnings reform, adoption, reinsurance and oil and gas tax credit and the closely tied oil project development loan fund bills as they stood before legislators gaveled out of the extended regular session late May 18. The administration introduced legislation addressing two of the governor’s 11 special session agenda items May 23, the first day of the special session, an omnibus tax bill and a bill to provide long-term health insurance for surviving family members of emergency responders killed in the line of duty. Either the governor or the Legislature can call a special session. Typically, the administration introduces bills during special sessions called by the governor. However, in this instance legislators suspended traditional rules with both bodies agreeing to the concurrent resolution through majority votes. The House vote was unanimous to adopt the resolution. Sen. Bert Stedman, R-Sitka, was the only dissenting vote on HCR 401 in the Senate. The House minority tried to amend the resolution to omit House Bill 247, but the majority emphatically rejected that amendment. Negotiations on the more-than-contentious oil and gas tax credit bill during the regular session stalled progress on the operating budget, but a compromise reached between the majority and several majority members was able to pass the House. When the Senate passed a version of HB 247 that wouldn’t cut the state’s future credit obligation enough or disclose which companies received the credits to satisfy enough legislators in the House, the impasse resumed in the last hours of the extended session. House Minority Leader Rep. Chris Tuck, D-Anchorage, acknowledged a lot of work had already been on HB 247 but suggested legislators should allow the administration, which first introduced the bill in January, draft another tax credit bill. He argued that because information regarding which companies receive what in regards to the credits is confidential to everyone except the Department of Revenue, the administration should lead the way. “I think that we need to at least hear what the governor would like to have and have the proper vetting process to hear that throughout the committee process,” Tuck said. “So we’re asking in this amendment that House Bill 247 be exempted from everything being put back to where it once was before ending the regular session.” Rep. Scott Kawasaki, D-Fairbanks, correctly noted in floor discussion that the bill changed radically through the committee process and even on the House Floor, where the final changes to the version that ultimately passed the House were made. He said a new bill from the administration would get proper vetting through the committee process. However, Majority members — including those that have sided more with the minority on the issue — were quick to point out that the changes Kawasaki referenced were not made without intense scrutiny as it moved through three committees in the House and another in the Senate. House Resources Committee co-chair Rep. Dave Talerico, R-Healy, cited the more than 20 meetings HB 247 had in his committee — it’s first referral. “We had very substantial testimony from the public, industry and our own consultants,” Talerico said on the House floor. “We went through well lease expenditures, capital expenditures, gross value reductions, gross value at the point of production, pipeline tariffs, exploration credits, royalties and everything else that was connected in any way shape or form with tax credits or this bill. We fully vetted everything that happens in the Cook Inlet and everything that happens on the North Slope.” The version of HB 247 that passed out of House Resources would have made the fewest changes to the current credit program of any of the bills numerous committee iterations. Sources in the Legislature said the minority’s amendment was spurred by the belief that the administration is crafting another piece of oil and gas tax credit legislation. Walker told the Journal May 25 that it was “too soon to tell” if the administration will introduce another tax credit bill or let an HB 247 conference committee hammer out the differences between the House and Senate versions. In the end, a six-member conference committee was appointed to resolve the House and Senate differences in HB 247. Those committee members are: Talerico; Reps. Kurt Olson, R-Soldotna; and Geran Tarr, D-Anchorage; Sens. Cathy Giessel, R-Anchorage; Peter Micciche, R-Soldotna; and Senate Majority Leader John Coghill, R-North Pole. The House participants all serve on the Resources Committee. Giessel chairs Senate Resources and led an oil and gas tax credit working group last year that outlined possible changes to the program; while Micciche serves on the Senate Finance Committee, which drafted the version of HB 247 that passed the Senate. During a speech at the Alaska Oil and Gas Association’s 50th anniversary celebration May 25 in Anchorage, the governor commended the leaders of the state’s producers and explorers for their willingness to openly discuss directly with him their concerns with his tax credit reduction proposal throughout the legislative session and how it could impact their companies. Industry leaders in the state have reiterated that reform to the credit program would mark Alaska’s sixth oil and gas tax change in a little more than a decade. While some of those changes were supported by industry, the near continuous tax alterations make it extremely difficult for businesses to plan for the future, they emphasize. The oil and gas tax credit legislation — part of the administration’s broader plan to erase the state’s roughly $4 billion budget deficit over the next three years — will help stabilize the state’s overall economic climate and provide the budgeting certainty the state will need to invest in his ultimate goal, a North Slope natural gas pipeline project, Walker said. But as he has for months now, he asked Alaskans to “pull together” and stay away from the “finger pointing” that often happens during turbulent political times. “There’s something for everybody not to like in the (fiscal) plan, whether it’s the fuel tax, it’s the fisheries tax, whether it’s on the oil and gas side, whether it’s income tax, the tobacco and alcohol tax,” Walker said. “There’s plenty of stuff in there so that everybody can find something they don’t like; I understand that. But I guess what I ask Alaskans to do is look at the long game. Where do we want to be in 50 years? What do we want to make sure that our children and grandchildren have available to them in this state?” He, and many of Alaska’s business leaders have said often that not making structural reforms to the state’s budget and how it is paid for and continuing to draw on savings will cripple Alaska’s economy in the coming years. Elwood Brehmer can be reached at [email protected]

Congress approves $561M for Alaska military construction in FY2017

Missile defense and fighter jets could be a just-in-time boon for Alaska contractors feeling the effects of low oil prices and state budget cuts. The U.S. House and Senate each passed appropriations bills May 19 to fund a dozen projects totaling $561 million worth of construction activity in Alaska. Most of that money will go to Interior military installations to upgrade the country’s missile defense system and prepare for the arrival of two squadrons of F-35 fighters to Eielson Air Force Base in 2020. The Senate’s $139.4 billion packaged appropriations bill addressed military construction, Veterans Affairs, Transportation and Housing and Urban Development spending for the 2017 fiscal year that begins Oct. 1. The $81.6 billion House bill funds Defense infrastructure and VA programs. Despite differences in other areas, the bills are nearly identical in terms of military construction funding for Alaska. “The decision to base two squadrons of F-35s, totaling 54 aircraft, at Eielson Air Force Base and position Long Range Discrimination Radar at Clear Air Force Station were major victories for Alaska and the nation. Not only will these systems play an immense role in defense of our nation, they also mean a significant boost to our economy and our local communities,” Rep. Don Young said in a May 19 statement. “Today’s House-passed Milcon-VA Appropriations Act lays the groundwork for these two important basing decisions and further supports the needs of our military men and women.” Sen. Lisa Murkowski added language to the Senate bill in the Military Construction-VA Appropriations Subcommittee encouraging the Defense Department to “conduct outreach to contractors located in Alaska and experienced in Arctic construction techniques in the execution of the military construction program for Alaska,” according to a release from her office. The intent language also urges DOD to maximize local workforce participation and coordinate that work with the state Labor Department and the University of Alaska to provide training for the pending construction work. The language was pulled as the bill moved through the committee process, but was ultimately reinserted in the legislation that passed. Despite Alaska receiving more military construction funding than any other state in the appropriations package, the projects are security investments for the entire nation, Murkowski said in a release. “This funding bill not only allows us to obtain the resources that we need to support our military efforts, such as preparing for the arrival of the F-35s at Eielson Air Force Base and building the Long Range Discrimination Radar at Clear; it also represents a resurgence for Alaska’s construction industry and thousands of new full-time jobs at a time when Alaska’s economy needs it most.” Murkowski’s office estimates the projects could spur nearly 2,700 new construction-related jobs and more than 1,600 permanent positions. Missile Defense Agency Director Admiral James Syring said during a February talk to the Fairbanks Chamber of Commerce that more than $325 million will be spent over the next six years installing the Long Range Discrimination Radar at the Clear Station near Nenana. That work will require a 350-person man camp starting next year, with peak occupancy and construction in 2019, he said. Syring added that the missile defense and detection upgrades in Alaska are all aimed at expanding the country’s defense mechanisms against North Korea. He said he would expect local contractors to get much of the work at Clear Air Force Station at least. Elwood Brehmer can be reached at [email protected]

Legislature resurrects bills from regular session; conference committee named on tax credits

Legislators approved a resolution May 24 to pick up where they left off, at least in regards to the bills Gov. Bill Walker put on their agenda when he called the special session. House Concurrent Resolution 401 reinstates the operating, capital and mental health program budgets as well as the Permanent Fund earnings reform, adoption, reinsurance, and oil and gas tax credits, and the closely tied oil project development loan fund bills as they stood before legislators gaveled out of the extended regular session late May 18. The administration introduced legislation addressing two of the governor’s 11 special session agenda items May 23, the first day of the special session: an omnibus tax bill and a bill to provide long-term health insurance for surviving family members of emergency responders killed in the line of duty. Either the governor or the Legislature can call a special session. Typically, the administration introduces bills during special sessions called by the governor. However, in this instance legislators suspended traditional rules with both bodies agreeing to the concurrent resolution through majority votes. The House vote was unanimous to adopt the resolution. Sen. Bert Stedman, R-Sitka, was the only dissenting vote on HCR 401 in the Senate. The House minority tried to amend the resolution to omit House Bill 247 — the oil and tax credit legislation — but the majority emphatically rejected that amendment. Negotiations on the more-than-contentious oil and gas tax credit bill during the regular session stalled progress on the operating budget, but a compromise reached between the majority and several majority members was able to pass the House. When the Senate passed a version of HB 247 that wouldn’t cut the state’s future credit obligation enough or disclose which companies received the credits to satisfy enough legislators in the House, the impasse resumed in the last hours of the extended session. House Minority Leader Rep. Chris Tuck, D-Anchorage, acknowledged a lot of work had already been on HB 247 but suggested legislators should allow the administration, which first introduced the bill in January, to draft another tax credit bill. He argued that because information regarding which companies receive what in regards to the credits is confidential to everyone except the Department of Revenue, the administration should lead the way. “I think that we need to at least hear what the governor would like to have and have the proper vetting process to hear that throughout the committee process,” Tuck said. “So we’re asking in this amendment that House Bill 247 be exempted from everything being put back to where it once was before ending the regular session.” Rep. Scott Kawasaki, D-Fairbanks, correctly noted in floor discussion that the bill changed radically through the committee process and even on the House Floor, where the final changes to the version that ultimately passed the House were made. He said a new bill from the administration would get proper vetting through the committee process. However, Majority members — including those that have sided more with the minority on the issue — were quick to point out that the changes Kawasaki referenced were not made without intense scrutiny as it moved through three committees in the House and another in the Senate. House Resources Committee co-chair Rep. Dave Talerico, R-Healy, cited the more than 20 meetings HB 247 had in his committee — its first referral. “We had very substantial testimony from the public, industry and our own consultants,” Talerico said on the House floor. “We went through well lease expenditures, capital expenditures, gross value reductions, gross value at the point of production, pipeline tariffs, exploration credits, royalties and everything else that was connected in any way shape or form with tax credits or this bill. We fully vetted everything that happens in the Cook Inlet and everything that happens on the North Slope.” The version of HB 247 that passed out of the House Resources Committee would have made the fewest changes to the current credit program of any of the bills numerous committee iterations. Sources in the Legislature said the minority’s amendment was spurred by the belief that the administration is crafting another piece of oil and gas tax credit legislation. In the end, a six-member conference committee was appointed to resolve the House and Senate differences in HB 247. Those committee members are: Talerico; Reps. Kurt Olson, R-Soldotna; and Geran Tarr, D-Anchorage; Sens. Cathy Giessel, R-Anchorage; Peter Micciche, R-Soldotna; and Senate Majority Leader John Coghill, R-North Pole. The House participants all serve on the Resources Committee. Giessel chairs Senate Resources and led an oil and gas tax credit working group last year that outlined possible changes to the program; Micciche serves on the Senate Finance Committee which drafted the version of HB 247 that passed the Senate. The quick melodrama on the House floor May 24 was most of the action that happened in the first couple days of the special session. Scheduled committee hearings were mostly canceled in the days leading up to the holiday weekend. Elwood Brehmer can be reached at [email protected]

Walker introduces bills for two of 11 special session agenda items

Here we go, again. This Legislature’s fourth special session began midday Monday when legislators were given bills to address two of Gov. Bill Walker’s 10 original agenda items. Those bills were an omnibus tax bill and a seemingly noncontroversial bill providing health insurance to families of emergency responders killed in the line of duty. It took two special sessions in 2015 to pass the budget, and a third special session was held last fall to buy out TransCanada’s share in the Alaska LNG Project. The big items, an oil and gas tax credit bill; legislation establishing an annual draw from the Permanent Fund earnings account to fund government; and the operating and capital budgets were not introduced in House and Senate floor sessions. Those will undoubtedly be introduced soon as administration officials spent the weekend devising new bills. Walker added an 11th item to the special session call Monday — his legislation to establish a state oil and gas project development loan fund to be run by the Alaska Industrial Development and Export Authority. The loan program would help offset significant cuts to the state’s expensive and contentious tax credits by providing low interest capital to small companies, but was all-but ignored in committee hearings. The administration largely adopted the key points of the omnibus tax bill — formerly House Bill 249 and now House and Senate bills 4001 — that was stuck in the House Finance Committee at the end of the regular session. However, the governor’s proposal to reinstitute a state income tax at 6 percent of federal obligation was added to the bill with the group of industry and sin tax hikes. The tax increases are a primary piece of Walker’s New Sustainable Alaska fiscal plan to pull the state out of its $4 billion budget hole and balance the budget by fiscal year 2019. Higher industry, alcohol and tobacco taxes were expected to raise roughly an additional $250 million per year as first pitched by the administration. The income tax would bring in about another $200 million per year. Each tax started as its own piece of legislation, but they were combined by House Finance when several industry leaders of the impacted trades, commercial fishing, mining and transportation, said they were willing to absorb higher taxes as long as other groups felt similar financial pain. Walker has said he is amenable to changing or deleting the higher taxes from his fiscal plan as long as the revenue gap can be bridged elsewhere. Under the tax package most of the state’s fuel taxes would double. Alaska’s general motor fuel and aviation fuel taxes are currently among the lowest in the nation. The 8 cents per gallon highway fuel tax has not been raised in over 40 years. The administration is pushing for a higher tax on large mining operations than was in the bill at the end of the regular session. The House committees had proposed a 1 percent tax increase on large mine operators’ net income, from 7 percent to 8 percent, before the bill died. The administration reintroduced a 9 percent tax, but compromised on the length of a tax exemption for new mines. Currently, new mines do not pay an income tax for the first 3.5 years of production. The House cut that back to three years and the new tax bill sets a two-year exemption. The tax exemption was eliminated in Walker’s original mining tax bill. Most fisheries landing taxes would be raised 1 percent, as in the regular session legislation; the major exception being a tax decrease from 4 percent to 1 percent on developing commercial fisheries. Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Legislature adjourns without budget, Walker calls 4th special session

Ready or not, here comes special session number four. At 12:01 a.m. Thursday, Gov. Bill Walker signed a proclamation calling the Legislature back to work, almost immediately after the House and Senate adjourned late Wednesday when it became apparent a budget deal could not be struck. The 30-day special session, which will be the fourth for this Legislature and the governor, officially begins in Juneau Monday, May 23, at 11:00 a.m. The special session will include 10 items: notably, the state operating and capital budgets, oil and gas tax credit reform, legislation establishing an annual draw from the earnings of the Permanent Fund to pay for government, a tax package, and several non-revenue issues such as forming a state health care reinsurance program and insurance for families of emergency responders killed in the line of duty. With the regular session over, all bills that didn’t pass died. The items on the special session call either have to be redrafted and go through the committee process once more or the Legislature can resurrect the bills it was working on through joint House-Senate resolutions. “We’re not submitting anything that’s brand new, that hasn’t been seen,” Walker said at a Thursday morning press briefing. He decided to let everyone “take a deep breath” and come back Monday morning after discussing the special with House and Senate majority leadership late Wednesday, Walker said. Several legislators said they plan to head home over the weekend for the first time in weeks or months. Much like last year, the administration will be forced to issue “pink slips” to all state employees if the operating budget is not passed and funded by June 1. The current budget funds operations through June 30, the end of the 2016 state fiscal year.  Without an approved 2017 fiscal year budget, government will shut down July 1 and all non-essential government workers would be laid off. The state is required to give its workers 30 days notice of pending layoffs. Last year’s two spring special sessions stemmed strictly from wrangling over budget cuts; Democrats in the House Minority caucus leveraged their votes needed to approve a draw from the Constitutional Budget Reserve savings account to add back funding for education and the Alaska Marine Highway System. This year, the House Minority is the group advocating for budget cuts — to the much debated, publicized, scrutinized, and defended oil and gas tax credit program. Needing special sessions to pass budgets means Alaska’s 29th Legislature failed both times to meet its only constitutional requirement in regular time — passing a funded budget. Additionally, the governor continues to push for installation of his New Sustainable Alaska Plan to eliminate the states’ $4 billion budget deficit by fiscal year 2019. Walker said that without a fiscal plan the special session déjà vu will continue. “We were here last year; we’re here this year and we never want to be here again and that’s why we went out to Alaska in a very broad way to put together the plan,” he said. “It’s painful to be where we are today but I guess the point is to make sure we’re not here again.” Legislators had the option to extend the already extended session for up to 10 more days to resolve the tax credits and budgets, but Walker had said previously he would call a special session to address the revenue bills if they were not passed in some form. When the House — with a split Republican-led majority — did not concur with the Senate’s version of the tax credit legislation House Bill 247 late Wednesday night, the Senate adjourned, leaving the House little option but to follow suit. The governor has been fairly quiet during the first two regular legislative sessions of his term, for the most part staying out of debates even on his own bills. Walker said Thursday that he and members of his administration will spend the weekend trying to draft a compromise oil and gas tax credit bill and that his presence will be more noticeable in trying to reach agreements in the coming weeks. “Now it’s a process that I’ve created in some respects. I will be much more involved with legislators,” the governor said. Chenault said repeatedly at a press briefing just after midnight Wednesday that he was frustrated “the goal posts kept changing” during the last days of the session regarding what the minority needed for a budget compromise. Getting the budget done and “off the table” so it can’t be used as a leverage item is key in finishing the rest of the Legislature’s work, he said. House Minority Leader Rep. Chris Tuck was positive about how things went with the House Majority and commended the governor for continuing to push a comprehensive fiscal plan. “Mike Chenault did a really good job of trying to pull things together in the end,” Tuck said. He was less eager to spread praise to the other chamber, however. Tuck called a Senate-generated $100 million unallocated cut to department spending in the conference committee version of the operating budget “really lazy budgeting” and criticized a late cut to public education funding for not being vetted through the public process. “I know that we’ll start off strong this next special session,” Tuck said. “We’ve just been a little bit leery of how the Senate’s been — their role in all of this — so hopefully we’ll be able to get the Senate more on board with what our vision is for the State of Alaska.”   Elwood Brehmer can be reached at [email protected]

Showdown set over oil tax credit bills

At long last, oil tax credit reform legislation has passed both the House and the Senate. The issue, however, is still far from resolved. Despite technically being the same bill, House Bill 247 that passed the House May 13 is vastly different than the version of HB 247 that passed the Senate by a 14-6 vote on May 18, the last day of the session allowed under the state Constitution. The differences between the bills will have to be resolved in a conference committee, which will require either a 10-day extension of the current session if two-thirds of both houses agree, or a special session called by either the Legislature or Gov. Bill Walker. The bottom line budget impact of the Senate version would save and generate up to roughly $160 million per year once its provisions were fully implemented by 2019, according to Revenue Department estimates. The tax credit changes in the House bill approach $280 million in benefit to the state by fiscal year 2020, when it would take full effect. Regardless of changes to the future credit program, the state is still on the hook for about $775 million of earned credits that need to be paid in fiscal year 2017 — an expense that still needs to be added to the operating budget. That includes the $200 million Gov. Bill Walker vetoed from last year’s tax credit payment, which was in practice a veto, but in actuality a payment deferral. At the time Walker said the action was to “start a conversation” about the credit program that he and many legislators have said is unsustainable when the state is $4 billion in the hole. It worked. The hotly debated legislation stalled progress on other key revenue bills in the last weeks of the session. The impasse on the House side was seemingly overcome with the passage of its HB 247, but the Senate’s bill, passed on day 121, has likely added another high hurdle. Both versions of HB 247 would reduce the value of refundable credits for eligible capital expenses incurred by companies working in Cook Inlet in 2017 and wholly eliminate Cook Inlet refundable tax credits in 2018. The Senate bill would also add a tax to Cook Inlet oil of up to $1 per barrel, roughly equivalent to the 17.5-cent per thousand cubic feet, or mcf, tax on that exists on Inlet gas. It would be the first production tax on Inlet oil in roughly 20 years. The differences — and certain points of contention when legislators attempt to resolve them — mostly lie in credits applicable to companies working on the North Slope. The House version of HB 247 would immediately eliminate the current 35 percent Net Operating Loss, or NOL, credit for companies producing more than 15,000 barrels per day. The ability for large producers to carry annual losses incurred during periods of low oil prices or high investment and apply those losses against future tax liabilities was also stripped. For those small, remaining NOL-eligible Slope producers, the Net Operating Loss credit would ramp down from 35 percent to 25 percent by 2023. Additionally, the House version would institute a 5 percent minimum “tax floor” when the yearly average price of Alaska North Slope crude hits $70 per barrel. The Walker administration’s original HB 247 would have raised the minimum tax from 4 percent established by the production tax structure known as Senate Bill 21 to 5 percent. Industry and Republican-led majority caucus legislators contended the proposed tax increase would be a major change to Senate Bill 21, which Walker has said he was not interested in doing after voters upheld in the law in a 2014 referendum before he was elected. The current tax floor can be “pierced” by companies applying the NOL and other credits to their tax liability during times of low prices — an unintended consequence of not modeling the impact of SB 21 in low-price scenarios. The Senate version of HB 247 would not change the 35 percent NOL credit for North Slope companies. By eliminating refundable credits from the Cook Inlet basin, the only refundable credit available to companies in the producing areas of the state would be the North Slope NOL for small producers. Both bills would limit companies to $70 million of refundable, or cashable, credits per year. The per company limit has swung in the many versions of credit legislation from a low of $25 million in the administration’s tax credit proposal to as high as $200 million in House Resources. The Senate HB 247 complicates the cap slightly by allowing companies to receive full payment for the first $35 million of applied credits; the state would pay the second $35 million installment at 75 percent of face value unless the company chooses to carry the second half of its credits to a future year. Current law has no per company limit for refundable credits. Both bills also complicate the 20 percent Gross Value Reduction credit that is applicable to oil produced from new wells. They end the deductible GVR credit seven years after first production from a new well or after three years — consecutive or not — of an Alaska North Slope crude price of at least $70 per barrel. “New oil” is currently eligible for the GVR indefinitely, which the governor’s bill did not address. Numerous committee versions of tax credit legislation jumped between five-year and 10-year GVR limits. Credit confidentiality The House version of HB 247 would allow the Revenue Department to disclose which companies receive refundable credits and the amount they are reimbursed. The Senate version would allow the department to annually report how much the state spent reimbursing each type of credit, but the names of the companies receiving the credits would be kept confidential. A floor amendment by Sen. Bill Wielechowski, D-Anchorage, to change the Senate bill to mirror House language was voted down. Republican Sens. Peter Micciche and Bill Stoltze broke from Majority ranks on that vote and supported the amendment. Currently law limits the department to aggregating the total annual credit amounts paid by the basin in which they were earned. Industry has said the companies receiving credits needs to remain confidential to protect private tax information. House and Senate Minority caucus members have rebutted that accepting the credits are optional, and therefore companies can choose whether or not they want to accept the subsidy or keep the information confidential.  

State affirms demand for marketing info in Prudhoe plan

Simply put, the State of Alaska wants information about potential North Slope natural gas sales the big three producers are not willing to hand over. Alaska Division of Oil and Gas Director Corri Feige sent a letter to BP Alaska management May 12 reiterating that the 2016 Plan of Development for the Prudhoe Bay will be considered incomplete until the company shares “specific information” regarding its efforts to market North Slope gas in preparation for a gasline project. BP operates Prudhoe Bay on behalf of ConocoPhillips and ExxonMobil, the field’s other primary working interest owner companies. The May 12 letter is the latest correspondence in a back-and-forth between the producers and the state that dates back to early in the year. In January, now-retired Department of Natural Resources Commissioner Mark Myers wrote the first letter to BP on the issue stating the department, which houses the Division of Oil and Gas, would be requesting new technical and marketing information related to prospective “major gas sales” in future unit plans of development. Similar letters were sent to each oil and gas unit operator across Alaska with the aim of improving the state’s knowledge bank regarding how it can help get the currently stranded gas resources to in-state or export markets, according to DNR officials. BP firmed up its position 10 days earlier in a letter to the division contending the new Plan of Development “requirement is outside the scope of current regulations and constitutes impermissible rulemaking,” BP Alaska Reservoir Manager Scott Digert wrote May 2. The division must go through the formal public regulatory process to appropriately change what is required in unit Plan of Development, Digert added. “In order to adequately evaluate how the (Prudhoe Bay Plan of Development) meets the requirements of (state regulations) and other law, the division needs specific information regarding past and on-going efforts to market gas in both the local and non-local markets,” Feige wrote in the May 12 letter. “To the extent it is contemplated at this time, the division also needs specific commitments and timelines regarding how gas will be marketed in the future. The division acknowledges the various objections raised by BP and ConocoPhillips regard the division’s requests and, again, respectfully disagrees.” If the Plan of Development is not approved, an appeal to the division’s ruling would likely be heard by the Alaska Oil and Gas Conservation Commission. The state is an equal-share partner in the $45 billion-plus natural gas export effort known as the Alaska LNG Project with BP, ConocoPhillips and ExxonMobil. While roughly three-quarters of the gas reserves to feed the AK LNG Project would come from Prudhoe Bay, the prodigious oil and gas field would undoubtedly be the main driver behind any major North Slope gas sales. BP’s 2016 Prudhoe Bay Unit Plan of Development submitted March 31 focused on immediate plans to recover oil from the field and contained only a couple vague paragraphs about its ongoing efforts to support a gas project. It told the division that each working interest owner company would have to submit its own gas marketing information to avoid anti-trust issues among the potentially competing parties. The current Prudhoe Bay Plan of Development expires June 30, according to the division. ConocoPhillips responded to an April 11 letter from Feige on May 4 stating its support of BP’s position and offering a bilateral meeting with division officials to understand the demands for information. ExxonMobil has not responded to the division, a fact noted in Feige’s May 12 letter. An ExxonMobil Alaska spokesperson told the Journal the company would defer to BP as the unit operator on the issue. Elwood Brehmer can be reached at [email protected]  

Alaska delegation asks Kerry to review transboundary mining

Alaska’s congressional delegation responded to continued concerns from Southeast Alaskans about Canadian mine plans by asking Secretary of State John Kerry to look into whether environmental practices across the border are worthy of scrutiny under a bilateral treaty. Rep. Don Young and Sens. Lisa Murkowski and Dan Sullivan sent a letter to Kerry May 12 requesting the State Department to question Canadian officials about the impact active and proposed hard rock mines in British Columbia and the Yukon could have on salmon in several large “transboundary” rivers. “Like most Alaskans, we strongly support responsible mining, including mines in Southeast Alaska, but Alaskans need to have every confidence that mining activity in Canada is carried out just as safely as it is in our state,” the delegation wrote. “Yet, today, that confidence does not exist. “Proposed mining development in the Stikine, Taku River, and Unuk watersheds has raised concerns among commercial and recreational fishermen, tourism interests, and Alaska Native communities regarding water quality maintenance of the transboundary rivers that flow by their homes and onto their fishing grounds.” The letter references seven active or planned mines just on the British Columbia side of the border from Southeast Alaska. It specifically notes that the long-closed underground Tulsequah Chief metal mine in the Taku drainage northeast of Juneau has been leaking acidic wastewater into the river for many years. Late last year, Canadian government officials finalized efforts to reduce the leakage but did not require the mine’s water treatment facility be restarted. There have also been proposals to reopen the Tulsequah Chief project. Also last November, Gov. Bill Walker and British Columbia Premier Christy Clark signed a non-binding memorandum of understanding, or MOU, to establish a Bilateral Working Group on the Protection of Transboundary Waters. The Alaska side of the group, tasked with facilitating an exchange of best practices, marine safety and joint visitor industry promotion among other things, is led by Lt. Gov. Byron Mallott. The delegation did not go as far as to ask for action by the International Joint Commission, or IJC, which was established in 1909 to resolve disputes over how actions in one country could impact watersheds shared by both. It did, however, urge Kerry to “utilize all measures at your disposal to address this issue at the international level” and decide if the “IJC is a suitable venue to determine whether Canadian mines are following ‘best practices’” for wastewater and mine tailings treatment. Also highlighted in the delegation’s letter is a British Columbia Auditor General report released earlier this month that is highly critical of the province’s oversight of mining activity. Additionally, it asked for a more formal consultation process with state agencies, Tribes, and Alaska Native corporations during Canadian mine permit reviews. While numerous Alaska environmental, commercial fishing, and Alaska Native groups have called for IJC involvement, the commission can only be spurred by a formal call from either the State Department or Canada’s Global Affairs Department. Those groups lauded the delegation in formal statements reacting to the letter. “This powerful statement underscores that Alaskans, regardless of political party, want Secretary Kerry to address (British Columbia) mining with Canadian officials so that clean water and healthy salmon runs will support our economy for generations to come,” Salmon Beyond Borders director Heather Hardcastle said. Originally, IJC intervention was intended only when both governments submit a “letter of referral” asking for the commission to resolve a dispute. Over time that procedure has morphed and both countries have at times singularly requested IJC involvement, which has often been granted. The commission’s recommendations are nonbinding but generally adhered to in an effort to maintain a cooperative relationship between the countries. Throughout its history the IJC has been intensely involved in water and air quality issues related to development along Canada’s border with the Lower 48. However, it has never ruled on or heard a water-related contention regarding the Alaska-Canada border, according to a statement on its website. British Columbia Minister of Energy and Mines Bill Bennett has said in interviews with the Journal and the Juneau Empire that the issues are not with the province’s environmental regulations and enforcement, but rather with better communicating with Alaskans how thoroughly British Columbia monitors its mines. The province has taken significant heat for the Mount Polley mine tailings dam failure in 2014, which a government investigation concluded was caused by design flaws. B.C. regulatory report British Columbia Auditor General Carol Bellringer pulled no punches in a lengthy report released May 3 calling for an overhaul of the province’s environmental regulation enforcement practices. “We found almost every one of our expectations for a robust compliance and enforcement program within the (Ministry of Energy and Mines) and the (Ministry of Environment) were not met,” Bellringer wrote in comments on the report. “We found major gaps in resources, planning and tools. As a result, monitoring and inspections of mines were inadequate to ensure mine operators complied with requirements. The ministries have not publicly disclosed the limitations with their compliance and enforcement programs, increasing environmental risks, and government’s ability to protect the environment.” The 109-page report plainly entitled, “An Audit of Compliance and Enforcement of the Mining Sector,” recommends the responsibility to enforce environmental regulations be pulled from the Ministry of Energy and Mines. The ministry is also tasked with promoting resource development, which Bellringer described as being “diametrically opposed” to its regulatory enforcement mandate. As a result, the report recommends British Columbia establish an independent compliance and enforcement unit for mining activities to ensure environmental protection. The report also contends Energy and Mines relies too heavily on individuals referred to as “qualified professionals” — industry’s technical experts that are trusted to monitor the mine construction and operation. “It is not (the Ministry of Energy and Mines’) practice to carry out its own technical review [or to oversee an independent technical review] to confirm that tailings dams are built in accordance with the design and technical standards,” the report states. Provincial government officials retorted in a response included in the report that the audit team failed to clarify what regulatory compliance and enforcement programs should be measured against. Government’s response also pushed back against the charge that Energy and Mines officials cannot handle the responsibility of both promoting and regulating the mining industry. “We do not accept that mere appearances are sufficient to warrant the act of removing compliance and enforcement from (Energy and Mines),” government officials wrote. “No one is more aware of the need to find the appropriate balance between promotion and regulation of mining in ministry decision-making than those who are asked to do so on a daily basis.”

Showdown set over oil tax credits

At long last, oil tax credit reform legislation has passed both the House and the Senate. The issue, however, is still far from resolved. Despite technically being the same bill, House Bill 247 that passed the House May 13 is vastly different than the version of HB 247 that passed the Senate by a 14-6 vote on May 18, the last day of the session allowed under the state Constitution. The differences between the bills will have to be resolved in a conference committee, which will require either a 10-day extension of the current session if two-thirds of both houses agree, or a special session called by either the Legislature or Gov. Bill Walker. The bottom line budget impact of the Senate version would save and generate up to roughly $160 million per year once its provisions were fully implemented by 2019, according to Revenue Department estimates. The tax credit changes in the House bill approach $280 million in benefit to the state by fiscal year 2020, when it would take full effect. Regardless of changes to the future credit program, the state is still on the hook for about $775 million of earned credits that need to be paid in fiscal year 2017 — an expense that still needs to be added to the operating budget. That includes the $200 million Gov. Bill Walker vetoed from last year’s tax credit payment, which was in practice a veto, but in actuality a payment deferral. At the time Walker said the action was to “start a conversation” about the credit program that he and many legislators have said is unsustainable when the state is $4 billion in the hole. It worked. The hotly debated legislation stalled progress on other key revenue bills in the last weeks of the session. The impasse on the House side was seemingly overcome with the passage of its HB 247, but the Senate’s bill, passed on day 121, has likely added another high hurdle. Both versions of HB 247 would reduce the value of refundable credits for eligible capital expenses incurred by companies working in Cook Inlet in 2017 and wholly eliminate Cook Inlet refundable tax credits in 2018. The Senate bill would also add a tax to Cook Inlet oil of up to $1 per barrel, roughly equivalent to the 17.5-cent per thousand cubic feet, or mcf, tax on that exists on Inlet gas. It would be the first production tax on Inlet oil in roughly 20 years. The differences — and certain points of contention when legislators attempt to resolve them — mostly lie in credits applicable to companies working on the North Slope. The House version of HB 247 would immediately eliminate the current 35 percent Net Operating Loss, or NOL, credit for companies producing more than 15,000 barrels per day. The ability for large producers to carry annual losses incurred during periods of low oil prices or high investment and apply those losses against future tax liabilities was also stripped. For those small, remaining NOL-eligible Slope producers, the Net Operating Loss credit would ramp down from 35 percent to 25 percent by 2023. Additionally, the House version would institute a 5 percent minimum “tax floor” when the yearly average price of Alaska North Slope crude hits $70 per barrel. The Walker administration’s original HB 247 would have raised the minimum tax from 4 percent established by the production tax structure known as Senate Bill 21 to 5 percent. Industry and Republican-led majority caucus legislators contended the proposed tax increase would be a major change to Senate Bill 21, which Walker has said he was not interested in doing after voters upheld in the law in a 2014 referendum before he was elected. The current tax floor can be “pierced” by companies applying the NOL and other credits to their tax liability during times of low prices — an unintended consequence of not modeling the impact of SB 21 in low-price scenarios. The Senate version of HB 247 would not change the 35 percent NOL credit for North Slope companies. By eliminating refundable credits from the Cook Inlet basin, the only refundable credit available to companies in the producing areas of the state would be the North Slope NOL for small producers. Both bills would limit companies to $70 million of refundable, or cashable, credits per year. The per company limit has swung in the many versions of credit legislation from a low of $25 million in the administration’s tax credit proposal to as high as $200 million in House Resources. The Senate HB 247 complicates the cap slightly by allowing companies to receive full payment for the first $35 million of applied credits; the state would pay the second $35 million installment at 75 percent of face value unless the company chooses to carry the second half of its credits to a future year. Current law has no per company limit for refundable credits. Both bills also complicate the 20 percent Gross Value Reduction credit that is applicable to oil produced from new wells. They end the deductible GVR credit seven years after first production from a new well or after three years — consecutive or not — of an Alaska North Slope crude price of at least $70 per barrel. “New oil” is currently eligible for the GVR indefinitely, which the governor’s bill did not address. Numerous committee versions of tax credit legislation jumped between five-year and 10-year GVR limits. Credit confidentiality The House version of HB 247 would allow the Revenue Department to disclose which companies receive refundable credits and the amount they are reimbursed. The Senate version would allow the department to annually report how much the state spent reimbursing each type of credit, but the names of the companies receiving the credits would be kept confidential. A floor amendment by Sen. Bill Wielechowski, D-Anchorage, to change the Senate bill to mirror House language was voted down. Republican Sens. Peter Micciche and Bill Stoltze broke from Majority ranks on that vote and supported the amendment. Currently law limits the department to aggregating the total annual credit amounts paid by the basin in which they were earned. Industry has said the companies receiving credits needs to remain confidential to protect private tax information. House and Senate Minority caucus members have rebutted that accepting the credits are optional, and therefore companies can choose whether or not they want to accept the subsidy or keep the information confidential.  

Stalemate between state, producers continues over Prudhoe plan

Simply put, the State of Alaska wants information the big three producers are not willing to hand over about potential North Slope natural gas sales. Alaska Division of Oil and Gas Director Corri Feige sent a letter to BP Alaska management May 12 reiterating that the 2016 Plan of Development for the Prudhoe Bay will be considered incomplete until the company shares “specific information” regarding its efforts to market North Slope gas in preparation for a gasline project. BP operates Prudhoe Bay on behalf of ConocoPhillips and ExxonMobil, the field’s other primary working interest owner companies. The May 12 letter is the latest correspondence in a back-and-forth between the producers and the state that dates back to early in the year. In January, now-retired Department of Natural Resources Commissioner Mark Myers wrote the first letter to BP on the issue stating the department, which houses the Division of Oil and Gas, would be requesting new technical and marketing information related to prospective “major gas sales” in future unit plans of development. Similar letters were sent to each oil and gas unit operator across Alaska with the aim of improving the state’s knowledge bank regarding how it can help get the currently stranded gas resources to in-state or export markets, according to DNR officials. BP firmed up its position 10 days earlier in a May 2 letter to the division contending the new Plan of Development “requirement is outside the scope of current regulations and constitutes impermissible rulemaking,” BP Alaska Reservoir Manager Scott Digert. The division must go through the formal public regulatory process to appropriately change what is required in unit Plan of Development, Digert added. “In order to adequately evaluate how the (Prudhoe Bay Plan of Development) meets the requirements of (state regulations) and other law, the division needs specific information regarding past and on-going efforts to market gas in both the local and non-local markets,” Feige wrote in the May 12 letter. “To the extent it is contemplated at this time, the division also needs specific commitments and timelines regarding how gas will be marketed in the future. The division acknowledges the various objections raised by BP and ConocoPhillips regard the division’s requests and, again, respectfully disagrees.” The state has a 25 percent share in the $45 billion-plus natural gas export effort known as the Alaska LNG Project with BP, ConocoPhillips and ExxonMobil. Roughly three-quarters of the gas reserves to feed the AK LNG Project would come from Prudhoe Bay, and the prodigious oil and gas field would undoubtedly be the main driver behind any major North Slope gas sales. BP’s 2016 Prudhoe Bay Unit Plan of Development submitted March 31 focused on immediate plans to recover oil from the field and contained only a couple paragraphs about its ongoing efforts to support a gas project. It told the division that each working interest owner company would have to submit its own gas marketing information to avoid anti-trust issues among the potentially competing parties. The current Prudhoe Bay Plan of Development expires June 30, according to the division. ConocoPhillips responded to the April 11 letter from Feige on May 4, asserting its support of BP’s position and offering to meet with the Division of Oil and Gas about the information requested. ExxonMobil has not responded to the division, a fact noted in Feige’s May 12 letter. An ExxonMobil Alaska spokesperson has told the Journal the company would defer to BP as the unit operator on the issue. Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Delegation asks Kerry for transboundary review

Alaska’s congressional delegation responded Thursday to continued concerns from Southeast Alaskans about Canadian mine plans by asking Secretary of State John Kerry to look into whether environmental practices across the border are worthy of attention under a bilateral treaty. Rep. Don Young and Sens. Lisa Murkowski and Dan Sullivan sent a letter to Kerry May 12 requesting the State Department to question Canadian officials about the impact active and proposed hard rock mines in British Columbia and the Yukon could have on salmon in several large “transboundary” rivers. “Like most Alaskans, we strongly support responsible mining, including mines in Southeast Alaska, but Alaskans need to have every confidence that mining activity in Canada is carried out just as safely as it is in our state,” the delegation wrote. “Yet, today, that confidence does not exist. Proposed mining development in the Stikine, Taku River, and Unuk watersheds has raised concerns among commercial and recreational fishermen, tourism interests, and Alaska Native communities regarding water quality maintenance of the transboundary rivers that flow by their homes and onto their fishing grounds.” The letter references seven active or planned mines just on the British Columbia side of the border from Southeast Alaska. It specifically notes that the long-closed underground Tulsequah Chief metal mine in the Taku drainage northeast of Juneau has been leaking acidic wastewater into the river for many years. Late last year, Canadian government officials finalized efforts to reduce the leakage but did not require the mine’s water treatment facility be restarted. There have also been proposals to reopen the Tulsequah Chief project. In November, Gov. Bill Walker and British Columbia Premier Christy Clark signed a non-binding memorandum of understanding, or MOU, to establish a Bilateral Working Group on the Protection of Transboundary Waters. The Alaska side of the group, tasked with facilitating an exchange of best practices, marine safety and joint visitor industry promotion among other things, is led by Lt. Gov. Byron Mallott. The delegation did not go as far as to ask for action by the International Joint Commission, or IJC, which was established in 1909 to resolve disputes over how actions in one country could impact watersheds shared by both. It did, however, urge Kerry to “utilize all measures at your disposal to address this issue at the international level” and decide if the “IJC is a suitable venue to determine whether Canadian mines are following ‘best practices’” for wastewater and mine tailings treatment. Additionally, it asked for a more formal consultation process with state agencies, tribes and Alaska Native corporations during Canadian mine permit reviews. While numerous Alaska environmental, commercial fishing and Alaska Native groups have called IJC involvement, the commission can only be spurred by a formal call from either the State Department or Canada’s Global Affairs Department. Those groups lauded the delegation in formal statements reacting to the letter. “This powerful statement underscores that Alaskans, regardless of political party, want Secretary Kerry to address (British Columbia) mining with Canadian officials so that clean water and healthy salmon runs will support our economy for generations to come,” Salmon Beyond Borders director Heather Hardcastle said. Also highlighted in the letter is a British Columbia Auditor General report released earlier this month that is highly critical of the province's oversight of mining activity. British Columbia Minister of Energy and Mines Bill Bennett has said in interviews with the Journal and the Juneau Empire that the issues are not with the province’s environmental regulations and enforcement, but rather with better communicating with Alaskans how thoroughly British Columbia monitors its mines. The province has taken significant heat for the Mount Polley mine tailings dam failure in 2014, which a government investigation concluded was caused by design flaws. Elwood Brehmer can be reached at [email protected]

Producers reject state demand for details on gas sales

The major North Slope producers and state regulators have considerable differences of opinion regarding what information the state can demand in oilfield development plans. BP sent a letter to the Division of Oil and Gas May 2 contending that its Prudhoe Bay Plan of Development for 2016 satisfies the requirements in the 1977 Prudhoe Bay Unit Agreement and all state regulations regarding unit development plans. The company did not provide the detailed technical and marketing information about potential “major gas sales” — a gasline project — that Oil and Gas Director Corri Feige wrote in an April 11 letter that the division would need to approve the plan. “The division’s (April 11) letter seeks extraordinary additional information concerning ‘the timing and type of activities that will be conducted to prepare for major gas sales,’” BP Alaska Reservoir Manager Scott Digert wrote. “These new requirements asserted by the division are contrary to the terms of the (Prudhoe Bay Unit Agreement) as well as the division’s regulations and the division’s own interpretation of its regulations over many decades.” ConocoPhillips Prudhoe Area Manager Jon Schultz wrote to the division May 4 that the company supports BP’s May 2 letter. BP is the operating company for Prudhoe Bay; ConocoPhillips and ExxonMobil are working interest owners in Prudhoe. Schultz wrote that the company proposes to meet and discuss the requests to “avoid potential confusion and miscommunication between ConocoPhillips and the division, which could conceivably impact other confidential discussions between ConocoPhillips and the DNR and give rise to other issues.” The ConocoPhillips letter concludes, “At this point, our goal is to understand the context, intent and purpose of the division’s request.” In a statement, the Division of Oil and Gas said it “appreciates the companies’ responses and is review all of the data and information that has been provided.” BP’s March 31 development plan told the division the company could not speak about efforts made to market Prudhoe natural gas by the other working interest owners. Prudhoe Bay and Point Thomson, which is operated by ExxonMobil, are the fields from which the proposed $45 billion-plus Alaska LNG Project would draw natural gas. The companies and the division use the generic term “major gas sales,” referring to any potential gasline project. The division forwarded the BP and ConocoPhillips letters to the Journal after a records request for all responses to the April 11 letter. ExxonMobil appears not to have responded to the division. ExxonMobil spokeswoman Kim Jordan said the company would defer all questions on the issue to BP as the Prudhoe unit operator. Now-retired DNR Commissioner Mark Myers wrote letters in January to all oil and gas unit operators in the state notifying them that the department would be asking for new information in future development plans. When a brief general reference to BP’s work on major gas sales in the Prudhoe Bay plan did not suffice, Feige responded with the more specific April 11 request. She said in an interview that the division expected the new information to be “pretty broad-brush responses” to help the state establish baseline knowledge about how the operational transition from oil production to major gas sales from the Slope fields would work. When asked for his input on the issue a spokeswoman for Gov. Bill Walker said it would not be appropriate for him to comment on the apparent impasse because it is a regulatory issue. Unit operators typically must submit development plans 90 days prior to the annual plan expiration date. The 2015 Prudhoe Bay plan expires June 30. Development plan years start and end based on when the unit in question was formed and thus do not align with the calendar year. Elwood Brehmer can be reached at [email protected]

Bank backing Anchorage LIO warns Legislature to stay put

An attorney for the bank that financed the Anchorage Legislative Information Office building made it clear in a May 10 letter that the Legislature will not walk away from the building without once again going to court over the matter. Jacksonville, Fla.-based EverBank wrote through its local legal counsel Robert Hume of Landye Bennett Blumstein LLP that it will sue the state for violating the subordination, non-disturbance and attornment agreement signed by an internal attorney for the Legislature, Rep. Mike Hawker and the bank in December 2014, just after the LIO construction project was completed. Mark Pfeffer, managing partner of the building owner group 716 West Fourth Avenue LLC, also signed the agreement, or SNDA. Hawker chaired the Legislative Council at the time. The bank contends the SNDA is its contract with the Legislative Affairs Agency that binds the agency to its obligations associated with the building regardless of extenuating circumstances. EverBank made its $28.6 million loan to 716 based on the assurance that the Legislative Affairs Agency would honor the 10-year lease it signed to rent the Downtown Anchorage office space. It would not have made the loan if the agency had not entered into the SNDA, according to the letter. The Legislative Affairs Agency handles business and legal matters for the Legislature. With a year-plus of the lease paid, EverBank estimates it would seek $27.5 million from the state. “In addition, if EverBank is required to institute an action to recover damages from the state, under the SNDA EverBank is entitled to recover its litigation costs,” the letter states. On May 2, the Legislative Council voted to negotiate a purchase of Wells Fargo’s Midtown Anchorage office building for up to $12.5 million on the grounds that Gov. Bill Walker said he would veto a $32.5 million purchase of the Anchorage LIO that was included in the state capital budget. The amended capital budget released May 11 included $12.5 million for the Wells Fargo building and removed the funding for the LIO. Walker said it is inappropriate for the Legislature to spend millions of dollars on an office building while the state is cutting services to reconcile its $4 billion budget deficit. “EverBank demands that the (Legislative Affairs Agency) reaffirm and establish that the tenant lease is in full force and effect, valid and binding on the state, and cease any and all efforts to invalidate the tenant lease, vacate the property, or secure alternate lease premises,” Hume wrote. “This is a serious matter,” Hume concluded. “Please give it immediate attention.” The Anchorage Assembly also weighed in on the matter May 10, passing a resolution urging the Legislature not to relocate its Anchorage offices outside of downtown because the move would conflict with the city’s land use plan, and by extension, could potentially violate state law requiring agencies to abide by local planning and zoning ordinances. Legislators first took action to move out of the LIO in December after bowing to public scrutiny over the $3.3 million per year lease to occupy the offices that were custom-built for the Legislature. At that time, the Legislative Council passed a motion to move to the nearby state-owned Atwood Building unless a cost-competitive solution to stay could be found. After several months of wrangling, the cost-competitive solution appeared to be the purchase of the building — approved at a March 31 council meeting — which would also satisfy EverBank’s needs by allowing 716 to repay its debt. As is common practice for large construction projects, EverBank’s loan refinanced the short-term construction loan 716 secured for the $44.5 million project from Wells Fargo and Northrim Bank. 716 spokeswoman Amy Slinker referenced a previous letter from the Alaska Bankers Association in a formal statement. The letter generally said leaving the LIO and breaking the lease would put the State of Alaska’s trustworthiness in jeopardy in the eyes of the financial industry. “EverBank describes this as a ‘serious matter.’ If the state breached an agreement with a substantial financial institution, it would be hard to quarrel with EverBank’s characterization given the consequences that would follow. We trust that the state will review this matter with the high level of care and caution it warrants,” Slinker wrote. “A review of the EverBank letter makes it clear that the comments by the Alaska Bankers Association would no longer be hypothetical. A breach by the state likely would trigger a reassessment by lenders of the state’s credit risk and an increase in interest rates for state projects. The long-term cost to the state could dwarf the financial issues associated with the LIO.” EverBank’s May 10 letter cites a section of the SNDA that states the Legislature has no “defense against rental due or to become due under the terms of the lease.” The bank also argues that even though the lease between the Legislature and 716 was ruled invalid in state Superior Court in March because the council violated state procurement code in obtaining the lease, the SNDA still obligates the state to make EverBank whole. “If the tenant lease is invalid, as ruled in the McKay order, then each of the express representations made by the LAA to EverBank described above are and were false,” Hume wrote. 716 and Legislative Affairs filed motions requesting Judge Patrick McKay reconsider his ruling. If he does not and the lease is once again deemed invalid, then the SNDA was signed under false pretense and the Legislature is exposed to EverBank, according to the letter. Pfeffer has also said 716 would sue the Legislature if it walks away from the building. In its motion for reconsideration filed May 6, the Legislative Affairs Agency argues that if the lease is deemed invalid, the court would also need to consider whether the Legislature is entitled to get back some or all of the $7.5 million in tenant improvements it agreed to pay as part of the deal the Legislative Council negotiated with 716 in 2013. Elwood Brehmer can be reached at [email protected]

Seventh rewrite of tax credit bill gets hearing in House

The House Rules Committee met May 10 on the hope that the seventh version of oil and gas tax credit reform would be the compromise numerous other committees and the administration were unable to reach. The latest iteration of House Bill 247 cuts the credit program just a little deeper than the previous two versions tested by the Rules Committee over the past three weeks. It ends the refundable credit program to new entrants to the Cook Inlet basin immediately; however, companies with oil or natural gas production in the Inlet this year would be eligible for capital expenditure and net operating loss credits that would be completely phased out by the end of 2018. Drastically cutting the oil and gas tax credit program that has become the state’s third largest budget line item is a foundational piece of the administration’s New Sustainable Alaska Plan to solve the $4 billion budget deficit by fiscal year 2019. House Rules chair Rep. Craig Johnson, R-Anchorage, said he believes the bill “strikes a balance” between reducing the state’s immediate expenses and cutting credits and increasing taxes on the industry to the point of deterring future business. “What we don’t want to do is trim (credits) back so bad that we’re not open for business any longer,” Johnson said. Tax Division Director Ken Alper characterized it as “a $300 million bill” in combined annual savings and increased revenue once its changes are fully implemented by fiscal year 2020. For North Slope operators, the existing refundable 35 percent Net Operating Loss credit that has garnered much attention with oil at low prices would be limited to very small producers, those with less than 15,000 barrels of production per day, and companies with current plans to explore or develop projects on the Slope. That select group of companies could receive the NOL credit through 2019, at which point it would be eliminated. After 2019, all companies would adhere to the more traditional method of deducting one year’s operating losses against future tax liabilities. Previous Rules Committee versions of HB 247 allowed companies with up to 20,000 barrels per day to continue to get the refundable NOL credit before it was phased out. Large producers, those with more than 50,000 barrels per day, must currently deduct operating losses incurred at times of low oil prices or high investment, or both, against future tax liabilities. HB 247 would eventually implement that mechanism on all companies on the Slope. Ending the refundable NOL credit would establish a true tax “floor” by not allowing deductions to reduce a company’s tax obligation below the 4 percent minimum production tax. The Department of Revenue estimates a 4 percent minimum production tax could raise up to $100 million per year in tax revenue once the NOL is fully eliminated. Legislators on both sides of the debate have conceded the impact of refundable NOL credits on the minimum tax during low oil price periods — such as now — was not considered while the industry-supported oil tax reform known as Senate Bill 21 was vetted and passed in 2013. At that time oil prices were consistently near $100 per barrel. Janak Mayer, chairman of the Legislature’s consultant firm Enalytica, testified May 10 that the NOL credit being refundable as cash is “somewhat unique” among oil and gas regimes. In broader terms, Mayer said the latest HB 247 is a major improvement over the administration’s credit reform package because it is much less sudden. “Crucially, the bill holds the existing credit system in place until the end of the year,” he said. “That’s important because numerous companies have entered into solid contracts from now until the end of the year for work programs in part for drilling and other capital work premised on the basis of receiving these credits.” Regardless of the look of the final legislation, in fiscal year 2017 the State of Alaska will still have to pay upwards of $775 million of refundable credits that companies have already earned. Credits for exploration in “Middle Earth” Alaska— areas of the state other than Cook Inlet or the North Slope — would be maintained. Alaska Oil and Gas Association President and CEO Kara Moriarty testified at a May 11 Rules meeting that reducing incentives and raising taxes on the industry that supports thousands of jobs and a vast majority of the state budget at a time when the industry is struggling with low oil prices will do nothing to benefit the future of the state. “We recognize that many of you are looking for ways to fill the state’s budget cap and see increasing taxes on the oil industry as part of the solution,” Moriarty said to the committee. “However, to be completely candid, the (bill) in question will result in disastrous long-term economic consequences to our state that will far outweigh the temporary and modest short-term gains.” She noted that the royalty revenue the state would lose if North Slope production declines at the rate projected by the Revenue Department — with no tax change —would eventually negate much of the savings the state would see as a result of the HB 247. Reversing the production decline curve, as has been done in fiscal year 2016, requires stable, not reactionary policies, Moriarty said. “It is simply a mathematical calculation. Numbers dictate investment, and a bill like this makes the numbers worse. End of story,” she said. The earlier Rules bills also set an $85 million per company per year cap on refundable credits. The latest bill lowered the cap to $75 million. The per-company refundable limit has varied widely as the legislation has evolved through the committee process. Gov. Bill Walker’s credit bill introduced at the start of the session set a $25 million cap; House Resources put it at $200 million; House Finance tried $100 million; Senate Resources first floated the $85 million cap that was adopted by House Rules, which has now dropped it to $75 million. A 10-year limit on the 20 percent Gross Value Reduction, or GVR, credit applied to oil produced from new fields has been in each Rules Committee substitute. Current tax law allows companies producing oil from new fields to use the GVR to reduce the wellhead value of that oil by 20 percent forever, which in turn lowers the taxable value of that oil. The administration’s bill did not address the GVR, but other committees ended it after five years of production, which, according to Mayer, could strain the viability of many projects and would essentially be the same as eliminating it altogether. Mayer said the 10-year term limit on the GVR is a significant improvement over the five-year expiration, but could still impact the financial viability of some developments. Mayer said elimination of the GVR could wipe out the economic value of a project at $60 per barrel, and that eliminating NOL credit refunds for developments would increase the need for private capital by more than 50 percent and require an increase in price of $10 per barrel to generate an attractive rate of return. Elwood Brehmer can be reached at [email protected]

AOGA at 50: A half-century of discoveries, and déjà vu

A select group of people has had the opportunity to watch Alaska grow along with one of its trademark industries from the inside out. Marilyn Crockett is one of those people. As a former leader of the Alaska Oil and Gas Association, she, and the others that have held that position, had the unique task of representing a diverse group of companies — including some of the largest businesses in the world — as one. AOGA will mark its 50th anniversary May 25 with a special daylong event at the Dena’ina Civic and Convention Center in Anchorage. Crockett “went to work pounding a typewriter” for AOGA as a 17-year-old secretary when it was still the Alaska Division of the Western Oil and Gas Association, she said. She retired as executive director just four years ago after holding nearly every position in the organization. “I’m not going to lie; I needed a job and that was one of the interviews that I got. I stayed through all the years because it was a fascinating place to work because I got to work for all the oil and gas companies,” she recalled. “It was fascinating to be in the trade association and watch all the different dynamics of the different companies, whether they were producers, refiners or explorers.” The name change came a few years later. AOGA’s membership has continued to reflect the industry in the state. Current President and CEO Kara Moriarty said the association had upward of 40 members in the 1980s and 17 when she was hired about a decade ago. AOGA currently has 10 member companies: seven producers, two refineries and Alyeska Pipeline Service Co., which operates the Trans-Alaska Pipeline System. Crockett was hired by Bill Hopkins, who had taken leadership of the association not long after being hired himself in January 1969 and was responsible for public relations duties. He was hired by Bill Bishop, a former Richfield Oil Corp. geologist that helped discover the Swanson River oilfield on the Kenai Peninsula, Alaska’s first modern-day oil and gas field. “Those were pretty rocking times,” Hopkins said. The history-altering discovery of Prudhoe Bay had been made a year prior and the budget-altering first North Slope lease sale that would net the state more than $900 million on Sept. 10, 1969, was yet to come. (That equates to a $5.8 billion lease sale for about 412,000 acres in today’s dollars.) Hopkins called it “Prudhoe mania.” “All of a sudden everyone’s speaking in terms of billions,” he said. To the south, the Cook Inlet and Kenai Peninsula oil and gas fields were growing and the industry and Alaskans were learning how to get along. Before joining the association Hopkins worked as the Southcentral liaison for Gov. Bill Egan. The job acquainted him with the industry managers and also schooled him in the residents’ concerns about local hire and environmental issues, making him a well-suited mediator between the two. One of the first messages he had to relay was that trash could not be tossed over the side of the new platforms in Cook Inlet. Commercial salmon fishermen complained about catching pallets and empty concrete bags in their nets. “To the guys on the platforms, Cook Inlet just looked like muddy water that came in on the high tide and went out on the low tide,” Hopkins explained. Environmental practices in the oil and gas industry have certainly changed; Alaska is a model for environmental stewardship and the best practices developed by North Slope companies have been adopted by other industries and other oil and gas regions, Crockett noted. However, other issues haven’t evolved much. “Prudhoe came along at a time when already the public and in particular the politicized portion of the public saw the oil industry as all money and no people,” Hopkins said. “(The companies) were generating large revenues to the state and the more populous-thinking folks said, ‘Well why don’t we get 90 percent and they only get 10 percent? It’s our oil,’ kind of forgetting that there’s a contract stating how much of the oil was whose.” Though a registered lobbyist, the stiff competition between companies meant Hopkins’ role was at first was more that of a messenger than a representative for the industry as a whole. Companies that were targets for increased taxation or regulation didn’t want a third party, or worse yet their competitors, to speak on their behalf, he said. “I acted a lot as a referee, but mostly as an information channel,” to assure the companies weren’t, “being played against each other by the hammerheads in the Legislature,” he quipped. When U.S. Vice President Spiro Agnew cast the deciding vote in the Senate to pass the Trans-Alaska Pipeline Authorization Act on July 17, 1973, Alaskans were ready to get to work on the project that would reroute the history of their state. “I can remember sitting in my office just after TAPS was authorized and seeing who I knew were construction workers coming down the hall because they saw our sign on the building and thought we were the hiring hall for TAPS and we’d have to send them on their way,” Crockett said. Since Prudhoe began production in 1977, one of AOGA’s biggest missions has been to educate new Alaskans about the reason they don’t pay personal taxes for the services they receive and actually get a check each year from their government, she said. The state income tax was repealed in 1980 as the oil boom began. Crockett is particularly proud of the economic impact studies AOGA has led that illustrate the importance of an industry that is often out-of-sight and out-of-mind to the economic health of the state. She said the association has done a “stellar job” educating people about the role the industry that even in today’s tough times supports more than 12,000 well-paying jobs and has historically accounted for nearly 90 percent of state revenue. Hopkins, who retired from AOGA in 1993, said he still gets a pleasant reminder of his time in Alaska now and then even though he has since moved to Idaho. “Every time I go into my walk-in closet I’ve got a helmet up there — a white helmet with my name on it for the 10th anniversary of the operation of the trans-Alaska Pipeline — and every time I see that thing it kind of gives me a warm feeling that I was just lucky to be a witness, if not a great mover and shaker, of the whole thing,” he said. “I was quite peripheral but I was right there watching the people that were really doing it.” Crockett referred to the current debate over industry tax credits that has ground progress in the Legislature to a halt for weeks as “déjà vu all over again.” Despite the challenges today, she said she still has high hopes for the industry and the state, citing the doubling of Cook Inlet oil production in recent years as an example of what can still happen in Alaska when policy matches market. “I think, largely thanks to the Legislature providing incentives for those Cook Inlet companies, we now have production back up, which I think a lot of folks thought would never happen again,” she said. Current AOGA head Moriarty concurred. “The good news is the rocks aren’t going anywhere,” she said. “But will there be policies in place from a local, state and federal level to allow companies to utilize their expertise to develop those resources?” Elwood Brehmer can be reached at [email protected]

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