Elwood Brehmer

Audit: state books off by at least $1.6B

Conflicting legal opinions have led to discrepancies in the state’s finances totaling more than $1.6 billion, according to a legislative audit that detected 91 issues with the state’s money management and reporting last year. The largest problems identified in the 2020 fiscal year Statewide Single Audit released June 3 by the Legislative Budget and Audit Committee resulted in a qualified opinion of the state’s financial statements from Legislative Auditor Kris Curtis. “State of Alaska’s General Fund rents and royalties are not reported in accordance with generally accepted accounting principles and management declined to correct the misstatements. Misstatements include an unreported General Fund prior period adjustment of $199.0 million for overstated General Fund royalty revenues of $99.8 million in (fiscal year 2018) and $99.2 million in (fiscal year 2019), and an understatement of $199.0 million due to other funds,” Curtis wrote in her Independent Auditor’s Report to committee members dated Feb. 22. The root cause was the decision by Department of Natural Resources officials to transfer mineral royalty revenues owed to the Permanent Fund to the General Fund instead, according to the audit report. Additionally, the Constitutional Budget Reserve, the state’s primary — and dwindling — savings account “is materially misstated by $1.6 billion” and Revenue Department officials have also declined to correct the error, she wrote. The alleged misstatements in the state’s financial records stem from decisions made by former Gov. Bill Walker’s administration to put more money in the General Fund at a time when state was, and still is, running significant annual deficits. Tariff settlement Former Attorney General Jahna Lindemuth wrote to Curtis in October 2018 insisting that Department of Revenue officials appropriately put oil tax revenue in the General Fund that previously would have gone to the CBR based on her recommendation. According to the 630-page audit and report, the Federal Energy Regulatory Commission in 2016 and 2018 reduced the tariff rates the Trans-Alaska Pipeline System owner companies — the North Slope oil producers — could charge for using the pipeline, thereby increasing the net production tax they owed on the oil throughput since 2010. The Revenue Department ultimately collected $201.5 million in retroactive taxes and interest when the tariffs were applied and put it in the General Fund. Prior to that, money collected from FERC decisions, which are the result of litigation, was put in the CBR as the constitutional amendment establishing the savings fund directs all settlement revenue into it. In Lindemuth’s opinion, which the Dunleavy administration has adhered to, the tariff changes resulted in a change to the net tax the producers owed and all tax revenue goes to the General Fund. Conversely, Legislative Legal Director Megan Wallace wrote in a September 2018 memo to Curtis that the revenue stemming from FERC decisions must go to the CBR because it “seems to fit within the category of ‘windfall revenue’ the framers of the CBR amendment intended to be deposited into the CBR.” Further, the tariff-related tax revenue was the outcome of federal litigation the state was a party to, and even if the state had not participated in the suit it would have eventually sought to collect it from the producers based on the terms of the settlement “and any additional revenue received by settlement or otherwise would undeniably be deposited into the CBR,” according to Wallace. Curtis has adhered to Wallace’s advice and wrote in her audit report that based on the attorney general opinion, money deposited into the CBR under the prior guidance “should be reclassified as General Fund monies, thereby reducing the amount that the General Fund must repay the Constitutional Budget Reserve Fund in the future. Legal analysis does not support the attorney general’s opinion.” The CBR currently holds just more than $1 billion and the General Fund along with a handful of other state investments total nearly $2.6 billion, according to the Revenue Department. Royalty revenue As for DNR, the audit states that administration officials under Walker asked the Legislature to reduce the amount of royalty revenue allocated to the Permanent Fund to again increase available revenue for fiscal years 2018 and 2019. While at least 25 percent of all mineral royalties collected are constitutionally mandated to the fund, in 1980 the Legislature directed 50 percent of all royalty revenue from future state leases to the Permanent Fund. “The Legislature made the reduction by omitting from the FY 18 and FY 19 annual operating budget bills a reference to (the 1980 statute). Although there was no appropriation for the post-1980 lease revenues, the governor’s Office of Management and Budget instructed DNR staff to transfer 25 percent of the post-1980 lease revenues to the (Alaska Permanent Fund). The transfer occurred without an appropriation,” the audit states. Lindemuth at the time argued that the 1980 law could not explicitly dedicate the additional revenue to the Permanent Fund and therefore the transfer did not need an appropriation to be legal. Legislative Budget and Audit chair Sen. Natasha von Imhof, R-Anchorage, said that what is often described as a “friendly lawsuit” is likely needed to resolve the diverging views with a court ruling since the Supreme Court has not dealt specifically with these matters before. “There needs to be a discussion with the Legislature, along with Megan Wallace and (Legislative) Legal to decide how we want to go forward with this,” von Imhof said in an interview. “I think we’re going to have to have the courts decide whether this money needs to go to pot A or pot B.” She noted that while the biggest practical implication of the dispute is what vote threshold needs to be cleared to spend the money is significant — the CBR requires a three-quarters supermajority vote in the Legislature and for the General Fund it is a simple majority — the state still has the money regardless. Lawmakers were considering ways to fix the issue early in 2020 before the pandemic halted court proceedings, according to von Imhof. Legislative Budget and Audit member Rep. Andy Josephson, D-Anchorage, said that the FERC-derived collections probably should go to the CBR but also questioned the importance of the distinction. “On the other hand, I don’t know as an academic point what the difference would be because we likely would’ve spent it out of the CBR because that’s what we’ve been doing,” Josephson said. His primary concern is that the differences have led to a qualified opinion of the state’s finances. “I don’t know to what extent that is a red flag to the federal government,” Josephson added. Anchorage Democrat Sen. Bill Wielechowski, who filed the suit against former Gov. Bill Walker for his partial veto of the Permanent Fund dividend appropriation in 2016, said Curtis is one of the most universally respected officials in state government, particularly for her objectivity. Wielechowski said a suit by the Legislature or someone in the public against the administration would be a way to resolve the issues, or the administration could “just do what Kris Curtis is recommending and go ahead and transfer those funds to the appropriate places.” The Supreme Court’s ruling in Wielechowski’s lawsuit that reinforced the Legislature’s ultimate appropriation authority largely set the precedent for subsequent money moves that have conflicted with statute, both by the Legislature and the state administrations. Wielechowski emphasized that having the money in the General Fund as opposed to the CBR creates a whole different political dynamic given the vote requirements. He said he was struck by the top line numbers of 94 findings of noncompliance and 41 unresolved issues that include some of the constitutional questions. The reporting issues are spread throughout agencies, including equipment rentals made outside of required bidding processes, mishandled Medicaid funds and other accounting misstatements, Wielechowski said, which require better controls in state agencies. “Those are things I’ve always paid extra attention to because that’s preventing waste; it’s preventing cronyism. You have procurement rules for a reason,” he said. Von Imhof said there is likely a “multi-pronged answer” to the seemingly high number of discrepancies and other issues in the audit. She has asked Curtis to dissect the alleged misstatements in a spreadsheet to parse out any themes or trends among them. “The large one is we seem to have a brain drain of I think seasoned, several-year employees that have left the state and we just have newer, less-experienced accountants and I just think there is some institutional knowledge that may have been lost,” von Imhof said. When asked about the audit June 7, Dunleavy said he had not yet reviewed it and couldn’t comment. Curtis wrote in an April 28 letter to Dunleavy attached to the audit that the 2020 fiscal year report included 94 findings and the 41 that were unresolved from prior years. “With your active support and encouragement, we hope to see improvement in the implementation of corrective action for these findings by the state agencies,” Curtis wrote to the governor. Josephson said he also believes a high turnover rate among state staff is a contributing factor and suggested a long-term solution would be to bring back defined benefit pension plans for state workers in an attempt to make long-term state employment more appealing. Elwood Brehmer can be reached at [email protected]

Gov: ‘No other choice’ but to fix budget, PFD this year

Gov. Mike Dunleavy insists he will do what it takes this year to solve the state’s fiscal dilemma that has led to a nearly decade-long run of budget deficits. That starts with legislators agreeing to start splitting the roughly $3 billion in annual Permanent Fund revenue evenly between the dividend and other government expenses now, which would result in roughly $2,300 PFDs, before his compromise plan to put such a “50-50” fund earnings split into the Alaska Constitution is acted on, the governor said during a June 7 phone conversation with the Journal. “I think it would be a tremendous step forward if they were talking about a 50-50 because that’s the mindset that I think people need to get around. When I talk to the people of Alaska, what they’ve said to me is, they don’t think that it’s fair for the government to take more out of the Permanent Fund dividend than what they get,” Dunleavy said. He also acknowledged there is discussion among lawmakers of a smaller, negotiated dividend amount as has been done in recent years to limit damage to the state’s dwindling savings and avoid overdrawing the Permanent Fund Earnings Reserve Account. The Senate Finance Committee approved an operating budget that would fund PFDs in the $1,000 per person range at a cost of $674.9 million from the General Fund. The $2,300 per person PFDs adopted — almost literally at the last minute — by the Senate during floor debate on the budget would cost roughly $1.5 billion and result in what many legislators fear would be a precedent-setting overdraw of the Permanent Fund. Another stalemate in the Legislature over the size of the PFD has left the fiscal year 2022 state budget unresolved into June, again leading to the prospect of layoff notices for state workers and bringing on the threat of a July 1 government shutdown. Some legislators feel the result will be a truce over dividends of about $1,000 to narrowly avoid a shutdown, as has happened in years past, but the political dynamics aren’t all the same. More legislators who, like Dunleavy, previously demanded dividends according to the formula in statute have initially backed the 50-50 concept, potentially making larger PFDs more likely this year than in the past. Dunleavy said he has offered any resources his administration can provide legislators to reach a resolution on the budget, noting he is back in Juneau to talk with them, but he is not injecting himself into their negotiations. He feels a compromise can be reached soon. “We’re looking at next week,” Dunleavy said June 7. “We have to prepare for the potential of layoffs on July 1; I am still very optimistic that is not going to occur. I think you’re going to see movement this week into next week.” At its core, the Permanent Fund amendment formally known as Senate Joint Resolution 6 would put the 5 percent of market value, or POMV, annual draw on the Permanent Fund currently in law into the Constitution along with the 50-50 split of the draw. Doing so would prevent future overdraws from the Fund that could erode its long-term value, but the governor’s plan also calls for a one-time $3 billion “bridge” transfer from the Earnings Reserve to the Constitutional Budget Reserve in separate legislation. The overdraw — which would be the second totaling $4.5 billion if both the Senate’s PFD plan and SJR6 are approved — is necessary to provide the state with a couple years of reserves while ways to close the rest of the budget deficit are hashed out, according to Dunleavy. (Editor's note: Office of Management and Budget Director Neil Steininger said after publication of this story that the adminsitration is requesting $3 billion from the Permanent Fund beyond the annual 5 percent draw. If the Senate's plan for $2,300 PFDs is ultimatley approved by the full Legislature, the governor will reduce his current request for a $3 billion transfer from the fund to the CBR, according to Steininger.) The CBR, which held nearly $14 billion several years ago, has been reduced to just more than $1 billion, which officials in both the Dunleavy and former Gov. Bill Walker’s administrations have said is near the practical minimum amount needed to manage day-to-day government cash flows and operations. Dunleavy emphasized a belief that the near-term performance of the Permanent Fund and other state investments has put Alaska in a unique position to take action now, even if it means taking more from the Fund in the near-term than its Board of Trustees and most financial advisors would recommend. Booming balance The Permanent Fund had a balance of $77.8 billion as of April 30 with $11.3 billion of realized and uncommitted income in the earnings reserve account. It has since grown to a latest unaudited value of more than $81.3 billion while it started the 2021 fiscal year last July at $65.3 billion. “The fund has made 25 percent here from the end of last (fiscal) year. Our pension obligations have closed considerably, by billions,” Dunleavy said. “If ever you want to take an opportunity to really fix something forever — you have the assistance of an Earnings Reserve that has grown by billions and billions to do it.” Many legislators, however, are entrenched in their conviction that the state should not spend beyond the 5 percent draw limit on the Fund, which some also say is too high, because the money spent today cannot provide revenue forever. Some have said continuing the current situation is even preferable to an overdraw. Based on the Permanent Fund’s historical performance, the combined $4.5 billion in addition to the POMV that Dunleavy hopes to appropriate from the Fund for this year’s PFD and the CBR transfer would generate roughly $300 million per year in annual investment income. Others remain wary of putting the PFD on the same required spending plateau as education, public safety and the Judiciary. Senate President Peter Micciche has said he has no interest in the $3 billion transfer because of the forgone revenue, though he supports putting the 50-50 PFD solution in the Constitution. The governor countered that the state has been forgoing economic opportunities brought by private investors who for years have avoided Alaska because of the ongoing and untenable fiscal situation of state government. “One just can’t view Alaska solely as the state budget,” Dunleavy said. “That’s part of the problem.” As for his embrace of the “50-50” PFD after campaigning largely on restoring use of the statutory dividend formula and issuing PFD “back payments” for prior-year amounts cut by lawmakers, the governor said he sees it as a compromise solution after his prior effort to balance the state budget was rejected. His proposed cuts and more than $440 million in vetoes in 2019 were also the primary cause for an ongoing effort to recall him from office. “I would’ve loved for the Legislature to take a serious look at expenditures and the size of the budget and as you know the first year we did and proposed significant reductions; and once again it was not something the Legislature was significantly interested in,” Dunleavy said. “Some of us have made significant movement; we just need others to make significant movement.” He has been consistent in his stance that “the people of Alaska will be the ones to decide in the end,” he added. Dunleavy has also proposed constitutional amendments that would put a strict cap on state spending and require voter approval of all new state taxes, though they have garnered less attention from legislators. Revisiting revenues While it would resolve the PFD, SJR6 would still leave an annual deficit in the hundreds of millions and the exact size of the gap is another cause for disagreement. Department of Revenue officials have told legislators in recent hearings on the 50-50 plan that when the Permanent Fund’s recent performance, improved oil prices and potential new oil production from North Slope fields under development are factored into their economic models the state’s annual deficit will be approximately $300 million by the time the $3 billion in bridge funding is nearly exhausted in fiscal year 2025. In that scenario, the state would not need a broad sales or income tax and instead could achieve fiscal neutrality and eventually small surpluses with incremental cuts and revenue measures, according to Revenue Commissioner Lucinda Mahoney. Administration officials are working on revenue measures to propose during the special session Dunleavy called for August, when he hopes to resolve the remaining budget issues if the Legislature passes some form of SJR6 before the current special session ends June 19. “We think the gap is close and with the bridge draw on the Earnings Reserve, if we keep our budget in check the growth can be managed with what we have coming out of the Permanent Fund and oil,” he said. Legislators skeptical of the positive financial outlook contend the state’s oil forecasts have routinely been proven artificially rosy and the financial markets driving the Permanent Fund’s returns are due for a correction. Leaders of the Alaska Permanent Fund Corp.’s advisory firm Callan said earlier this year that relying on the Fund’s historical return average of nearly 7 percent per year, which underpins the sustainability of the 5 percent annual draw, might be overly optimistic for the future. Rather, Callan representatives suggested a POMV draw closer to 4 percent per year could be necessary to maintain the real value of the Fund based on their long-term market outlooks. When asked about the revenue options administration officials are considering, Dunleavy said, “We will let you know in August,” later adding that “It won’t matter if the Legislature decides to add several hundred million (dollars) into the budget because then you’re just chasing revenue again.” Building support for 50-50 split Some Democrats in the Legislature also contend Dunleavy did not do enough behind the scenes to gain support for SJR6 before going public with it. They insist administration officials first asked for support of the 50-50 plan just hours before the May 12 press conference in which the governor unveiled it backed by a nearly all-Republican contingent of legislators, and that they weren’t briefed on the proposal until well after it was submitted. The requirement for supermajority votes to approve constitutional amendments in the Legislature means at least some Democrat support will be needed to pass SJR6. Dunleavy’s spokesman Jeff Turner called it a “mischaracterization” of the events in a follow-up email, noting the governor’s staff held meetings with the leaders of the four legislative caucuses prior to the briefing. “It is important to recognize that three of the four caucus leaders not only attended, but spoke during the governor’s press conference on May 12. In fact, around 20 lawmakers, a third of the entire Legislature participated in the press conference,” Turner wrote. “Keep in mind that the purpose of a press conference is to make an announcement.” Whether or not Dunleavy did enough to garner the support needed to pass SJR6 in the coming weeks as he wants — while also finishing this year’s budget — he said he’s committed to seeing it through before another election cycle in 2022 could grind fiscal discussions to a halt again. “We’ll take as much time as we need to get this entire thing taken care of this year,” Dunleavy said. There’s no other choice.” Elwood Brehmer can be reached at [email protected]

Without options in Congress, Murkowski urges lawsuit over ANWR

It took nearly four decades to get a bill opening the Arctic National Wildlife Refuge coastal plain for oil exploration to the desk of a president who would sign it, but several months after the first lease sale the state’s congressional leaders are mostly relegated to the sidelines as the Biden administration has suspended the highly contentious program. When Interior Department officials announced June 1 they would be suspending the ANWR oil and gas leasing program, they were making a common bureaucratic move to review actions by the prior administration for legality’s sake. In that regard, suspending the leasing program finalized in the last months of the Trump administration is akin to Interior under Biden reviewing the environmental impact statement for ConocoPhillips’ $6 billion Willow oil project on the North Slope. However, with the Willow review Interior leaders ultimately decided to back the Trump administration’s approval of the development in lawsuits challenging its adequacy in late May court filings. For that, Rep. Don Young and Sens. Lisa Murkowski and Dan Sullivan lauded Interior Secretary Deb Haaland for supporting the oil project because of the potential jobs and revenue it could provide the state. A similar outcome is much less likely in the case of the ANWR leasing suspension, as it would also be an initial step towards making good on a campaign promise to reverse the prospect of energy exploration in the uniquely positioned refuge. And despite the rider hitched to the 2017 Tax Cut and Jobs Act by the delegation requiring Interior to develop and conduct an oil and gas leasing program in the coastal plain, there appears to be little they can do about it. Murkowski said in a lengthy statement provided by her office that she wasn’t surprised when the administration suspended the lease program but she was “incredibly disappointed” Interior did so to leases that have already been issued and patented. She also asked for help from state officials. “I don’t understand how Interior can take that position. Through the natural resources title that I authored in the Tax Cut and Jobs Act of 2017, Congress mandated in statute the establishment of an oil and gas leasing program in the non-wilderness coastal plain of ANWR. The department doesn’t get to pick and choose which laws to follow,” Murkowski said in the statement. “Since the federal land manager is choosing not to follow the law, unfortunately the only option to uphold Congress’ explicit direction is to use the court system. Consequently, I urge the State of Alaska and other leaseholders to sue the Biden administration to implement the law.” When asked about options to counter the administrative move, Alaska Oil and Gas Association representatives declined to comment, citing an ongoing lawsuit the trade group is a party to. AOGA intervened as a defendant in a suit by national environmental groups challenging the Trump administration’s environmental considerations in the ANWR leasing plan. Nate Adams, a spokesman for Sullivan, wrote via email that the senator is considering “all options at his disposal to counter the Biden administration’s misguided decision to suspend leases in the (coastal plain).” A second lease sale in which at least 400,000 acres are offered must be held before December 2027 to comply with the schedule laid out in the tax bill. An Interior spokesman wrote in response to questions about complying with the 2017 tax law that the department had nothing more to offer beyond the June 1 press statement announcing it would “initiate a comprehensive environmental analysis to review the potential impacts of the program and to address legal deficiencies in the current leasing program’s environmental review under (the National Environmental Policy Act).” The Alaska Industrial Development and Export Authority dominated bidding in the Jan. 6 lease sale, collecting nine of the 11 awarded lease tracts. Small firms won the two other leases and no major oil companies bid in the first ANWR sale. Many industry insiders now believe the 23 million-acre National Petroleum Reserve-Alaska covering much of the western North Slope, and where Willow is located, is a much more attractive development region for its geology and political considerations. The state-owned development bank also intervened as in the lawsuit to defend the leasing program and attorneys representing AIDEA from the national firm Holland and Hart roundly denied all the claims in the suit in their initial answer brief. Elwood Brehmer can be reached at [email protected]

Annual budget impasse over PFD drags into June

Gov. Mike Dunleavy wants legislators to be settling the future of the Permanent Fund dividend for decades to come but first they have to decide what it will be this year. Visible progress on the 2022 fiscal year budget has stalled as lawmakers again appear stuck in negotiations on the PFD. A June 1 budget conference committee meeting initially indicated as likely by committee chair Rep. Neal Foster, D-Nome, never materialized and Rep. Steve Thompson accused Senate leadership of dragging the process out during a May 26 floor speech. Fellow Fairbanks Republican Rep. Bart LeBon replaced Thompson as the House Republican caucus’ representation on the budget committee after it became clear finishing work on the budget would conflict with prior commitments Thompson made for early June. Thompson said he had gotten assurances from legislative leaders that the budget would be settled well before June but that did not happen. “I hope that it has a fast resolution but I don’t see how it’s going to,” he said of the conference committee’s work. Senate Republican leaders have mostly stayed quiet during the latest round of negotiations since passing the budget May 19. Senate President Peter Micciche, R-Soldotna, previously stressed a desire to be done with the budget before June. In prior years an unresolved budget on June 1 for the next fiscal year starting July 1 meant the administration would send out “pink slip” layoff notifications to state employees, but the Dunleavy administration has said the notices aren’t required until later in the month, per union agreements. At about $4.2 billion in unrestricted general fund spending from the House and just more than $4.4 billion from the Senate without PFD appropriations, the Legislature’s budgets are very close to the administration’s nearly $4.4 billion proposal for agency operations and other general expenses such as debt service, which historically would’ve led to a quick resolution. However, the House kept the PFD out of the budget and the Senate approved an additional $1.5 billion draw from the Permanent Fund Earnings Reserve Account to pay for PFDs of approximately $2,300 per Alaskan, in line with Dunleavy’s long-term plan for a “50-50 split” of the annual 5 percent of market value, or POMV, draw between the PFD and government spending. The Senate’s PFD vote came late in the process after many hours of floor debate on the budget and split Republican leadership in the nonbinding caucus. Micciche co-sponsored the PFD budget amendment, while Finance co-chairs Reps. Click Bishop and Bert Stedman — the caucus’ conference negotiators — voted against the larger dividend appropriation. Stedman has been particularly steadfast in his opposition to ad hoc draws from the Permanent Fund in his years as the operating budget chair. The Senate Finance version of the budget funded PFDs in the $1,000 range, or a $674.9 million appropriation. Conference member and House Finance co-chair Rep. Kelly Merrick, R-Eagle River, also submitted legislation late in the session to fund the PFD directly with 30 percent of the state’s annual mineral royalty income. Merrick’s plan in House Bill 202 would eliminate the state’s annual deficit based on current revenue projections but would do so via appropriations of $333 million and rising for PFDs in the $500 range, a fiscally expedient but politically challenged approach to the situation. Dunleavy called lawmakers into a special session May 20 immediately after the Senate passed its version of the budget to finish off the 2022 work and approve his 50-50 split constitutional amendment. Legislators, on the other hand, have given no indication they will take up the big issues this month. Instead, that is more likely to happen — if at all — during the second special session Dunleavy called for August when the governor wants lawmakers to settle on a revenue measures and future levels of spending cuts. Revenue Commissioner Lucinda Mahoney told Senators during a May 27 hearing on Dunleavy’s fiscal plan that administration officials do not believe a broad-based personal tax is necessary to close what they believe will be a long-term deficit of about $300 million per year based on projections for increasing oil revenue and continued strong Permanent Fund investment returns. “There is a recognition that we could have potential market disruptions; however, with the 5-year smoothing (in the POMV), we feel we should have plenty of time to react if there’s a sustained correction,” Mahoney said of a potential market downturn. The Fund returned just more than 25 percent on its investments in the first 10 months of the 2021 fiscal year and has performed far better than historical averages for the last five years. Revenue officials said they are working on ways to increase the state’s income ahead of the August special session call, which likely means oil production tax and corporate tax changes in the absence of broad personal taxes. Numerous legislators have said they believe the annual deficit would actually be closer to $1 billion under a 50-50 plan and current spending. While the PFD keeps wagging the budget dog, the conference committee members on May 27 did agree to cover ferry operations and a bunch of DOT projects with federal COVID-19 aid. The Senate’s budget was passed after much of the federal guidance for pandemic aid was published and included a broad spending plan for the money. Elwood Brehmer can be reached at [email protected]

Bank income starts 2021 where it left off in 2020

2021 is starting to look a lot like 2020 for Alaska’s banks, which is a good thing for them, at least. Alaska’s local and statewide banks reported consistently strong results again in the first quarter. First National Bank Alaska led the way with net income of more than $13.9 million during the period, a slight improvement over the $13.2 million netted to end 2020 and in line with the $14.1 million Alaska’s largest in-state bank made in the first quarter of last year, according to filings with the Federal Deposit Insurance Corp. FNBA total assets also grew by 4.9 percent in the first quarter, reaching nearly $5 billion, or a 29 percent increase in the past year. Fellow Anchorage-based statewide institution Northrim Bank reported $12.2 million in first quarter net income to FDIC officials, up from $10.1 million to end 2020 and just more than $1 million a year ago. Northrim’s quarterly profit was on the back of more than $2.3 billion in assets, which grew 10.8 percent in the quarter and have also increased by nearly 40 percent since the first quarter of 2020. Alaska’s smaller, local banks fared much the same to start the year. Denali State Bank netted $1.3 million in the first quarter on $397 million in total assets. A year ago, the Fairbanks-based community bank netted $552,000 in quarterly income on $306 million in assets, for 29 percent growth over the last 12 months. Southeast’s First Bank reported total assets of more than $715 million at the end of the first quarter for growth of nearly 23 percent since March 2020, with a first quarter net income tally of more than $2.5 million compared to $843,000 a year ago, according to FDIC filings. FNBA Chief Financial Officer Michele Schuh wrote via email that Paycheck Protection Program loans and low interest rates have continued to drive profitability across the banking sector. The Alaska Housing Finance Corp. advertised interest rates June 1 as low as 2.25 percent for a 15-year mortgage and rates for a 30-year loan as low as 2.65 percent. The low borrowing costs have fueled a boom in home sales since being implemented early last year in an attempt to mitigate the potential economic side effects of the pandemic. Northrim executives said in a conference call that the deposit growth should provide additional strength to future operations and PPP activity should provide another boost to the bank when more recent applications start to be forgiven in the second half of the year. Northrim led Alaska-based banks in PPP loans, residential mortgage activity and market share growth last year, according to bank leaders. PPP loans accounted for 26 percent of the bank’s approximately $1.5 billion total loan portfolio, according to a quarterly release. Additionally, home mortgages accounted for approximately 40 percent of Northrim’s first quarter total revenue and earnings, according to bank figures. “It’ll be a bit of a stretch to think 2021 will have the same activity from residential mortgages as 2020 even though the first quarter was strong,” Northrim Chief Financial Officer Jed Ballard said. Northrim CEO Joe Schierhorn noted the bank continues to grow its core loan and deposit portfolios alongside the growth more tied to outside forces, such as interest rates driving home-buying and mortgage refinance activity. Northrim increased its net loans by 45 percent, from just more than $1 billion to more than $1.5 billion, in the past year, and 7 percent during the first quarter. A return to more normal life post-pandemic should also encourage more traditional bank activity as federal COVID-19 aid work eventually fades, according to Schuh. “The increasing reopening of broad business activity will help fuel the Alaska economy, leading once again to increasing loan demand, which supports strong bank performance long-term,” Schuh wrote. Elwood Brehmer can be reached at [email protected]

Copper River closed again amid low counts

This year’s Copper River sockeye run is starting out a lot like last year’s, which is bad news for most everyone, except for maybe the fish that are showing up. Alaska Department of Fish and Game managers closed the famed early season drift gillnet fishery for a second consecutive opener May 31 due to poor sockeye counts at the department’s Miles Lake sonar upriver from the fishery. Just 54,154 sockeye had been counted at Miles Lake through May 31, compared to the approximately 132,000 fish needed by that date to meet the department’s in-river goal based on historical run data, according to a June 1 ADFG advisory. However, unusually late ice flows in the river prevented managers from installing all of the sonar equipment ahead of the run, meaning the counts for roughly the first week of the run are incomplete. Similarly, the May 24 fishing period — the last of three 12-hour openers so far this year — yielded 32,227 sockeye when fishermen should’ve netted approximately 56,100 fish based on historical data. Copper River drifters harvested 5,188 kings and 52,729 sockeye in the first three openings of the fishery, according to Alaska Department of Fish and Game figures. Cordova Area Management Biologist Jeremy Botz said in a brief interview that he is hopeful the late, cool spring has held many fish back from entering the river on a more traditional schedule. “The Copper’s just running really cold. Some warmer water should hopefully coincide with some increased fish passage,” Botz said. Last year’s Copper River sockeye harvest totaled just 98,300 fish for one of the worst seasons ever after fishing was shut down quickly in response to poor catches and sonar counts. This year managers expected just more than 1.3 million sockeye to return to the Copper, allowing for a commercial harvest of 672,000 fish. The 10-year average Copper River run is approximately 2.1 million sockeye. The closures also come at a time when processors were paying some of the highest prices ever for Copper River salmon. Peter Pan Seafoods announced after the second opener that it would be paying $19.60 per pound for kings and $12.60 per pound for sockeye; prices that are several fold greater than historical averages. Daily sonar counts from May 26 to 31 were consistently in the 7,000 to 8,500-sockeye range and Botz said if the run is going to improve significantly it should start showing in the counts soon. “We haven’t fished for close to 10 days so we think we’ve probably got some decent numbers of fish in the river relative to what this actual run size is,” he said June 1, adding that fishing could be allowed on “pretty short notice” if the situation improves. “We could even have an out-of-cycle fishing period,” if counts justify it, Botz said. The Copper River district is normally open Mondays and Thursdays for 12 hours each period. Elwood Brehmer can be reached at [email protected]

Interior Dept. files brief defending Willow project review

Attorneys for the Interior Department argue in a court brief filed late Wednesday that conservation and Alaska Native groups filed suits to stop ConocoPhillips’ $6 billion Willow oil project too late and the agency sufficiently accounted for the greenhouse gas emissions from the development in its environmental review. The complaints filed in federal Alaska District Court late last year violate the 1976 Naval Petroleum Reserves Production Act, which limits the time to challenge the environmental impact statement, or EIS, for a project in federal petroleum reserves to 60 days after the final EIS is published, the government contends in its court motion. The Sovereign Inupiat for a Living Arctic filed suit against the Bureau of Land Management and other Interior officials under the outgoing Trump administration in mid-November and a coalition of conservation organizations filed a similar complaint in late December. The Willow Project EIS was published in the federal Register Aug. 14, Interior’s attorneys note, adding that Judge Sharon Gleason has already exhibited a great degree of skepticism towards the plaintiffs claims on the issue. The groups argue that specific language in an amendment to the NPRPA stating the time limit applies to reviews “concerning oil and gas leasing,” meaning just least sale and land planning reviews for the National Petroleum Reserve-Alaska where Willow is located. Gleason, who is handling both cases, wrote in a Feb. 1 order denying a preliminary injunction motion to stop ConocoPhillips from opening a gravel quarry for early project construction that “Plaintiffs’ (National Environmental Policy Act) claims are likely time barred” and to that point had “not demonstrated ‘serious questions going to the merits’ with respect to their NEPA challenges.” The 9th Circuit Court of Appeals issued a preliminary injunction on appeal several weeks later, stopping ConocoPhillips’ work for the season at Willow until the merits of the case could be more closely examined. Federal attorneys also insist in the 70-page response brief that the allegation BLM officials “used the same modeling approach” when evaluating greenhouse gas emissions from Willow as was recently shot down by the 9th Circuit in a different case is not a fair comparison of the situations. Not only does the Willow EIS state that downstream, lifecycle emissions projections from foreign countries as a result of the project could not be reliably made because of a lack of important data, according to the brief, BLM officials reached a more logical conclusion regarding project emissions than Bureau of Ocean Energy Management officials did in regards to Hilcorp’s offshore Liberty oil project. “BLM’s analysis of lifecycle GHG emissions associated with the Willow project does not suffer from the flaws identified by the court in Liberty,” the brief states. “As that court explained ‘BOEM’s conclusion that not drilling will result in more carbon emissions than drilling is counterintuitive.’” As currently proposed, the Willow master development plan calls for the eventual construction of five drill sites stretching north-south over approximately 20 miles in the northeast corner of the federal petroleum reserve. ConocoPhillips also has two other nearby developments in the NPR-A but the Willow project would be several times larger than the single-drill site Greater Mooses Tooth-1 and 2 projects extending from the Alpine field. Full build-out of Willow is estimated at a cost of up to $6 billion, according to the company, with first oil during the 2025-26 winter. The project’s oil production is expected to approach 160,000 barrels per day at its peak. Overall, the project is expected to produce about 590 million barrels over 30 years. ConocoPhillips Alaska representatives have said it’s too early to tell what, if any impact the work stoppage early this year will have on the overall development schedule for Willow. The members of Alaska’s congressional delegation lauded the court filing as confirmation the Biden administration after a formal policy review would back the environmental conclusions made in favor of Willow under President Trump in a joint Thursday press call. Rep. Don Young thanked Biden and Interior Secretary Deb Haaland — a former New Mexico congresswoman and friend of Young’s — and said she called the delegation members in advance of the court filing. “This week has been a good week,” Young said, also referencing the legislation to re-open Alaska’s cruise industry Biden signed Monday. Sen. Lisa Murkowski said it was a good sign for Alaska’s economy, as Willow is expected to generate 2,000 jobs during construction and roughly $10 billion in government revenue over its production period. “It is a recognition of the value of the resource that we have within the NPR-A and the potential for jobs and revenues that we’re talking about,” Murkowski said. Both, along with Sen. Dan Sullivan, said they had been pressing administration officials — including the president on Monday — to support Willow. They emphasized in the press call that Willow was discovered and evaluated under the NPR-A land-use plan approved by the Obama-Biden administration in 2013. “Restricting the production of American energy fundamentally undermines our national security interests. We’ve been making that argument to everyone who will listen,” Sullivan said. “Some members of the Biden administration agree with that and I think that’s why we were able to gain traction on this.” ConocoPhillips Alaska leaders thanked the delegation for their advocacy in an emailed statement and said they believe the Willow EIS satisfies all legal requirements. Bridget Psarianos, an attorney with Trustees for Alaska representing the plaintiffs wrote via email that it is surprising the Biden administration would defend a process that the 9th Circuit already found to have “serious legal issues” and a project on the scale of Willow and in proximity to the Village of Nuiqsut was not contemplated when the 2013 land-use plan was approved. “The point here is the Trump administration broke multiple laws in its approval process,” Psarianos wrote. “We’d hoped this administration’s commitment to science-based decision making, environmental justice, and addressing the climate crisis would have caused them to take a closer look, rather than carry a bad decision forward to appease ConocoPhillips.” Elwood Brehmer can be reached at [email protected]

2021 Copper River fishery underway with record prices

Update: State managers have decided to close the Copper River drift fishery for the 12-hour Thursday fishing period to allow more sockeye into the river, according to an advisory issued late Tuesday. Through Tuesday, just 6,298 sockeye had been enumerated at the Miles Lake sonar site upriver from the fishery while approximately 40,000 fish should've passed the sonar so far to meet the Department of Fish and Game's inriver run goal, the advisory states. ADFG Commercial Management Biologist Jeremy Botz noted that remaining ice flows in the river have deployment of the sonar equipment on the south bank of Miles Lake, which based on historical counts means only about half of the sockeye that have moved passed the sonar site have been counted. Botz added that he believes the sockeye are moving slowly through the lower river, which has abnormally low and cold flows, but said the low counts still necessitate closing the period. He's hopeful fishing can resume on a normal schedule with the 12-hour opener scheduled for Memorial Day. "We're still somewhere in that middle ground," between a potentially late and poor run, he said. Fishermen harvested 32,727 sockeye during the Monday opener, a drastic improvement over the first two periods; however, approximatley 56,000 fish should've been harvested based on historial data for the period, according to the closure advisory. Original story: The famed Copper River salmon fishery appears to be improving after a slow start and harvesters are mostly enjoying sky-high prices for their catch. Peter Pan Seafoods announced following the second 12-hour Copper River drift gillnet opener of the year that the company would be paying $19.60 per pound for kings and $12.60 per pound for sockeye; those prices that are several fold greater than historical averages. That compares to early season ground prices in the $3 to $4 per pound range for sockeye and just more than $6 per pound for Copper River kings last year when the onset of the pandemic closed many restaurants that drive much of the demand for salmon from the early season fishery. Peter Pan Vice President Jon Hickman said in a statement that to his recollection those are the highest prices any processor has paid for Copper River salmon. Those prices were reflected in retail offerings as well. Anchorage’s 10th and M Seafoods was selling Copper River sockeye for $54.95 per pound and kings for $69.95 per pound May 25. Seattle’s renowned Pike Place Market at the same time was advertising sockeye fillets for $59.99 per pound and fresh Copper River king for $79.98 per pound. While prices in the Copper River fishery are strong, the fishing is trying to catch up. Copper River drifters harvested 5,188 kings and 52,729 sockeye in the first three openings of the fishery, according to Alaska Department of Fish and Game figures. The king catch was fairly steady with between 1,160 and 2,068 fish caught in each of the three 12-hour openers but most of the sockeye — 32,727 of them — were caught May 24. The king harvest through three periods has already nearly matched last year when 5,850 big salmon were caught and the sockeye harvest is more than halfway there as well. A very poor Copper River sockeye return last year resulted in a harvest of just 98,294 fish when recent harvests had averaged more than 1.2 million sockeye, according to ADFG records. Fishing was closed for much of June due to poor catches in the May openers and low in-river sonar sockeye counts. Last year’s Copper River sockeye run totaled just 630,000 fish based on combined escapement and harvest data. This year, the department’s forecast calls for a total run of just more than 1.3 million sockeye with an allowable harvest of approximately 672,000 fish. The 2021 Copper River king forecast of 37,000 fish, if accurate, would allow for an all-user harvest of 13,000 kings to still meet the system-wide escapement objective. Through May 24 managers had counted just 4,813 at the Miles Lake sonar just upriver from the fishery; however, ice in the lake prevented complete readings for the first few days of counts. The Copper River sockeye escapement goal range is 360,000-750,000 fish for the prolonged run. Elwood Brehmer can be reached at [email protected]

Budget conference underway; Fund gains 25% in 10 months

Official work to finish the state’s 2022 fiscal year budget has slowed and it doesn’t appear lawmakers will give Gov. Mike Dunleavy’s plan to overhaul the Permanent Fund and constitutionalize the dividend much time in the coming weeks. The House and Senate operating budgets are quite close to each other in terms of overall spending at roughly $4.2 billion and $4.4 billion in unrestricted general fund appropriations, respectively, for agency spending and other items such as debt service; the hang-up continues to be the size of this year’s PFD. In most respects the budgets for next year are close to this year and in line with what the governor proposed as well. Senate President Peter Micciche said shortly before the first budget conference committee meeting that he “absolutely” expects the Legislature to pass a compromise budget before June 1 — when state agencies are required to send out layoff notices if the budget for the next fiscal year starting July 1 has not been approved — even though lawmakers technically have the full 30-day special session to complete it. The Senate passed its version of the budget 17-3 in literally the last minute of May 19 before the regular session officially ended with money for PFDs of between $2,300 and $2,400 per eligible Alaskan this fall. Paying for dividends of that amount means “overdrawing” the Permanent Fund’s Earnings Reserve Account by approximately $1.5 billion in excess of the annual 5 percent of market value draw, or POMV, which would be just more than $3 billion for next fiscal year, according to Legislative Finance Division figures. Micciche, who co-sponsored the amendment to increase the PFD, said he sees overdrawing the Earnings Reserve this year to “plant a flag” that a 50-50 government-PFD split of the POMV is the grand compromise that can end years of deadlock over the state’s ever-tightening fiscal situation. “I’m willing to overdraw for a year to get a package across the finish line,” he told reporters. Dunleavy, who campaigned on paying dividends in accordance with the decades-old statutory formula still on the books, proposed a constitutional amendment May 12 to split the POMV evenly and fold the currently spendable Earnings Reserve Account into the corpus of the Fund to prevent future overdraws. The governor was backed by a large group of Republican legislators and Bethel Democrat Sen. Lyman Hoffman in a showing of broad support for a conceptual fiscal compromise but whether it will last after the alternatives to resolve the roughly $1 billion annual deficit the 50-50 plan are vetted remains to be seen. Micciche stressed that the Legislature probably won’t reach the fiscal finish line until August when the second special session called by Dunleavy commences. He said individual lawmakers need to talk with their constituents about the 50-50 POMV split and the mix of taxes and a spending cap that appear to be leading ways to fill the rest of the budget gap. “I hope that when we arrive in August we’ll arrive ready to vote, not to start a discussion,” he said. “I think we have a lot of work to do to get our constituents there as well.” Senators also approved a $4 billion transfer from the Earnings Reserve into the constitutionally protected corpus of the Fund, a move to prevent it from being spent reminiscent of 2019 when the whole Legislature approved a $9 billion ERA-to-corpus transfer and Dunleavy vetoed $5 billion of it. The ERA held $11.3 billion in realized, uncommitted earnings as of April 30 with another $3.9 billion in unrealized gains on invested assets. The House, on the other hand, left the PFD out of the budget in favor of addressing it in a standalone bill. Leaders in that body have been adamant against exceeding the POMV draw limit. The six-member budget conference committee has limited powers, meaning it can set individual appropriations at any amount between what the bodies have already passed — in the case of the PFD anything between $0 and $1.5 billion. Similar situations in recent years have led to PFDs in the range of $1,000 per person and all three Senate conference committee members, Republican Finance co-chairs Sens. Bert Stedman and Click Bishop and Democrat Donny Olson, voted against the PFD amendment on the Senate floor. Senate Finance approved a $674 million overall PFD appropriation in line with last year in its version of the budget, but Micciche emphasized that the budget conference members will have to consult with their respective caucuses before setting the final amount. House Finance co-chairs Reps. Neal Foster, D-Nome, and Kelly Merrick, R-Eagle River, and Fairbanks Republican Rep. Steve Thompson are the House conference members. The conference committee held a brief organizational meeting May 20 but as of this writing May 25 no additional meetings were scheduled. The Senate also rolled the capital budget into its operating budget and included general language to appropriate roughly $500 million in federal American Rescue Plan COVID-19 aid. The Senate’s capital budget would spend $264.2 million in unrestricted general funds — more than double recent years — with $38.5 million going to school repair and maintenance projects and another $113 million for transportation projects statewide. It also approves spending for more than $1.9 billion in federal money, an increase from $1.2 billion last year. Fund keeps earning While lawmakers continue to banter over whether and how to spend it, Alaska Permanent Fund Corp. managers have the Fund growing at an astounding rate. As of May 24, the Permanent Fund had an unaudited value of more than $79.9 billion, up from $65.3 billion at the start of the 2021 fiscal year last July. Permanent Fund investments have achieved a rate of return just more than 25 percent in the 2021 fiscal year, according to the April 30 APFC performance report. For comparison, the fund’s five-year return average is 11.46 percent annually and its historic return averages are in the 7 percent range. APFC Board of Trustees chair Bill Moran said the recent growth of the fund is “unprecedented” in a formal statement but cautioned against getting overly excited about it. “We must put this unparalleled growth into context and recognize that it is not sustainable,” Moran said. “Recessions are likely in our future and will have a negative impact on the fund, which will impact the state. Knowing that the state now gets more than 70 percent of its revenue from annual withdrawals from this fund, we must remain diligent in managing and understanding our portfolio risk.” The fund’s nearly $31 billion public equity, or stock, portfolio had an astounding 43.6 percent return rate through the first 10 months of the 2021 fiscal year, according to the April performance report. It was bested only by the $13.4 billion private equity and special opportunities portfolio, which had a 47.5 percent rate of return over the period. Other investment sectors had returns more in line with historical averages. Elwood Brehmer can be reached at [email protected]

U.K. explorer makes billion-barrel find along Dalton Hwy.

The leaders of a small British explorer insist they have struck an oil accumulation measured in the billions of barrels that is also conveniently located alongside the Dalton Highway. Pantheon Resources intersected two reservoirs near the bottom of its Talitha-A exploration well that, combined, likely hold roughly 1.4 billion barrels of recoverable light oil and more than 12 billion barrels of oil in place, according to Technical Director Bob Rosenthal. The promising results from the Talitha well drilled and tested last winter transforms the prospect called “Theta West” within the company into an oil project, Rosenthal said. Pantheon did the drilling approximately 10 miles from what would normally be the best location for a well targeting the Brookian Upper and Lower Basin Floor Fan formations that contain the discovery because the primary target for Talitha-A was a shallower zone known as the Shelf Margin Deltaic that the company was unable to test before spring put an end to the North Slope exploration season. “We actually drilled this well 1,500 feet down-dip from the crest and we are actually 10 miles down-dip from its location, so this trap is huge,” Rosenthal described in an interview. “We’ve drilled a huge step-out appraisal well before we drilled the crest location.” Pantheon merged with Anchorage independent explorer Great Bear Petroleum in early 2019 and the blended operating company Great Bear Pantheon is conducting the fieldwork. Rosenthal was a founding member of Great Bear, which previously explored the area about 20 miles south of Prudhoe Bay along the Dalton for years, first focusing on shale oil prospects and then shifting its focus to conventional plays after the oil market reset of 2015-16. Pantheon leaders are particularly confident in their assertions about the first test results from Talitha-A because the company is also working off of data from the nearby Pipeline State-1 well drilled in 1988 by Arco that — combined with modern 3-D seismic data — has helped give them a better sense of what the rocks in the area hold. In that sense, Talitha-A is not a true wildcat exploration well. The Basin Floor Fan complex was also identified in data from the Pipeline State well, according to Rosenthal. He said previously that even though the 10,000-foot vertical Pipeline State-1 well has a roughly 2,200-foot oil-bearing column over four reservoirs, with the technology and oil prices of the late 1980s it did not add up to a viable prospect at the time. Rosenthal said before the initial well tests that Talitha A was similarly expected to have an oil-bearing zone of roughly 2,000 feet in the wellbore of about 10,200 feet but that has since grown to approximately 3,700 feet of oil-bearing rocks, according to a company statement. CEO Jay Cheatham also said prior to drilling that he thought Theta West could hold up to 500 million barrels of recoverable oil. “We know where we have oil 10 miles down-dip from the crest (of the trap). We know that there is oil up-dip from there because, of course, oil migrates up,” Cheatham said. Industry sources who have followed the Great Bear-Pantheon work generally said it is very probable the company hit a significant oil column but the porosity and permeability of the rock formations — and the ability to easily get the oil out of them — will most likely determine the ultimate size and success of the project. Rosenthal said the company hopes to drill another well into the crest of the Basin Floor Fan trap located northwest of Talitha-A, where the rocks should have better characteristics. “We expect to have thicker reservoir and because it’s shallower, better reservoir,” he said of the crest location. Pantheon also still needs to test the Shelf Margin Deltaic that was the primary Talitha target. Cheatham said there are additional plans in the works to drill a second well at the company’s Alkaid prospect just to the north to prove up what Great Bear found when it drilled Alkaid-1 in 2015. Cheatham acknowledged that the work the company hopes to do next winter is not yet funded; however, Rosenthal noted in a conference call that the early-stage economics of the project, which benefits greatly from its location adjacent to the Haul Road, helped convince investors to fund the Talitha work last year when work was otherwise being curtailed across the Slope due to the pandemic-induced oil market collapse. At the time, the company was running economic development models with oil in the $40 to $45 per barrel range, according to Rosenthal. “Oil prices are back up in the $60s,” he said. “COVID is hopefully going to be in our rearview mirror and we’ve gone out and actually drilled the well and found a world-class resource.” Elwood Brehmer can be reached at [email protected]

Biden signs bill authorizing Alaska cruise season

It took several months of educating and vote wrangling, but President Joe Biden signed the Alaska’s congressional delegation’s legislation on May 24 to salvage the latter half of this year’s cruise ship season, in Southeast, at least. The House of Representatives broadly approved Rep. Don Young’s version of the bill allowing Alaska-bound cruise ships to bypass a required stop in Canada for the rest of this year on May 20, a week after the Senate passed nearly identical legislation from Sens. Murkowski and Sullivan. The large cruise companies that have had their Alaska operations stalled since the start of the pandemic promptly responded to the activity in Congress by resuming ticket sales for Alaska cruises and announcing their schedules for later this summer. “This is the kind of news that makes everybody happy because as much as we love our state, we love the opportunity to showcase it to those who have dreamed about coming to Alaska,” Murkowski said late May 20. “This legislative fix was a long shot, in fairness, but it has paid off.” Holland America will sail to Alaska July 25 to Oct. 2; Princess Cruises will sail July 25 to Sept. 26; and Carnival Cruise Line ships will sail July 27 to Sept. 14. Industry officials have long said they would need at least two months after getting the clearance to sail to prepare the ships and hire crews before making the first passenger runs. Cruise Lines International Association Alaska spokeswoman Lanie Downs said she expects a “steady stream” of cruise ships through the Inside Passage though it is unclear at this point exactly how frequent the cruise ship traffic will be later this summer. “I don’t think there will be any four- or five-ship days in Juneau,” Downs said, referencing peak activity in recent years. Officials at the Anchorage and Fairbanks international airports have reported that summer passenger capacity levels are likely to be near or better than 2019 levels. Industry representatives say that’s in part because of pent-up demand among travelers along with the fact that it appears airplanes will remain the only way to get to much of Alaska as long as Canada keeps its borders closed. That’s because this summer’s large ship sailings will be limited to Southeast. A provision in the order issued last fall by the Centers for Disease Control laying out the broad requirements for the eventual return to cruise voyages limits all sailings to seven days this year; not enough time to reach Southcentral Alaska cruise ports from Seattle. While many Alaska cruises are normally limited to Southeast itineraries, several hundred thousand passengers made the cross-gulf trip to Seward, Whittier, Homer and Anchorage prior to 2020. Visit Anchorage spokesman Jack Bonney wrote via email that the 102-passenger National Geographic Orion is the only cruise vessel currently expected to reach Southcentral this summer with a July stop in Seward. Smaller, often domestic-made vessels such as the Orion are exempt from many of the public health rules and maritime laws that apply to the large cruise ships. Visit Anchorage leaders continue to believe the region’s tourism industry will rebound this year, but not recover completely, according to Bonney. “Before the Alaska Tourism Restoration Act passed, the prospect of having any Alaska cruises this summer seemed unlikely,” he wrote. “It’s encouraging that one part of our state may see some ships this summer. The congressional delegation has worked hard to get this far.” Alaska Railroad spokesman Tim Sullivan wrote that officials at the state-owned railroad were hopeful cruise ships would bring additional passengers for their cars but planned their summer passenger schedule based on the status quo earlier this year. Cruise lines that own rail cars for an extended land-based tour of the state contract with the Alaska Railroad to pull them in an arrangement that contributes significantly to the railroad’s passenger business most years. Introduced in late February following the Feb. 4 announcement from Canada’s Transportation Ministry that cruise ships again would not be allowed to dock in the country’s ports, the legislation temporarily exempts Alaska cruises from the 19th Century Passenger Vessel Services Act, or PVSA. The law mandates a stop in a foreign port for foreign-built passenger ships. The bill sat for months in committees in both chambers without action. It was first heard in the Senate Commerce, Transportation and Science Committee April 28. Murkowski said much of the intervening period was spent drilling it into colleagues that the PVSA exemption is focused and temporary but critical to Alaska because of the hundreds of businesses in the state that rely on the eager-to-spend visitors the ships normally bring. Talk of the longstanding PVSA, initially meant to protect domestic shipyards and mariners, often evokes philosophical debates that can slow or kill legislation in Congress, which the delegation worked hard to avoid. “Some of our Senate colleagues had legitimate issues that merit discussion or debate, but it was not the time to reform the PVSA or to bring up extraneous issues — although they may be very important — related to the cruise industry,” Murkowski said. “We had to walk them through the details of what’s been happening in Alaska.” She said in a previous interview with the Journal that Washington Democrat Maria Cantwell, who chairs the Commerce Committee and shared a close working relationship with Murkowski when they led the Energy and Natural Resources Committee for their respective parties, was also helpful in getting Democrat leaders on board. Cantwell highlighted the cruise industry’s impact on the Seattle economy in a statement following the Senate vote on the Tourism Restoration Act. The million-plus cruise passengers that previously arrived to Alaska via the Inside Passage accounted for more than half of the total visitors to the state in most pre-pandemic years and provided the foundation for one of the state’s handful of growing industries in recent years. Pre-2020, the leisure and hospitality industry had become one of the state’s largest employment sectors, but lost nearly 15,000 jobs last year, according to state Labor Department figures. “I applaud the commitment from Alaska’s congressional delegation in moving forward the Alaska Tourism Restoration Act,” said Alaska Travel Industry Association CEO Sarah Leonard. There was widely a presumption that large cruises would resume on some level this summer prior to Canada’s ban. After the extension of the Canadian ban, Gov. Mike Dunleavy proposed a $150 million aid program for tourism industry businesses out of Alaska’s roughly $1 billion American Rescue Plan allocation in mid-April and the state also launched a new nationwide visitor marketing campaign when the PVSA exemption appeared stalled. Young highlighted in a joint delegation statement that the Alaska Tourism Recovery Act is half of the equation to resume cruise sailings; CDC approval is the other. He and many other Alaska lawmakers have been critical of the CDC — to the point the Dunleavy administration joined a Florida lawsuit against the agency — for being slow to implement a conditional sail order allowing cruise activity to resume domestically with detailed COVID-19 mitigation plans in place. However, Young and Murkowski noted CDC officials have signaled an unofficial goal of midsummer for the first sailings. “We now have a path forward for a 2021 cruise season, and I am confident that Alaskans will all do their part to ensure a safe and prosperous tour season,” Young said. “To those who will be visiting our state this summer, I say, ‘welcome to Alaska; we are open for business!” Downs said the operators are currently working on agreements with local port governments to set formal plans and protocols for virus mitigation. While the agreements do not also have to be approved by the CDC, they must be in place, per agency guidance. Elwood Brehmer can be reached at [email protected]

New CP Alaska president excited about return

New ConocoPhillips Alaska President Erec Isaacson should have a pretty good idea of what it will take to remain competitive on the North Slope in the rapidly evolving oil industry. That’s because he just was the competition. Isaacson took to the helm of the Alaska business unit in January following the retirement of Joe Marushack, who had held the spot since 2015. He and his family came north from the Lower 48 where Isaacson led development and operations of the company’s Eagle Ford and offshore Gulf Coast assets, which produced an average of 241,000 barrels of liquids per day last year. The South Texas Eagle Ford basin is one of ConocoPhillips’ — and the country’s — top focus areas for unconventional oil production and Isaacson said in a May 14 interview with the Journal that he believes Lower 48 unconventional, or shale, oil will largely continue to set the base of oil markets that other regions around the globe must match. That’s in part due to the relative fast pace of the work that is regularly measured in weeks or months, compared often to years on the North Slope. And it’s more than just the ability to quickly match activity and production levels to market conditions; it’s the ability to innovate at the same pace. “You’re finishing off wells every couple weeks. You drill and then move on to the stimulation phase and that ability to learn rapidly and continue to optimize really quickly,” Isaacson said of work in the shale fields of the Lower 48. “You can try different things and learn really quickly whether or not it works and then you can optimize your program and continue to work in it from that standpoint; whereas up here, you’re not turning things over as quick. You have to take the opportunity to learn a little bit differently, through maybe just statistics. You just have to be more purposeful about the way that you learn, the way that you optimize (in Alaska).” ConocoPhillips doubled down on its unconventional oil bet last year when the company announced a deal to purchase fellow shale producer Concho Resources for $8 billion, a further indication that the Lower 48 will remain Alaska’s biggest competition for oil capital within ConocoPhillips as well as broader markets for years to come, according to Isaacson. He is well versed in the fundamentals of the North Slope industry despite being only a few months into the Alaska president position because it is not his first time here. He first reported to work in Alaska in 2006 as the company’s exploration manager when ConocoPhillips was starting to explore the National Petroleum Reserve-Alaska in earnest. Before heading overseas in 2010 for roles leading operations in Qatar and Indonesia, he also did a stint as Alaska vice president of commercial assets at a time when ConocoPhillips still operated Cook Inlet gas fields and the Kenai LNG plant when cargoes were regularly being sent to Japan. He was also a representative for the company on the Trans-Alaska Pipeline System Owners Committee. “It was a real opportunity to see the full value chain of the oil and gas industry,” Isaacson said. During his first tour north, ConocoPhillips was looking in the NPR-A to repeat the massively successful Alpine field, which began producing in 2001, and had picked up federal leases in the Chukchi Sea. At the time, many in the industry envisioned a big move offshore as sea ice gradually retreated and oil prices remained high. That early NPR-A exploration is now starting to turn into oil production with the development of the two Greater Mooses Tooth drill sites — first oil from GMT-2 is expected late this year — but the company never struck Alpine 2.0. The shale-induced oil market reset of 2014-15 has all but evaporated former visions of massive Arctic offshore oil fields even if the resources are there. Arctic offshore oil just can’t compete with the price standard set by Lower 48 unconventional production. However, Isaacson noted that Alaska’s innovations have come in the form of new onshore discoveries and major advancements in the sustainability of North Slope developments. While ConocoPhillips did not replicate Alpine in its initial NPR-A exploration seasons, the company has turned the shallow, conventional Nanushuk oil formation find first popularized by Armstrong Energy and Repsol in the Pikka Unit into the $6 billion Willow project in the NPR-A and other satellite prospects as well. “That Brookian topset play that is Willow and in the Pikka area — that was stuff that we weren’t really chasing back then,” Isaacson said of his first stint in Alaska. The opportunity to lead development of a large, modern oil project on the scale of Willow, which could produce up to 160,000 barrels per day at its peak, is something he said he finds truly exciting; so is being in a place where there is still plenty of largely unexplored territory. “In some ways it’s part of the hunt. Part of the excitement you had in the original oil and gas industry is going out there and conducting that exploration activity,” Isaacson, a trained geophysicist, described. The Colorado native also mentioned several times, unprovoked, that he enjoys winter among the other aspects of the Alaska lifestyle that made him want to eventually return after leaving roughly a decade ago. “I like the mountains, the skiing. I like the winter and the outdoor pursuits, so as a family, we really enjoyed it here,” Isaacson said. He hopes his family can spend this summer reacquainting themselves with the once-familiar parts of Alaska and finding new favorites. “For us it’s just kind of being active up here again,” he added. On the business side, the rest of the year will be much about restarting after the forced reset of 2020. Isaacson said he wants to get back to the Slope more frequently as COVID-19 travel and camp space limitations are relaxed to meet more of the people doing the field work and see some of the infrastructure that didn’t exist the last time he worked in Alaska, such as the highly successful CD-5 drill site and the Greater Mooses Tooth projects. He also wants to “reinforce the safety culture that has made ConocoPhillips so successful in working on the North Slope,” Isaacson said. “That’s one of my key responsibilities when going up to the Slope: engaging with our employees, reinforcing our safety culture, reinforcing the way we work and the way we develop things here in Alaska.” ConocoPhillips is drilling again at CD-5, development wells are planned at GMT-2, and it is conducting workover operations in the large Kuparuk River field this year. According to Isaacson, ConocoPhillips and the other working interest owners of Prudhoe Bay have also agreed to restart drilling there later this year. ConocoPhillips is also continuing engineering and design work on the facilities for Willow while on-the-ground development is paused in the midst of two lawsuits challenging the federal government’s environmental review of the company’s plan for the project. Isaacson reiterated that no major decisions would be made regarding the future of Willow until the lawsuits filed by conservation and Alaska Native organizations are resolved. The parties have asked federal Alaska District Court Judge Sharon Gleason to expedite the suits so a decision can be reached prior to next winter’s North Slope construction season. “Barring those legal risks, it’s competitive within our portfolio and we’re doing a lot of work right now, spending a lot of money heading towards getting that engineering done so we can be in a position to make (a final investment decision),” he said of Willow. Looking out further, he said the State of Alaska must maintain a stable oil and gas fiscal regime to garner investment dollars, particularly as pressure on Arctic developments continue to intensify and even though the state still faces significant annual budget deficits. “Alaska has a risk premium, so if you think about being attractive for investment you have to consider that sort of risk premium that you’re operating in the Arctic — from a regulatory standpoint — that really underpins the need for an attractive, stable fiscal regime in order to attract that capital investment in the long-term,” Isaacson said. Elwood Brehmer can be reached at [email protected]

Cruise legislation halfway to Biden’s desk after Senate passage

Those pushing to get large cruise ships back to Alaska waters this summer are halfway home on one major front at least after the Senate broadly approved legislation allowing the ships to temporarily bypass Canada on their way north. The Alaska Tourism Restoration Act sponsored by Sens. Lisa Murkowski and Dan Sullivan passed the senate by voice vote May 13 after the bill spent much of the spring stalled in the Senate Commerce, Science and Transportation Committee despite consistent pressure for action from the Alaska congressional delegation. It was moved out of the committee earlier May 13 without objection. Murkowski said that the key to gaining support for the Tourism Restoration Act was reinforcing to other senators that it is an Alaska-focused and temporary exemption to the Passenger Vessel Services Act, or PVSA, and little more. “It effectively is designed to just get us through the balance of the cruise season for ’21, that’s it,” Murkowski said in a May 17 interview. Keeping the scope of the bill limited helped Murkowski and Sullivan keep it out of more philosophical debates over the need for the PVSA at all from Utah Republican Sen. Mike Lee and the business practices of large, international cruise companies raised by Connecticut Democrat Sen. Richard Blumenthal. “We said, ‘legitimate arguments on both sides but this is not that fight. This is a very temporary, targeted fix for a state that has been hit very hard by COVID,’” Murkowski said. “It allowed both sides to come together and sit down.” Sullivan said on the Senate floor that passing the PVSA exemption is “an example of the U.S. Senate working at its best.” “This is an important step forward, but we still have more work to do. Congressman Don Young, the dean of the House and a great advocate for Alaska, will be working with his colleagues to quickly get the Alaska Tourism Restoration Act through the House,” Sullivan said May 13. “And we’re continuing to work around the clock with (Centers for Disease Control) leaders to finally issue workable guidance that allows the cruise lines and coastal communities to safely welcome visitors again. Given the CDC’s much-awaited loosening of mask guidelines today for vaccinated Americans, I am hopeful we will see progress on this front as well.” The PVSA requires foreign built, crewed or flagged passenger vessels sailing between U.S. ports to make at least one stop in a foreign port and cruise lines typically used a Canadian port — most often Vancouver — as a stop en route or the starting point for Alaska-bound voyages to comply. However, the Feb. 4 announcement by Canadian transportation officials that they would not be allowing large cruise ships to dock in the country’s ports again this summer disrupted plans for a return to more normal sailings. While the first ships of the year have usually arrive in Ketchikan by the start of May, Murkowski noted that getting the bill to President Joe Biden quickly could provide roughly a two-month window for sailings late this summer. “We all know there’s no cruise ships that will come north beyond September,” she said. The cruise legislation was also aided by Washington Democrat Sen. Maria Cantwell, who worked closely with Murkowski in recent years when Murkowski chaired the Energy and Natural Resources Committee and Cantwell was the ranking Democrat. Cantwell now chairs the Commerce, Transportation and Science Committee that was given the PVSA exemption bill. Murkowski said Cantwell helped get Democrat leaders on board with the bill, which would also help Washington’s tourism industry recover. For her part, Cantwell said in a statement from her office that the loss of the 2020 cruise season cost Seattle — where many Alaska-bound voyages originate — 5,500 jobs and $900 million in lost economic activity. Industry representatives have consistently said they need at least two months of lead-time to prepare and crew the vessels before sailings can resume. Young’s spokesman Zack Brown wrote via email May 17 that passage of the cruise bill puts Alaska in a much better position than it has been in for some time. “The Congressman is working very hard to expedite consideration of the legislation, and will be working with his colleagues to earn support for the effort before the House is adjourned (for Memorial Day),” Brown wrote. “We are extremely hopeful that any remaining hurdles can be addressed, so that the cruise season may safely resume in some form.” CDC officials took a step towards loosening its restrictions on domestic cruises in an April 28 letter to industry leaders in which agency officials wrote that they are hopeful guidelines can be put in place to resume large cruise sailings by midsummer. The million-plus cruise passengers that arrived to Alaska via the Inside Passage accounted for more than half of the total visitors to the state in most pre-pandemic years and provided the foundation for one of the state’s handful of growing industries in recent years. Pre-2020, the leisure and hospitality industry had become one of the state’s largest employment sectors, but lost nearly 15,000 jobs last year, according to state Labor Department figures. The lack of visitors has also hit many local governments hard. According to City and Borough of Juneau officials, the lack of cruise ship and passenger fees and taxes totaled roughly $26 million in forgone revenue last year. Murkowski also reiterated that it seems unlikely Canadian officials will lift their ban on large passenger vessels anytime soon following discussions with them given the country’s more conservative approach to COVID-19 and the fact that vaccine distribution has been slower there than in the U.S. “I wish I could tell you that we had received a more enthusiastic agreement to working with us but so much of this has been directed out of Ottawa it seems,” she said of talks with Canadian government officials. “Those in British Columbia certainly recognize that their communities are impacted by this Canadian order and they don’t like it, either.” Regardless, Murkowski said she would raise the issue during upcoming Canada-U.S. Inter-Parliamentary Group meetings with Canadian lawmakers. Elwood Brehmer can be reached at [email protected]

Dunleavy calls for resolution of PFD, budget in special sessions

Gov. Mike Dunleavy unveiled his latest offer to settle the suite of omnipresent issues relating to the Permanent Fund that have mostly stalled work on all other fiscal matters backed by a large, bipartisan group of legislators on May 12, but it’s still unlikely the proposal will breeze through the Capitol. At the heart of Dunleavy’s plan, which is packaged as a sweeping constitutional amendment to change the structure of the Permanent Fund and how it can be spent, is a call to equally split the revenue from the annual 5 percent of market value, or POMV, draw between money for government services and Permanent Fund dividends. “Imagine a world where we’re not wrestling over the Permanent Fund anymore. Imagine a world where we’re not wrestling over the PFD anymore,” Dunleavy said. “We realize that for the people of Alaska we need to solve this now.” As to the now, Dunleavy included an amended version of Senate Joint Resolution 6, the legislative vehicle for the Permanent Fund constitutional amendment, in his call for an immediate special session along with the operating budget and separate legislation setting this year’s PFD. Dunleavy campaigned on the prospect of getting the Legislature to issue full, statutory PFDs after several years of the formula-driven amount being first cut by former Gov. Bill Walker and then by lawmakers concerned dividends approaching $3,000 per person they believed were unaffordable while the state was also running multibillion-dollar annual deficits. After two years of unsuccessful attempts to get enough legislators on board to pass fully funded PFDs or reach resolution on any other aspects of a long-term budget fix, the governor’s hard line on the statutory formula PFD has faded. Lawmakers with varying stated views on the structure of the fund and the long-term fate of the PFD commended Dunleavy for putting the first big pieces of a broad fiscal compromise into something they can work with. Senate President Peter Micciche, R-Soldotna, said until there is a fiscal plan with a PFD resolution at the center of it, the Legislature will remain “stuck in neutral,” a sentiment echoed by Dunleavy and others. “Until this matter is settled you cannot figure out how to fix the rest of the (budget) gap,” said Senate Majority Shelley Hughes, R-Palmer. Sen. Lyman Hoffman, an influential rural Democrat from Bethel, has previously been sharply critical of many of the administration’s fiscal policies but said he’s worried that if the various issues pertaining to the Permanent Fund are not addressed soon “we’re going to be in a bigger mess than we’ve ever been in before” given it holds Alaska’s remaining spendable reserves. SJR 6 would also enshrine the “50-50” PFD in the state constitution and roll the Earnings Reserve Account, which currently holds more than $14 billion in spendable cash, into the corpus of the fund to ultimately make for a more traditional endowment-style fund. It would additionally roll the Power Cost Equalization endowment fund into the Permanent Fund and require the PCE program be funded each year out of the adjusted POMV. While the concept of simplifying the fund’s structure through and subsequently limiting all appropriations from it to the annual POMV has gradually gained support in the Legislature, particularly among those most vocally opposed to ad-hoc draws from the fund, constitutionally guaranteeing a set annual PFD will be a much tougher sell amongst fiscally conservative legislators who fear the state could someday be forced to forgo essential services in order to pay PFDs. At current revenue and budget levels with a traditional formula-driven PFD, the state has roughly a $2 billion deficit per year that would shrink but not be eliminated with a 50-50 POMV split. However, some legislators once reluctant to constitutionally mandate dividends concede it is the only way — other than eliminating it — to actually settle the issue after the Supreme Court in 2017 unanimously confirmed lawmakers’ authority to bypass the statute when setting the budget each year. Dunleavy is additionally proposing a one-time, $3 billion transfer from the ERA to the Constitutional Budget Reserve to act as a monetary bridge for the state until the Permanent Fund amendments and other deficit-reducing measures can take full effect. Amending the Alaska Constitution requires supermajorities of 14 votes in the Senate and 27 in the House before going to a vote of the people, which Dunleavy noted takes the executive branch out of the debate once the resolution is submitted. “This is really between the representatives of the people and the people themselves,” he said. However, the statewide vote would not happen until 2022 at the earliest, putting the first fiscal impacts of any changes well after that. Dunleavy also gave legislators the heads-up May 13 regarding a second special session in August to take up federal COVID-19 aid appropriations, his constitutional amendments for a tighter state spending cap and to mandate a public vote to approve new taxes, which have gained little traction in the Legislature, as well as “An act or acts relating to measures to increase state revenues,” the special session proclamation states. Micciche said in a May 14 briefing with reporters that he strongly supports taking the divisive PFD issue off the table but he is “struggling” with the $3 billion transfer out of the Earnings Reserve on top of the annual POMV draw of approximately $3 billion primarily because it would likely have an opportunity-cost approaching $200 million in lost fund earnings each year. Micciche also backs the plan for an August special session as it would give lawmakers time to talk to their constituents about the specifics of big policy changes but urged Dunleavy to go beyond his general acceptance of tax discussions to submitting legislation to fill the deficit left by a 50-50 POMV split. “The governor’s plan is a good start but it leaves a $1 billion hole in perpetuity,” he said. “I’d like to know what their plans are for paying for a 50-50 PFD.” Micciche contends a sales tax and adjustments to industry taxes, including oil taxes, will be necessary to fill the deficit under a 50-50 split. “Are the people that support the PFD ready to pay for it? That means taxes,” he said. Elwood Brehmer can be reached at [email protected]

Raters credit Permanent Fund for improved outlooks

The firms that evaluate Alaska’s creditworthiness mostly agree that the state’s financial picture is getting better, at least in the short-term. Analysts for Moody’s Investors Service have upgraded the state’s fiscal outlook from negative to stable, according to a May 4 credit opinion that cites stabilizing oil prices and substantial growth in Permanent Fund as reasons for the improved opinion of Alaska. S&P Global Ratings similarly revised its outlook on the State of Alaska from negative to stable in a report issued May 4 as well. Both ratings agencies also reaffirmed their general obligation ratings for Alaska, with S&P maintaining its AA- rating and Moody’s keeping its equivalent Aa3 rating for the state. Fitch Ratings also revised its outlook for $319 million in revenue bonds sold by the state-owned Alaska International Airport System from negative to stable May 5 based on a surge in cargo traffic that largely offset lost passenger revenue from the pandemic. S&P’s May 4 opinion followed an April 15 report in which the agency’s analysts concluded states with oil-centric economies and budgets are likely out of immediate harm of the pandemic’s influence on oil prices — which have returned to the mid-$60s per barrel range — but surmised Alaska’s economic recovery would likely be slower than other oil producing states. S&P analysts noted in the most recent report that with Permanent Fund income now supporting the majority of the state budget, oil revenues are likely to account for just 20 percent unrestricted state revenue in the 2022 fiscal year that starts July 1. They also wrote that while the state’s fiscal system still needs structural changes to be sustainable over the long-term, the Alaska Permanent Fund Corp. has exceeded investment return expectations in recent months to give the state more cash to play with, for now. Some lawmakers who have long been opposed to Gov. Mike Dunleavy’s plan to spend from the Earnings Reserve outside of the annual structured draws for fear it would degrade the long-term earning power of the fund have also proposed moving most of the available money in the account into the corpus of the fund to ensure it is not spent. However, S&P analysts indicate doing so might also have an unintended impact on their view of the state’s finances because it would lessen Alaska’s reserves, which currently stand at nearly 250 percent of the state’s annual unrestricted general fund budget. “We expect reserves at fiscal year-end 2021 and 2022 to be significantly better than the state’s estimates absent any transfer from the (earnings reserve account) to the Permanent Fund corpus or unexpected market downturn,” the May 4 S&P report states. The analysts added that the roughly $1 billion in federal American Rescue Plan aid Alaska is set to receive reduces the near-term need for new state revenue sources. The Permanent Fund Earnings Reserve Account, which contains the spendable income the fund generates, held nearly $14.2 billion in reserves available for appropriation by the Legislature, up from $9.8 billion last June. As of May 10, the Fund’s overall unaudited value was $78.9 billion, up approximately 21 percent since the start of the 2021 fiscal year. In general terms, fund managers need to achieve annual returns in the 7 percent range to maintain the real value of the fund over time while accounting for inflation and the annual 5 percent of market value, or POMV, draw lawmakers started in fiscal 2019. Revenue Commissioner Lucinda Mahoney said in an interview that she finds the ratings adjustments “encouraging” but emphasized that lawmakers and state officials need to keep pushing towards fiscal reforms that will improve the state’s long-term sustainability. Mahoney said she stressed the view that Alaska’s revenue streams are more diversified than they may appear in recent meetings with ratings agency analysts. While the state was long dependent on oil prices and production for its revenue picture, the Permanent Fund — through its many billions of dollars in real estate, stocks and other varied income ventures — has indirectly but substantially diversified the state’s revenue picture. “I tried to get them to think about revenues in a different light,” Mahoney said, adding that the strong market performance behind the Permanent Fund’s growth has also improved the state’s pension funds, thereby decreasing the expected long-term pension debt obligation and annual payments. Elwood Brehmer can be reached at [email protected]

State could net extra $3M with royalty oil sale to Marathon

Department of Natural Resources Commissioner Corri Feige has approved a sale of the state’s oil that could net up to $3 million in additional revenue over the coming year and more importantly sets the stage for lawmakers to consider a similar five-year sale as well. Feige signed off April 22 on the best interest finding for the one-year state royalty oil sale to Marathon Petroleum Corp. that will have the state make 10,000 to 15,000 barrels of oil per day available to the Kenai refinery between Aug. 1 and July 31, 2022. The sale should represent 19 percent to 25 percent of the state’s total available royalty volume, according to the finding. DNR typically makes a small per-barrel premium on the state’s royalty oil when it is sold in-kind versus receiving an in-value payment from the producers for the state’s oil that they sell. Department officials and local refiners agree on a negotiated price differential that allows the state to capture some of the revenue lost from transportation costs when oil is otherwise shipped to West Coast refineries. In recent royalty in-kind, or RIK, oil contracts the state has generally netted $1 to $2 more per barrel than if it sold its royalty oil in-value, according to DNR; however, the state briefly lost money when oil prices and demand collapsed last year along with the onset of the pandemic. The Marathon agreement calls for an RIK differential price of $2.17 cents per barrel, meaning the state will collect incremental revenue as long as average marine transportation costs between Alaska and West Coast refineries remains greater than $2.17 per barrel. A Department of Revenue forecast projects marine transport costs will gradually climb from $3.01 per barrel this year to $3.56 by 2030. In 2016, DNR officials negotiated an RIK differential of $1.95 per barrel for a previous contract with Tesoro, a prior owner of the Kenai refinery. That five-year contract was for up to 25,000 barrels per day and was unanimously approved by the Legislature, which must pass a bill authorizing each RIK sale longer than one year. A Marathon spokesman did not respond to questions in time for this story, but the best interest finding indicates the company has agreed to start negotiations on another five-year contract that would commence in 2022. DNR officials will make up to 95 percent of the state’s future royalty oil — in the range 70,000 barrels per day — available for nomination by refiners under RIK sales. They prefer to keep a small portion available for in-value sales due to higher royalty values for certain leases and to obtain pricing and other market information from in-value sales. The Kenai refinery has a processing capacity of approximately 68,000 barrels of oil per day and generally produces about 59,000 barrels of refined products daily, according to DNR’s finding. In addition to strictly the monetary benefit, DNR’s commercial negotiators also factor in more subtle reasons for selling the state’s oil locally, such as the incremental economic benefits of processing it here rather than having it sent elsewhere. While being on the edge of Cook Inlet allows Marathon to import oil to the Kenai facility, approximately 90 percent of the oil refined there has been either from the North Slope or Cook Inlet in recent years, according to DNR. Since 1979 the state has sold 964.5 million barrels of North Slope oil through in-kind sales, according to DNR data. Elwood Brehmer can be reached at [email protected]

Mishap highlights growing foreign-flagged oil tanker traffic

An unladen oil tanker that’s part of a growing number of foreign-flagged vessels transporting Alaska crude reportedly dragged its anchor for nearly four miles in rough Gulf of Alaska seas while waiting for a pilot escort to Valdez in mid-April. The mishap ultimately resulted in a damaged windlass, or anchor winch, aboard the Bermuda-flagged tanker Stena Suede but little else, according to collated reports. However, it was enough to raise concerns from the federally mandated public oversight group tasked with oil industry activity in Prince William Sound as well as the group of marine pilots that escort large vessels through Southcentral Alaska’s often shallow, tricky nearshore waters. According to the Prince William Sound Regional Citizens’ Advisory Council, or PWSRCAC, the crew on the 810-foot Stena Suede decided to drop anchor roughly 20 miles outside of the Hinchinbrook Entrance to Prince William Sound when winds began to increase on April 14. Continually increasing winds caused the crew to reverse its course of action and attempt to pull the anchor after several hours. During the attempt to retrieve the anchor, the Stena Suede dragged it for nearly four miles — to a position 16.5 miles from Hinchinbrook Entrance — over 30 hours. After the windlass motor failed, the crew reset the anchor and worked to repair the anchor windlass, based on information from the council and a vessel tracking service. The Stena Suede eventually reached the Valdez Marine Terminal a day late on April 16 and departed Valdez April 17. PWSRCAC spokeswoman Brooke Taylor said in an interview that the attempt to anchor in the open Gulf of Alaska amplified the council’s attention to the increased frequency of foreign tankers chartered by North Slope producers to take Alaska oil to refineries across the globe. Taylor stressed that the citizens’ council mostly wants to know more about the vetting process that oil companies use before selecting a vessel operator to carry out a chartered mission. “We were very lucky that it wasn’t a worse situation,” she said, noting that the Stena Suede was unladen with crude oil but still held thousands of gallons of fuel and such situations put the crew at risk as well. “There’s less risk (with an empty tanker) but there’s still plenty of fuel and things that could hit water had this situation gone differently,” Taylor said. U.S. Coast Guard officials said during a May 6 videoconference council meeting that crew leaders on the Stena Suede asked if the Coast Guard had any objection to them “drifting” in the Gulf but did not request assistance. A Coast Guard spokeswoman did not respond to questions about the Stena Suede in time for this story. Southwest Alaska Pilots Association President Capt. Joe Martin wrote in an April 22 letter to Coast Guard Sector Anchorage Commander Capt. Leanne M. Lusk that there are just three acceptable anchorages in Southcentral waters based on the association’s best practices for large vessels. Those are at Knowles Head in Prince William Sound, east of the Homer Spit in Kachemak Bay, and in St. Paul Harbor near Kodiak. While Martin did not specifically reference the Stena Suede in his letter, he wrote that in the association’s opinion, “there is no safe anchorage to be had in the Gulf of Alaska within our pilotage area for large seagoing commercial vessels other than those listed above. This includes adjacent offshore waters. Anchoring in open waters in the Gulf of Alaska is at best imprudent, and at worst negligent, given the unpredictable environmental conditions which may be encountered at any time of the year.” Alaska marine pilots board large ships at predetermined points off the state’s coast and assist the crews in navigating the near shore waters that often have unique tides or highly unpredictable weather, among other factors. Martin also wrote in testimony submitted to the council that the Stena Suede also received damage to its bow mooring equipment but it was made satisfactory for docking at the Valdez terminal and the rest of the tanker’s voyage was uneventful. Longtime Alaska oil industry attorney and analyst Brad Keithley, who tracks Alaska crude shipments weekly, said there are indeed more foreign-flagged tankers visiting Valdez in recent months and the root cause is COVID-19. “It’s a subset of the shift in (Alaska North Slope oil) since the pandemic started,” Keithley said. The price collapse that hit Alaska producers and the state budget so hard last spring was the result of a drastic drop in demand for transportation fuel in the U.S. That forced refineries along the West Coast where Alaska’s oil is typically sent to sharply curtail production, and in turn their oil needs, pushing producers to charter foreign tankers that usually end up in China, he said. According to Keithley, Alaska producers sent an average of approximately 2 percent of their oil to foreign refineries in the years prior to 2020. Last year it jumped to 11 percent, peaking at 17 percent in the second quarter when the global oil glut was at its most severe. He said logistics dissuade the large producers from using their own tankers to make the cross-Pacific journey and therefore they often contract with third-party vessel operators to move their oil. The foreign tankers are likely to keep coming as long as demand from West Coast refineries remains subdued and it has at least temporarily stabilized at about 20 percent less than 2019 levels, Keithley said. “The pandemic certainly started this; it’s a question of whether those West Coast refineries come back up to full demand and I don’t think anyone knows the answer,” he said, noting some California refinery owners have committed to convert their facilities to renewable diesel production. A chart provided by the council indicates that as of May 6, foreign-flagged tankers have loaded in Valdez 11 times since the start of 2020 out of 279 tanker visits. Foreign tankers made just eight calls on Valdez in the three years prior. Regardless of why there are more foreign-flagged tankers calling on Valdez, Taylor said the council primarily wants to learn more about how the unique operating best practices and regulatory requirements in Alaska are communicated to the crews of chartered tankers before they start their journey here. “I’m told anchoring in open water is a technique used in many areas; it’s common practice. It’s a common practice internationally that doesn’t apply here,” she said. “Are the risk factors and the knowledge that people need to navigate our waters — are they being communicated?” Rob Kinnear, shipping manager for Hilcorp Energy’s subsidiary Harvest Midstream, said during the council board meeting that the company, which owns 49 percent of the Trans-Alaska Pipeline System, has chartered vessels when the tankers that normally make the West Coast run were in dry dock or when oil demand has waned on the West Coast. Each charter operator gets port information and vessel traffic manuals — about 800 pages of stuff — before sailing to Alaska, according to Kinnear. “Those documents are present on day one — probably 30 days out from when the vessel is going to load,” he said. The unique aspects of bringing a tanker into Prince William Sound are discussed with the vessel master in a call about a week out, Kinnear added. He said the incident involving the Stena Suede, which was chartered by Harvest, reemphasized the inbound tanker protocol. Alyeska Pipeline Service Co. spokeswoman Kate Dugan wrote via email that foreign tankers are required to have the same design features, such as double hulls, as those purpose-built for the Valdez run under the 1990 Oil Pollution Act. Elwood Brehmer can be reached at [email protected]

Ucore aims to start construction of rare earths facility by ‘23

A Canadian metals exploration and technology firm has solidified its plan to disrupt China’s control over increasingly critical metal supply chains and Southeast Alaska is at the center of it. Leaders of Nova Scotia-based Ucore Rare Metals Inc. highlighted their “Alaska 2023” plan to complete a $35 million rare earth metals processing plant in Ketchikan by the end of the namesake year during a May 11 videoconference presentation hosted by the Alaska Support Industry Alliance. Ucore chose the Southeast town for its proximity to the Bokan Mountain-Dotson Ridge rare earth mine prospect on nearby Prince of Wales Island, which the company has held since 2007. CEO Pat Ryan said the schedule is “aggressive,” but the company hopes to use revenue from the metals processing facility to support development of a small underground rare earth mine. If developed today, the Bokan project would be just the second rare earth mine in the country. As it stands, Bokan is an advanced-stage prospect that the company largely set aside after a 2015 drop in prices for rare earth metals. Ucore leaders at the time shifted their focus to developing the Ketchikan SMC — in which they hope to deploy an emerging, proprietary metals separation technology dubbed “RapidSX” — to be ready to jump into the burgeoning rare earth supply chain when prices improved. It appears that time is rapidly approaching. Company leaders announced May 4 that they began testing the RapidSX technology under an agreement with a rare earth producer. They expect the design for a commercial-scale system to be ready early next year if the current tests go well, according to the May 4 statement. Ucore Vice President Mike Schrider said rare earth prices started to increase significantly last year and the company is tracking them so it is ready to restart work on the mine when metal prices justify it. With much of the resource delineation complete, Ucore can have Bokan “near shovel-ready” within 30 months of reaching a financing agreement for the mine, he said. In 2014, the Legislature approved the Alaska Industrial Development and Export Authority to issue up to $145 million in bonds to help finance the Bokan project. Ucore estimated in 2013 that the mine would cost about $220 million to develop. Company leaders said they are currently in discussions with AIDEA officials for financing the Ketchikan SMC. An AIDEA spokeswoman did not respond to questions about talks with Ucore in time for this story, but authority leaders have regularly voiced general support for developing Bokan. Ucore’s value-added rare earth plan could put Alaska on a path to help underpin the country’s clean energy revolution in much the same way the North Slope did with oil decades ago, according to Ryan. “The new oil or the new gas for the future are these critical (rare) metals,” he said. Currently, China controls roughly 80 percent of global available rare earth resources, Ryan said, which is potentially problematic given the particular need for them in electric vehicle batteries and motors. It’s because of China’s control over those markets that Ryan said Ucore is working to integrate multiple aspects of the supply chain into its business. “If we don’t do something to regain and recapture the supply chain in North America, in the U.S., it will be lost to China,” he said, insisting that Chinese government officials strategically aimed to the middle of the rare earth supply chain — processing concentrates into metal oxides —to influence the broader downstream markets. “China’s forcing people to set up (rare earth metals processing) in China,” Ryan added. Shipping concentrates to China forgoes upwards of half the total value in the supply chain, he said. The Bokan Mountain prospect holds more than 4.7 million metric tons of indicated rare earth ore, according to a 2015 resource assessment. That translates to approximately 63.5 million pounds of collective rare earth metals, according to Ucore, which are used in a plethora of high-tech applications, from smartphones to advanced batteries and fighter jets. There are 17 minerals defined as rare earth elements, but “heavy” rare earths — such as europium, terbium, and ytterbium with a greater atomic weight — are the most sought after and are used in products that rely on high-temperature magnets. More common lighter rare earths are used in a range of applications including LED displays. Heavy rare earths account for roughly 40 percent of the mineralization at Bokan, according to Ucore. The company hopes to utilize “allied” rare earth feedstock from mines in Brazil, Australia, or the Mountain Pass mine in California, among others, to supply the SMC until the Bokan mine is producing, according to Schrider, who said the feedstock supplies would eventually be blended for oxide production. The company’s economic modeling shows it can be competitive in rare earth oxide markets with its RapidSX separation technology, which uses the same metallurgical processes as traditional plants but does it on a much smaller footprint and at a much lower cost, Ryan said. He described a typical rare earth processing facility as being roughly the size of a football field, while the Ketchikan SMC would fit “in the Red Zone,” or the last 20 yards, he said. Ryan emphasized that Ucore’s biggest hurdle isn’t financing — he’s confident in what they’re developing — rather, it’s China realizing they could lose control of a valuable geopolitical tool. “When they see what’s developing, we’ll have to have our supply chain all wrapped up,” he said, stressing the company will then need political support to keep Chinese government officials from working to unravel what they’ve put together. Elwood Brehmer can be reached at [email protected]

CDC may allow cruises by mid-summer; Canada issue remains

The members of Alaska’s congressional delegation insist their efforts to clear the way for large cruise ships to return to Alaska waters this year are gaining momentum despite little movement of legislation likely need to finish the work. Sens. Lisa Murkowski and Dan Sullivan took to the Senate floor April 29 to pitch the rest of the body on the Alaska Tourism Recovery Act, their legislation to temporarily exempt cruises between Washington and Alaska from the 19th Century Passenger Vessel Services Act. Murkowski said an amended version of the bill first submitted in early March addresses broader cruise consumer protection concerns raised by Democrats and passing it posthaste would help salvage what can be from this year’s summer cruise season. “Back home right now people are not talking about the season for 2021 coming up; the motto is ‘get through to ’22.’ That’s an awful way to be approaching our situation,” Murkowski said, adding that she’s not trying to save the global cruise lines, but rather the businesses in Alaska that rely on their arrival. “It’s jobs; it’s livelihoods and it really is what allows our small communities to keep their doors open,” she said of the tourism industry. The CDC took another step towards loosening its restrictions on domestic cruises April 28 with a letter to industry leaders from U.S. Public Health Service Maritime Unit Capt. Aimee Treffiletti, who is leading the agency’s maritime COVID-19 response, which states that CDC officials acknowledge “cruising will never be a zero-risk activity” and provides further guidance for cruise companies submitting operating plans for review to federal health officials. “We remain committed to the resumption of passenger operations in the United States following the requirements in the (Conditional Sail Order) by mid-summer, which aligns with the goals announced by many major cruise lines,” Treffiletti wrote, adding agency officials are looking forward to reviewing the initial operating plans and moving to the next phase of the Conditional Sail Order soon. The million-plus cruise passengers that arrived to Alaska via the Inside Passage accounted for more than half of the total visitors to the state in most pre-pandemic years and provided the foundation for one of the state’s handful of growing industries in recent years. Pre-2020, the leisure and hospitality industry had become one of the state’s largest employment sectors, but lost nearly 15,000 jobs last year, according to state Labor Department figures. The lack of visitors has also hit many local governments hard. According to City and Borough of Juneau officials, the lack of cruise ship and passenger fees and taxes totaled roughly $26 million in forgone revenue last year. The PVSA requires foreign built, crewed or flagged passenger vessels sailing between U.S. ports to make at least one stop in a foreign port and cruise lines typically used a Canadian port — most often Vancouver — as a stop en route our a starting point for Alaska-bound voyages to comply. However, the Feb. 4 announcement by Canadian transportation officials that they would not be allowing large cruise ships to dock in the country’s ports again this summer disrupted plans for a return to more normal sailings. Alaska’s senators were initially critical of the Canadians’ handling of the situation and Murkowski said they have since tried to find alternatives to the outright ban but also noted that Canada “is in a different spot in terms of their vaccines,” an indication the country’s requisite officials might not be ready to ease their maritime travel restrictions. According to the Canadian government’s COVID-19 Vaccination Tracker online dashboard, approximately 34 percent of Canadians had received at least one dose of a vaccine as of May 4, compared to 44 percent of Americans and 51 percent of Alaskans, according to Centers for Disease Control and state Department of Health and Social Services data. Sullivan spokesman Nate Adams wrote in response to questions about the hurdles facing the Alaska cruise industry that flexibility from Canadian officials on their docking restrictions isn’t likely given the country’s own challenges in managing COVID-19, but it’s also imperative that the Department of Homeland Security provide clarity over what voyage options would meet the exact requirements of the Passenger Vessel Services Act while making sure operations match any potential scrutiny in Canada’s exemption process. Washington Democrat Sen. Maria Cantwell, who Murkowski had a largely positive relationship with during their years together on the Energy and Natural Resources Committee, now chairs the Commerce, Science and Transportation Committee, which has the Alaska Tourism Recovery Act but has not yet officially heard it. Murkowski spokeswoman Karina Borger wrote via email May 4 that while a request to move the bill through unanimous consent was rejected, there is general consensus among the key players that an agreement needs to be reached. According to Borger, allowing cruise ships back to Alaska is the top priority in the senator’s office right now and Murkowski is working multiple angles, including a continued dialogue with Canadian officials to see if they can “meet us halfway,” she wrote. Sullivan implored Alaskans dependent upon cruise passengers for their businesses to keep hope alive in his floor remarks. “Right now, here on the Senate floor, there’s actually been momentum and movement, and I’m confident we can get there,” Sullivan said of the Alaska Tourism Recovery Act. “Even with the CDC, we are starting to see progress with them. We are going to continue to fight and continue to try to move this. Do not give up, Alaska, on our summer tourism season. We haven’t. To the contrary, we’ve made progress. We’re not there yet.” Alaska’s state and federal lawmakers have also been critical of the CDC’s seemingly slow movement towards allowing cruise voyages in U.S. waters and Gov. Mike Dunleavy directed Department of Law officials to join a lawsuit filed by the State of Florida against the CDC last month. Murkowski praised CDC leaders for the updated guidance in a May 1 statement and said agency officials have been more responsive to the Alaska delegation and industry of late. “The CDC has committed to working with us to address any guidelines that may be too restrictive for Alaskans,” Murkowski said. “We aren’t out of the woods yet, but understanding what has to happen for cruise ships to sail is a step in the right direction.” Whether it can all come together quickly enough for the companies to be ready to sail when the time comes is still unclear. The first cruise ships of the year typically arrive in Ketchikan in the last days of April and industry representatives have consistently said they would need at least 8 to 10 weeks to re-crew and prepare the ships for sailing from the time they have clearance to sail. The last ships arrive in Southeast in September most years. On the House side, Rep. Don Young’s spokesman Zack Brown wrote that the most likely avenue to holding a semblance of a summer cruise season this year is for the CDC to lift its sailing restrictions. According to Brown, if the CDC lifts its sailing restrictions, Canada would very likely be pressured into allowing “technical calls” on its ports to satisfy the PVSA. “Congressman Young is running parallel efforts on this front, not only trying to get the CDC to lift their ban, but to convince Canadian officials to update their restrictions as well. Southeast families’ livelihoods hang in the balance,” Brown wrote. “The Congressman calls on the CDC and the Canadian government to trust the science behind vaccines and mitigation strategies and to allow the cruise season to commence in some form.” Elwood Brehmer can be reached at [email protected]

ConocoPhillips rebounds to profitability after $2.7B loss in ‘20

ConocoPhillips rebounded with a profit of nearly $1 billion in the first quarter, with $159 million of that coming from Alaska. CEO Ryan Lance said during a May 4 conference call with investors that ConocoPhillips executives are viewing 2021 as “a catalyst moment” to improve all aspects of the company’s business, similar to 2016 when oil prices reached lows of less than $30 per barrel early that year. Following the depths of that price cycle, leaders of the Houston-based producer set a companywide breakeven target of $40 per barrel of oil production. This time, ConocoPhillips leaders are focused on debt reduction to improve investor returns and driving down sustaining capital costs through supply chain and well-cost efficiencies, according to Lance. “Our entire organization is focused on improving every aspect of our underlying business to make us the most competitive in the industry: capturing additional synergies, lowering our sustaining price, increasing capital efficiency, generating free cash flow, strengthening our balance sheet, consistently delivering peer-leading return of capital to our owners and lowering emissions,” Lance said. “These are the essential keys to long-term success in the business.” The first quarter profit of $982 million is contrasted against a fourth quarter loss of $772 million and a first quarter 2020 loss of more than $1.7 billion when the combination of a Saudi-Russia price war and the global onset of the pandemic took oil prices to the lowest levels in decades. In total ConocoPhillips lost $2.7 billion last year. The $982 million translates to earnings of 75 cents per share and was on the back of more than $10.5 billion of quarterly revenue. ConocoPhillips generated no more than $6.1 billion of gross revenue in any quarter last year. The company’s stock price mostly held steady May 4 following the morning earnings release, closing at $52.57 per share. As to Alaska, where ConocoPhillips has become the predominant producer and explorer on the North Slope, the $159 million net for ConocoPhillips Alaska was the first positive quarter for the state in a year, when the company made $81 million here but lost big overall. ConocoPhillips incurred a tax and royalty bill of $227 million to the State of Alaska during the quarter, according to a company statement. The segment and companywide profits are largely the result of sustained price improvements in global oil markets. ConocoPhillips secured an average realized price of $59.56 per barrel in the first quarter for its Alaska oil, the highest price since the end of 2019. ConocoPhillips’ North Slope liquids production remained ostensibly flat at 208,000 barrels per day in the first quarter when compared to the fourth, but was down from a year ago when the company produced 217,000 barrels of oil and natural gas liquids per day. Senior Vice President of Global Operations Nick Olds said the company will restart four rigs on the Slope this year after suspending all drilling last spring and is still on track to start production late this year from its Greater Mooses Tooth-2 project in the National Petroleum Reserve-Alaska. “Our base Alaska business is performing very well and we’ve built strong momentum coming out of 2020,” he said. Facility and production costs are about 10 percent less than budget in the third and final construction season for the $1.4 billion GMT-2 drill site, according to Olds, who said production would likely start at about 10,000 barrels of oil per day and should eventually peak near 35,000 barrels per day. The company plans to eventually drill up to 48 wells on the 14-acre pad. Engineering work continues on the company’s nearby $6 billion Willow oil project — stalled by a court injunction in a lawsuit over the Bureau of Land Management’s environmental review for the development — and it remains competitive in the company’s portfolio, but a final investment decision won’t be made until the litigation is resolved, Olds said. ConocoPhillips spent $235 million on North Slope capital investments in the first quarter; the most in a year and part of a $1.2 billion capital spend companywide. Executives plan to spend roughly $5.5 billion total on capital projects this year. Elwood Brehmer can be reached at [email protected]

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