Elwood Brehmer

Administration seeks $17.7M increase for AK LNG budgets

The Walker administration wants to increase its gasline budget by $17.7 million to move its part of the Alaska LNG Project forward and that ask would be greater if not for the project’s struggling commercial negotiations, according to administration officials. Gov. Bill Walker’s initial $35.7 million request for the North Slope Gas Commercialization office has been cut to $26.6 million because the state can’t move forward with its full marketing plan as hoped until underlying project agreements are in place Deputy Natural Resources Commissioner Marty Rutherford told a House Finance subcommittee Feb. 11. Rutherford will become acting commissioner of DNR March 1 after the retirement of Mark Myers announced Feb. 16. The ask duplicates $8.9 million appropriated this fiscal year for the project that is split between the Law, Natural Resources and Revenue departments, plus the new marketing money. This past November during a special session called by Walker, the Legislature approved spending $160 million to buy out TransCanada Corp.’s share of the project in the pipeline and North Slope facilities and fund the state’s pre-front end engineering and design, or pre-FEED, technical work in 2016. The administration’s revised $26.6 million request includes $21 million for outside negotiating counsel and marketing contractors and would also fund four positions with annual salaries and benefits up to $1.4 million for the state’s gas marketing lead, an existing but currently vacant position. Three new positions for marketing negotiators and a market analyst totaling $2.4 million in compensation would be added to the Gas Commercialization office as part of the budget plan. Rutherford acknowledged a reference to the “sticker shock” of a $1.4 million state Alaska LNG marketing lead position by Rep. Lance Pruitt at a time when budgets and jobs in nearly every state agency are being cut. Lack of progress on the commercial side of the project means the marketing lead position would likely be filled by a contractor initially, Rutherford said in an interview. The full budget request must still be made, however, so the state is prepared to move forward if the pace and progress of the project increases, she added.  “Our total request is $26.6 (million); it’s still a lot of money. I’m not going to pretend it is not,” Rutherford said. “But it is simply one marketing organization.” The “incredibly complicated and incredibly competitive” nature of the LNG market the state is trying to jump into means paying for the best people available is a necessity, she said. “They will be developing the state’s marketing team with a level of expertise that none of us possess in the state,” Rutherford said. Whether or not the administration returns to the Legislature to ask for the full $35.7 million will depend on the pace of the commercial, or fiscal, negotiations between the state and the producers as well as what type of gas marketing arrangements the parties agree to. How the state’s 25 percent share of LNG from the project is marketed, and how much that marketing will cost, will depend on the outcome of the commercial negotiations, according to Rutherford. Those negotiations have been ongoing for more than a year, but terms of the foundational Gas Balancing Agreement between the producers, BP, ConocoPhillips and ExxonMobil have not been reached company representatives testified to House and Senate committees in late January. Alone, the Gas Balancing Agreement determines how and when the companies — each with different ownership shares of the natural gas in the Prudhoe Bay and Point Thomson fields — can pull their share of the gas and get it to market. However, seven other contracts, including marketing terms, depend on having the Gas Balancing in place. Senate Bill 138, the legislation that outlines the state’s role in the $45 billion-plus North Slope natural gas export project, called for a late 2015 special legislative session for the Legislature to review and rule on the fiscal agreements. A “gasline” special session was held, but it was to buy out TransCanada, not approve the critical agreements. The administration has had hopes of getting the contracts in place for another spring special session, but Rutherford, one of the state’s lead negotiators, told the Journal that is unlikely. She said the timeline slippage is somewhat understandable “given the complexities” of the four-party, megaproject negotiations. SB 138 also lays out four possible gas marketing scenarios for the state possibly with all, or none, of the producers. Those scenarios are: a joint-venture marketing arrangement including the state and all of the producers; individual joint-ventures between the state and each producer, or two producers and the state; the state selling directly to a producer that must make an offer to buy the gas at close to market rates; or each party going it alone in equity marketing ventures. The State of Alaska will participate or be completely responsible for marketing under three of the possible scenarios, Rutherford said to the subcommittee. “If we are an equity marketer, basically we would be competing in the market against every other LNG marketer in the world, including our co-venturers,” she said. The commercial agreements also set the backdrop for whether the state will take its 12.5 percent share of royalty gas “in-value” as cash or “in-kind,” as the actual gas molecules, a decision that will be made by the DNR Commissioner. Rutherford said the department has prepped as much as it can for that decision and should be able to make it within 60 days after the upstream commercial agreements are in place. An in-kind determination will likely lead to the producers paying their production tax as gas, which would fill the state’s 25 percent share of the project’s gas. While production from the Alaska LNG Project won’t commence until 2025 at the earliest, Rutherford said the state needs at least some of the highly paid gas marketing experts on its team to start building relationships with potential customers in Asian markets now. Eventually the Legislature will have to form a state gas marketing organization whether it’s in a joint venture or not, according to Rutherford. She compared the prospective entity to the Alaska Permanent Fund Corp. “It needs to be as independent as possible, as nonpolitical as possible and as expert as possible,” Rutherford said about the state’s future gas marketing group. DNR is leading marketing efforts currently because it is the state’s upstream expertise, which ties the department to buyers in need of supply certainty, according to Rutherford. Once the gas begins its journey down the 800-mile pipeline it would be transferred to the state marketers. In-state gas The Alaska Gasline Development Corp. is the state’s technical expertise in the project, also tasked with providing natural gas to in-state users. To the second duty, AGDC formed its own in-state gas “aggregator” subsidiary last fall. AGDC Gas Aggregator Co. would amount to an intermediary to, as the name implies, aggregate the demand of the state’s gas and electric utilities looking to buy gas from the project, rather than forcing each utility to individually barter with the project’s marketing ventures, however many there may be. The AGDC board is expecting to have an in-state program plan from the Gas Aggregator in June, according to discussion at the corporation’s Feb. 11 board meeting.  

House puts Walker oil tax bill under lens

The plumbing behind Gov. Bill Walker’s attempt to reduce the state’s oil and gas tax credit payments was exposed Feb. 12 in a House Resources Committee hearing. Rep. Mike Hawker, R-Anchorage, took the lead in criticizing the administration’s exhaustive 29-page House Bill 247 that closes complex loopholes in some sections and simply raises industry taxes in others. Tax Division Director Ken Alper got through less than half of the 46 sections of the legislation during the two-hour committee meeting. Much of that time was spent discussing ways the administration has proposed to prevent producers from lowering their tax liability below the intended minimum production “tax floor,” currently set at 4 percent, during periods of low oil prices. HB 247 would eliminate the ability for credits to be used to take a tax liability below the tax floor. Credits would then be held until a company had a sufficient tax obligation against which to use them. Legislators that supported the industry tax structure in Senate Bill 21, which was passed in 2013 under former Gov. Sean Parnell and upheld by a voter referendum in August 2014, have said the intent was to set a hard tax floor when SB 21 was passed, but there are ways that deductible credits can be used to take a liability below that floor. The issue is one that has only come up recently as low oil prices have reduced the prescribed production tax rate along with producers’ profitability. Alper noted, as others have, that SB 21 was first modeled and drafted in 2013 with an oil price regime between $80 per barrel and $120 per barrel, so some issues at today’s prices in the $30 per barrel range were unforeseen. The Oil and Tax Credit Working Group formed last summer and headed by Senate Resources chair Cathy Giessel, R-Anchorage, also recommended hardening the tax floor, a move the Alaska Oil and Gas Association referred to as a “flagrant money grab at a time when the state should be encouraging industry to continue making vital investments in the state,” in comments on the administration’s sectional analysis of the bill. Giessel said at a press briefing Feb. 15 that the Legislature’s consultant, Enalytica, is modeling the financial effects of Walker’s proposed tax credit changes. The report should be available by the week of Feb. 22. AOGA President Kara Moriarty noted in an interview that a hard minimum tax would not allow producers to apply a loss and lower a potential tax liability to zero; something companies in other industries often do with losses against their corporate income tax payments. The state’s oil and gas tax credit system once again became headline news last June when Walker vetoed $200 million from a $700 million appropriation for refundable, or cashable, credits paid by the state in the current fiscal year budget. Industry representatives and numerous Republican legislators have emphasized the credits as a necessity for doing business in Alaska’s high-cost environment, particularly during times of low oil prices. The governor contends the current program is unsustainable as the state faces annual budget deficits approaching $4 billion. Annual outlays attributable to the credits peaked at more than $1.5 billion when credits under the previous Alaska’s Clear and Equitable Share, or ACES, and SB 21 tax regimes were combined with one another in fiscal year 2014. ACES had a 20 percent capital expenditure credit that was repealed under SB 21 and replaced with a per-barrel tax credit that was designed to encourage additional production. The Revenue Department projects the state’s credit obligation will average about $850 million through 2020 under current statutes. In companion legislation to HB 247, Walker has also proposed establishing a $200 million oil and gas development revolving loan fund, administered by the Alaska Industrial Development and Export Authority, to offset some reductions to the overall credit program. Monthly calculations HB 247 would prevent companies from claiming per barrel production tax credits that could not have been applied during a specific month, because the credit can’t be applied to go below the minimum tax, at the end of the year true up. “If (the credit) is limited because of the minimum tax in a month, that month’s limitation should carry through for the rest of the year,” Alper said. “What we’re trying to prevent is if there is a limitation in one month, that the company can’t scoop up that limited credit by applying it against another month’s taxes.” Such circumstances can occur with the per barrel credit that is up to $8 per barrel at times of low prices and inversely shrinks to zero at times of high prices. The administration is attempting to constrain moving the value of that per barrel credit, which is already calculated monthly, to other months in which it could be applied, according to Alper. The situation is most notable during years of high price volatility. In 2014, when the price for Alaska North Slope crude peaked at $110 per barrel in June but fell to $60 per barrel by December, the state paid out somewhere between $100 million and $150 million to producers at the end of the year “because of the ability to in effect migrate some of those credits from month to month,” he said. AOGA called the monthly credit limitation “nothing more than a disguised tax increase.” Hawker said the portion of HB 247 dealing with monthly per barrel credits described by Alper as complex is actually simple; it allows the state to tax at high rates during certain months and takes taxes from being an annual calculation to a monthly affair strictly in an effort to generate more revenue. The state is attempting to take away the industry upside of price fluctuation, he contended. “Let’s just be honest about what we’re doing here. This is just clearly a money grab,” Hawker said, echoing the comments of AOGA. AOGA wrote that limiting the credits to monthly calculations disregards inevitable uncertainties in monthly calculations compared to year-end results and would mean credits that can’t be carried forward or transferred would be lost, amounting to a “significant and permanent tax increase.” Not addressed at the hearing, in HB 247 and its mirror legislation, Senate Bill 130, credits held beyond 10 years would expire. The 10-year sunset would apply both to deductible credits held because of minimum tax limitations and to refundable credits paid directly by the state. The legislation would also put a $25 million per year cap on refundable credits. A proposal the production tax floor from 4 percent to 5 percent would alone generate about $50 million for the state, Revenue estimates. Part of the rationale behind raising the minimum production tax to 5 percent was to make sure each industry contributed to the administration’s overarching fiscal plan to close the budget deficit, Revenue Commissioner Randy Hoffbeck said. Walker has proposed similar 1 percentage point tax increases on fishing and mining along with an increase in head taxes for cruise passengers. Hardening the minimum tax floor would add roughly $50 million to state coffers in the 2017 and 2018 fiscal years. Beyond that, the price of oil is expected to rebound sufficiently to where the minimum production tax is no longer an issue. AOGA contends that the price per barrel would have to rebound to $85 per barrel before the minimum tax does not apply. Operating losses and new oil Alaskans are constantly looking for ways to produce “new oil,” whether from existing fields or new discoveries. The administration is trying to encourage new production while limiting how much the state compensates companies for expenses incurred in bringing that new oil to the surface. Currently, North Slope companies producing new oil under SB 21 can subtract 20 percent from their net profit via the Gross Value Reduction, or GVR, credit before calculating the production tax on new barrels. Alper said the concept of the GVR was to reduce the tax as a reward for producing new oil. The issue with the credit, from the administration’s perspective, is when a new oil producer can claim both the GVR and a net operating loss. With old, or legacy, oil, companies can claim a Net Operating Loss credit to be refunded by the state for part of an annual loss. Last year that refund was 45 percent of a loss, meaning the state would offset a $10 million loss with $4.5 million in cash, Alper explained. Future Net Operating Loss credits for the North Slope will be paid at 35 percent, a change prescribed for the end of 2015 in SB 21. However, adding the GVR to the loss credit calculation can achieve much different results, according to Alper. Through a modification based on gross revenue with the GVR, an $10 million loss could be turned into a $30 million loss on the books and push the state’s payment beyond the actual loss amount. A 35 percent credit on a $30 million loss equates to a $10.5 million check. “That was a circumstance we found surprising that it was allowable under law; but it was according to the attorneys’ strict interpretation of Senate Bill 21’s provision’s as they were written,” Alper testified while sitting alongside Revenue Commissioner Hoffbeck. Accordingly, HB 247 would limit the loss credit, with the GVR calculation, to the actual size of the loss. Hawker said the change would be “truncating” the incentive for new production. “What is going to be our consequence? Is it going to have a chilling effect on the pursuit of new oil, which was a very high priority for us by essentially taking away that opportunity, that advantage, in a situation where somebody’s getting started?” Hawker questioned. “They’re getting their field developed; they’re getting their initial production going and they have a loss and we’re saying, ‘Oh, by the way, that incentive that we were trying to give you to get this done — you don’t get it.” Transparency One of the few parts of the legislation not focused on revenue generation attempts to increase what the state can disclose about the credits it pays. According to the administration’s analysis, HB 247 would allow the Revenue Department to publish each company claiming a credit, the amount claimed and a general description of the work being done — information Alper described as “summary level.” All of that information is currently held confidential by the state in accordance with statute. “I think it’s really imperative for us to be able to tell our people what we’re investing in,” Rep. Paul Seaton, R-Homer said. Walker said in a previous interview with the Journal that he would support making more tax credit information public if revenue collected through a broad-based tax — he has proposed an income tax — were used to support the credit payments. Hawker said the oil and gas tax credit information would take away a company’s  competitive advantage by revealing what companies are trying to accomplish. “It’s obviously philosophical, but I want to respect the taxpayers. I want to give them the advantage that when they make an investment in Alaska they are given the greatest advantage possible for having made that investment,” he said. However, companies are not required to accept credits for which they qualify. Hoffbeck noted that more transparency in the credit program would allow for a “more open discussion” around what is a major budget obligation for the state. The issue came up repeatedly when the administration could not provide legislators and others with enough data to inform discussions about policy changes, he said. AOGA wrote that the impetus for increased transparency arose from credits earned by one or two companies, which can’t be described on an aggregated basis. The industry group and Hawker also called the legality of the proposed reporting into question. The language in the bill could apply to Net Operating Loss credits and others that could put portions of a company’s financial results into the public realm, Hawker said. Alper acknowledged the potential issue of inadvertently revealing some of a company’s finances and said the administration would like to find language that is acceptable to all parties involved. Limiting the information to specific refundable credits the state pays directly — exploration, drilling and development credits, for example — could be a middle ground, he said. “We merely want to be able to report where public money is being spent for the purposes of providing subsidies and benefits to oil companies,” Alper said.   Elwood Brehmer can be reached at [email protected]  

Stevens asks for independent review of Anchorage LIO options

(Editor’s note: This is the continuation of a Feb. 5 story entitled Anchorage LIO proposal offers savings, settlement to suit; LAA disputes figures.) And the beat goes on. Legislative Council chair Sen. Gary Stevens directed the Legislative Affairs Agency on Thursday to hire a third-party for an independent analysis of dueling financial conclusions as to whether the Legislature should stay in the Anchorage Legislative Information Office building. The meeting was anticipated to bring some sort of resolution to the at times ugly dispute over the $3.3 million annual lease the Legislature has for the year-old space. The Legislature's lease of the building has drawn intense scrutiny from many legislators and the public as the state faces an annual budget deficit approaching $4 billion. Stevens said he has already discussed bringing hiring a third-party consultant with the council’s outside attorneys who have been in contact with potential independent finance experts. He acknowledged the need to have the financial review complete in time for the Legislature to fund, or not, its current Anchorage LIO lease in the state operating budget, which is usually finalized in late April. On Dec. 19, the council recommended to the full Legislature via a unanimous vote not to fund the lease in fiscal year 2017 if a solution to stay in the LIO that is cost-competitive with moving the legislative offices to the nearby state-owned Atwood Building could not be reached.  “This has all been political to this point,” Stevens said. “There’s been political advice and we need financial.” During the brief Thursday meeting the council voted to remove the lease funds from its 2017 budget to bring its actions in compliance with the December motion. The full Legislature could add the lease payment appropriation back into the state operating budget if the current Anchorage LIO is retained. A spokeswoman for the LIO’s owner group said in a statement that the group will gladly provide all necessary information for a third-party financial review and also will continue to work with the Legislature to find the best way forward for the State of Alaska.   Anchorage LIO proposal offers savings, settlement to lawsuit; LAA disputes figures A proposal by the building owners to keep the Legislature in the Anchorage Legislative Information Office building could save the state millions of dollars and get the legislators out of a political bind. However, Pam Varni, executive director of the Legislative Affairs Agency, which handles business for the Legislative Council, disputed the figures in a Feb. 5 memo to Council Chair Sen. Gary Stevens. The proposal, submitted Jan. 29 to Stevens, suggests the State of Alaska purchase the building for $37.9 million to accrue maximum savings that would outpace projected savings of moving legislators into the nearby Atwood Building, primarily occupied by executive branch agencies. A meeting of the Legislative Council is Feb. 11 is scheduled for 5 p.m. to discuss the proposal. Tax-exempt financing would be “considerably less” than the current lease payments of $281,000 per month the Legislature currently pays, and the equity in the building would serve as an accrued savings account for the state, according to 716 West Fourth Avenue LLC, the building owner group. The leaseholder company name is the Downtown Anchorage address of the LIO and the offer is signed by longtime Anchorage developer Mark Pfeffer, the firm’s managing member. Varni wrote to Stevens that the proposal overstates the costs of moving to the Atwood Building by $11 million over 10 years and by $16.3 million over 30 years by including costs for debt service that is currently set to expire in March 2017. She concludes that purchasing outright or financing a purchase of the building would cost the state from $22.5 million to $94.4 million over 30 years compared to moving to the Atwood Building. The 716 proposal creates a "statistical misperception," according to Varni. "The purpose of statistics is to make something easier to understand; however, when used in a misleading fashion, may trick the casual observer into believing something other than what the actual data show," she wrote. "In this instance, 715 West Fourth Ave LLC, asserts it is less expensive to stay at 716 W. 4th Avenue than the Atwood Building, based on unrealistic and erroneous debt service data." The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. Pfeffer has indicated an intention to sue if the Legislature walks away from its obligation. The proposal also states that 716 has secured a settlement to dismiss a lawsuit brought by Jim Gottstein, owner of the adjacent Alaska Building, against the LIO owner group and the Legislative Affairs Agency. Gottstein’s complaint alleges the LIO lease is illegal because it is neither an extension of an existing lease, nor 10 percent below market value, as statute requires for a long-term extension. To fully settle the suit the Legislative Affairs Agency must agree to waive potential claims to recoup legal fees, according to the proposal document. Last month, the judge in the suit denied Gottstein’s petition to receive a “whistleblower” award of 10 percent of any money saved if the lease is ruled illegal. Trial in the case is currently scheduled for March. A Department of Revenue analysis of the Legislature’s options based on figures provided by 716 West Fourth Avenue — buying the building outright, having another state agency purchase it, break the 10-year lease and move to the Atwood or keep the status quo — found a potential savings of more than 55 percent over the existing lease another state entity finances the purchase for the Legislature. Another stopgap solution offered to lower the existing rent by 5 percent, or $169,000 per year, beginning July 1 until a purchase could be executed. A rent reduction would require lender approval. The lease is paid through May 31, 2016. The owner group also notes it has approval to waive earthquake insurance on the building, which could save another $59,600 per year from the Legislature’s $3.3 million annual bill. Amy Slinker, a spokeswoman for 716, said in a statement that Varni's memo lacks third party analysis. "The Department of Revenue's professional review shows the ability for clear savings," Slinker said. Revenue’s examination of the options put the upfront cost to move out of the LIO and remodel 30,000 square feet of the Atwood at $3.5 million to $5.5 million, with an annual building operating cost of $664,000. Purchasing the LIO in some fashion would require the initial payment and then operating payments of $269,000 per year for 45,000 square feet of usable space. Legislative Affairs concludes the Atwood's annual operating cost to be $613,000, based on Varni's memo. State ownership would also save $231,000 per year in municipal property taxes; however, taking the building off the city’s tax roll has been a reason cited by legislators for why the council did not purchase it initially. Anchorage Democrats, the public and legislators from elsewhere in the state have disparaged the LIO lease terms as far too expensive at a time when the state is facing annual budget deficits approaching $4 billion. On Dec. 19, the Legislative Council unanimously recommended the full Legislature vote not to fund the lease at a meeting in the Anchorage LIO unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days — by Feb. 5. In a statement released prior to the proposal being made public — multiple news outlets were denied a copy when requests were made to Stevens’ office — Slinker wrote the group trusts the council will consider the proposal that meets the council’s terms. “Our discussions with Sen. Stevens over the past 45 days have pushed us to dig deep for short-term, interim savings,” Slinker wrote. “That then set the stage for a long-term solution to save millions of dollars and help avoid any negative financial implications for the state.” The building houses off-season offices for 25 Anchorage legislators and is the de-facto home to much of the general Legislature’s out-of-session activity. The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said. Appraisals of the six-story building plus its underground parking facility have been as high as $48 million, but numerous estimates put its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer. His group first drafted and submitted terms for the state to purchase the building for $37 million plus closing costs Oct. 9; a proposal requested by the Legislative Affairs Agency, which manages business for the council. The original terms agreed to by Legislative Affairs attorneys set a Jan. 31 deadline to act on the sale terms, according to correspondence between attorneys for both sides. 716 waived the deadline in a Jan. 29 letter on conditions that the council votes to buy the LIO by Feb. 5 or appropriate funds for fiscal year 2017 rent in the state budget.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]  

AK LNG talks ‘unlikely’ to meet deadlines

A lack of progress in negotiations between the state’s producer partners on major Alaska LNG Project agreements is likely to throw the project off schedule, according to a key member of the Walker administration. Deputy Department of Natural Resources Commissioner Marty Rutherford said in an interview that BP, ConocoPhillips and ExxonMobil are still working on the structure of the Alaska LNG Project’s critical Gas Balancing Agreement after more than a year of negotiations. Rutherford is the state’s lead negotiator for commercial terms on the project, Gov. Bill Walker has said. The Gas Balancing, or gas supply, Agreement is the underpinning contract for at least seven more issues that must be resolved within several months to keep the project on track, according to the administration. It provides a framework for the companies — each with a different share of North Slope natural gas dedicated to the project — to pull their gas from the fields at certain times without upsetting the overall operations of the project. Even if the Gas Balancing terms were reached immediately, she said, it would still be “highly, highly unlikely” that all the agreements could come together in time because it still takes months to finalize agreements met in principle. Rutherford noted she always thought the Alaska LNG Project commercial terms would be wrapped up in time for a spring 2016 special session, but she also characterized the general challenge of several-party negotiations, regardless of the topic. “Two-party negotiations are tough; three are very difficult and four are — it’s hell,” she said. Company representatives acknowledged the slow pace of the negotiations in recent testimony before state legislative committees. Gas supply agreements are common in joint-venture LNG projects, but disparate ownership in the Alaska LNG Project’s two major gas fields, Point Thomson and Prudhoe Bay, makes this negotiation particularly challenging, ConocoPhillips Vice President of Commercial Assets Leo Ehrhard told the Senate Resources Committee Jan. 27. The agreement dictates how gas is “lifted” from the field under normal operations, but also during downtimes for maintenance on one field or the other. Gas draws must also jive with when customers want LNG from the $45 billion-plus export project, further complicating matters. On top of all that, each party comes to the table with differing risk perspectives and policy goals in a time of particular financial stress, given the state of world oil markets, Rutherford noted. “There have been some pieces we haven’t even begun (negotiating) yet because the foundational, what I call the threshold agreement, hasn’t been landed, even structurally,” she said. Walker sent a letter to the company leaders in Alaska on Jan. 18 expressing his concern over the lack of progress. He said the state would seek other alternatives to commercialize its gas if the parties don’t reach an agreement by the end of the regular legislative session, which is in late April. The governor has said for several months he hoped to have a comprehensive set of project agreements in place for the Legislature to review late in the regular session so a special session to vote on the agreements could be held shortly thereafter. A special session would also include a vote on a constitutional amendment needed for the state to enter into long-term contracts — tax policy — for the initial 25-year life of the project. The Alaska Constitution prohibits one Legislature from taking the authority to tax away from future bodies, which locking the state into a 25 percent share of the project’s gas would seemingly do. “There is an absolute certainty that a constitutional amendment is needed if the fiscal agreements that the producers want contain the Legislature suspending their power to tax,” Attorney General Craig Richards said to the Senate Resources Committee Jan. 29. Richards noted many, if not most, states have similar clauses in their constitutions. He also said the Stranded Gas Development Act, an earlier attempt to monetize North Slope natural gas, included fiscal terms that would have required an amendment as well. Because the public must vote on the amendment in a general election, the Legislature’s vote needs to happen in time to get it to the Division of Elections before June 23, the deadline for getting it on the November ballot. If any of that falls apart, the project is all but delayed for at least two years until the 2018 general election. The timeline was imposed by the producers’ prerequisite to have fixed project tax terms, Rutherford said, which added deadlines for the fiscal term sheets and the subsequent constitutional amendment. Ehrhard also said the agreements are necessary for the project to enter the full-fledged front-end engineering and design, or FEED, stage. The decision whether to enter FEED has been expected sometime next year. Despite the challenges, the parties are continuously negotiating. “We’re working hard to try to get breakthroughs on all fronts with the hope that the unlikely could happen,” Rutherford said. “We’re totally focused on trying to make these dates.” Gas supply from each field is also an issue for the state, she said, but not on the level it is for the producers because the state holds an equal 25 percent share of gas in each field through royalties and the proposed tax share to be taken in-kind. The negotiations started even before the Walker administration took office in December 2014, but began in earnest about a year ago. Last June the producers asked the state to step aside so they could work on the issue themselves and the State of Alaska was invited back to the Gas Balancing table about a month ago, according to Rutherford. Elwood Brehmer can be reached at [email protected]

Utilities purchase share of Beluga gas field

Anchorage’s electric utilities have partnered to purchase part of a Cook Inlet natural gas field, a move that secures a long-term fuel supply and could save ratepayers up to $9 million per year, utility leaders said Monday. City-owned Anchorage Municipal Light and Power and Chugach Electric Association agreed to purchase ConocoPhillips one-third interest in the Beluga River Unit gas field for a total of $152 million. Under the agreement ML&P will own 70 percent of the unit share and Chugach will take the remaining 30 percent. ML&P purchased a one-third share of the Beluga field in 1996, which has already saved its ratepayers more than $239 million when the utility’s cost to produce the gas is stacked against historical market prices, according to ML&P General Manager Mark Johnston. Hilcorp Energy owns the remaining third of the West Cook Inlet field and is the expected operator on behalf of the utilities, Johnston said in a press briefing. “Because we have the city’s business core and commercial and industrial core (in ML&P’s service area) we think it’s very important that we have a stable fuel supply that helps us to have stable fuel prices for the business community that they can rely on,” Johnston said. The latest deal should supply ML&P with all of its natural gas needs and Chugach with about 10 percent to 15 percent of its gas demand for about the next seven years before production begins to significantly taper. Beluga is expected to produce for the utilities through 2033. Johnston said two reservoir analyses concluded there is between 70 billion and 80 billion cubic feet of gas remaining in the Beluga River Unit. Chugach CEO Brad Evans said his ratepayers would likely see overall savings up to 15 percent on the fuel portion of their electric bills, equating to an overall yearly savings of between $2 million and $3 million per year. Johnston said ML&P’s larger share in the field should translate into savings in the $4 million to $6 million per year. “My wife and I did a back of the envelope calculation and we figure it could be worth a couple hundred bucks a year,” in savings to ML&P ratepayers, Anchorage Mayor Ethan Berkowitz said. ML&P’s gas production cost this year is $4.35 per thousand cubic feet, or mcf, from its original share in Beluga, according to the utility; compared to the regulated wholesale market price of $7.42 per mcf for Cook Inlet natural gas. While still a savings, the production cost has nearly doubled since 2013, a consequence of drilling new wells and doing well workovers to maximize production, Johnston said. The cost of production has fluctuated over the 20 years ML&P has held an interest in Beluga, he said in an interview, and the utility could invest about $30 million to $40 million more in the field over the next five years. ML&P expects to be able to pay for its portion of the acquisition with about $80 million from its Deferred Regulatory Liability from Gas Sales Fund along with a $13.5 million underlift and nearly $25 million in available cash. If the Regulatory Commission of Alaska limits the fund draw Johnston said the utility would turn to revenue bonds tied to production from the field. Evans said Chugach will likely use its low-interest commercial paper program for short-term financing with longer-term debt covering any remaining balance. The utilities first partnered to build the $369 million Southcentral Power Project, a 183-megawatt natural gas-fired plant completed in early 2013. Ownership shares in the power plant are reversed from Beluga deal, with Chugach owning 70 percent and ML&P holding 30 percent. ML&P is also finishing work on the new wholly owned 120-megawatt George M. Sullivan Power Plant 2 natural gas-fired plant in Northeast Anchorage. Combining the new, more efficient generation with owned gas reserves enables the utility to provide power at the lowest possible cost, Johnston and Berkowitz said. Elwood Brehmer can be reached at [email protected]

Juneau hydro developer has plan for clean, stable heat

Duff Mitchell is doing his damndest to get Alaska’s capital off of fuel oil. The director of Juneau Hydropower Inc. announced plans for a seawater-sourced district heat system for Downtown Juneau Feb. 9 at the Juneau Economic Development Council’s annual Innovation Summit. The science behind the renewable energy is nothing new; it’s already being used on a smaller, and cooler, scale to heat the Alaska Sealife Center in Seward and the Ted Stevens Marine Research Institute in Juneau. Juneau District Heating’s system would take electricity from Juneau Hydropower’s Sweetheart Lake facility about 40 miles south of the city to power heat pumps in Gastineau Channel that “scavenge” the thermal energy in the seawater and transfer the heat to water in network of pipes used to deliver the heat to homes and businesses, Mitchell said in an interview. It is essentially the same process used in large-scale refrigeration, except the heat is trapped as a valuable resource rather than being collected and dispersed as waste. The City of Seward is also investigating the potential of sourcing its heat from Resurrection Bay. At more than 180 degrees Fahrenheit, the district heat loop would run hotter than the systems used at the Sealife Center and Marine Research Institute, according to Mitchell. With two water lines, that hot water can simply be put hooked up to and replace a fuel oil-fired boiler system, which 78 percent of Juneau’s buildings, including Downtown state facilities, use for space heat, he said. Mitchell estimated the cost to switch from fuel oil heat to the district heat system to be in the hundreds or low thousands of dollars — less than switching to natural gas. “The conversion cost is low because you’re not ripping out your old system; you’re just supplementing it,” he said. Adding a new space heat source adds redundancy, meaning a fuel oil boiler could be called back into use if need be just by turning a water bypass valve, Mitchell noted. Water used in the loop would head back to be reheated at a temperature between about 120 and 140 degrees Fahrenheit. The system does not sell an energy source; the end product is energy itself. “We’re selling and monitoring (British thermal units),” he said. Recent advancements in the compressors have improved the efficiency of the technology to upwards of 300 percent, making the system more feasible on a larger scale, according to Mitchell. “There’s nothing more efficient than a heat pump,” he said. “In fact, we’ve gone to saying heat pumps are to heating what LED lights are to lighting.” Juneau’s would be the first ocean-sourced district heat system in the country, but Mitchell said the coastal city of Drammen, Norway, supplies heat to its 65,000 residents through the same system. Alan Simchick, a regional manager for the heat pump manufacturer Emerson Climate Technologies, said the large-scale pump technology has been on the market for about eight years, a relatively short period in engineering time. “We really see a bright future for (heat pumps) in a lot of different areas, not just district heating, but also in food processing plants and any areas where heating is needed on an industrial scale,” Simchick said. He called it “one play” in reducing a community’s overall carbon footprint. The end cost of heat to consumers will largely depend on how many homes and businesses sign up, he said, but district heat can compete at today’s oil prices and it offers another major benefit — price stability. The seawater must be at least 37 degrees to maximize efficiency, according to Mitchell, and temperature records show Gastineau Channel has historically met the criteria. Installing the pipe network can be done through directional drilling, eliminating the need to rip up Juneau’s already cramped streets. Initial plans are to cover the city’s Downtown, Willoughby District and extend north to include Juneau-Douglas High School, Mitchell said. Expansion to include Douglas and the hospital areas is being analyzed. The key to Juneau’s system will be the stable cost of electricity born from Sweetheart Lake hydro. About half of the 20 megawatts available will go to power the district heat pumps and the other half will go to the Kensington underground gold mine north of Juneau, he said. Mitchell is developing both projects in concert with hopes have everything complete in 2018, he said. Permitting for the projects should be wrapped up by the end of this year. Combined, the work could inject upwards of $200 million into the region’s economy. Because inexpensive electricity is paramount for an ocean-sourced district heat system, the technology could be extended to communities in Southeast with excess hydro capacity; however, the economics would likely be challenged in communities with fuel oil, or diesel-fired, electric generation, according to Mitchell. Elwood Brehmer can be reached at [email protected]

ConocoPhillips absorbs $4.4B loss; nets just $4M in Alaska

ConocoPhillips’ fiscal situation looks a lot like the State of Alaska’s after the company posted a 2015 net loss of $4.4 billion in its year-end financial results released Feb. 4. While Alaska leaders are contemplating cutting the Permanent Fund Dividend to help fund the budget, ConocoPhillips announced it was slashing its dividend from 74 cents to 25 cents per share. Combined with reductions in capital expenditures to $6.4 billion from the $7.7 billion plan announced in December, the two moves will save the company $4.4 billion in 2016. The company’s share price dropped 8.1 percent to $35.50 following the announcement. In Alaska, ConocoPhillips reported earnings of $4 million for the year, compared with more than $2.04 billion in earnings for 2014. Excluding negative special items totaling $478 million for the year that include a $412 million impairment related to its Chukchi Sea leases, adjusted earnings for Alaska were $482 million for the year compared to $2.07 billion in 2014. The company posted positive Alaska earnings in the first three quarters, but reported a $389 million loss in the fourth quarter as its average realized price per barrel was $40.29 compared to $71.34 in the fourth quarter of 2014. In January, Alaska North Slope crude prices dipped to less than $30 per barrel for the first time in more than a decade. Including special items, ConocoPhillips reported an overall pre-tax net loss of $650 million for Alaska in the fourth quarter. Company spokeswoman Natalie Lowman said ConocoPhillips is estimating its tax and royalty obligation for the year at $665 million, which, when combined with capital expenses, resulted in a negative cash flow exceeding $100 million in Alaska. A $467 million fourth quarter after tax item loss for Alaska is primarily attributable to the company’s federal Chukchi Sea lease holdings, according to Lowman. Following Shell’s lead, the company announced it would suspend development of the Chukchi leases it paid $500 million for in 2008. New oil from the CD-5 development in the National Petroleum Reserve-Alaska and Drill Site 2S online late in the year helped boost fourth quarter production, Lowman said. ConocoPhillips’ average daily Alaska production increased 5,000 barrels per day in the third and fourth quarters compared with 2014. Its average daily in-state production for the year was down 4,000 barrels to 158,000 per day, or about 2.4 percent. The harsh financials likely mean a slight decrease to the previously announced $1.3 billion Alaska capital budget in 2016, Lowman said, but she also noted the state continues to have one of the highest capital spend levels of any sector of the company’s worldwide portfolio. “For this year we expect our (Alaska) capital budget will be higher than in 2012,” Lowman said. In November, ConocoPhillips announced the sanctioning of its Greater Moose’s Tooth-1 exploration in the NPR-A, with a projected development cost of $900 million. LNG export permit renewed On Feb. 9, ConocoPhillips received a renewal of its LNG export permit for its Nikiski plant. After allowing its permit to lapse in 2012 as Cook Inlet supply shortages were a concern, the company renewed exports from the plant in 2014 after utilities’ gas needs were secured. “For nearly half a century, Alaska has exported liquefied natural gas to our friends and allies overseas,” said Alaska U.S. Sen. Lisa Murkowski. “As projects get underway in the rest of the nation, and planning continues for an even larger project here in the State, we should remember that Kenai set the precedent for the historic build-out of export capability now underway in North America. Alaska led the way, Alaskans can now continue to lead the way, and all Alaskans should be proud.” Elwood Brehmer can be reached at [email protected]

AG wants permission to investigate Bill Allen

Alaska Attorney General Craig Richards and Sen. Dan Sullivan joined forces in Anchorage Feb. 5 to announce the state’s intent to pursue longstanding allegations of sexual abuse and trafficking of a minor against former Alaska business leader Bill Allen. Richards sent a letter to U.S. Attorney General Loretta Lynch Friday requesting she cross-designate the State of Alaska with authority to investigate and potentially prosecute Allen in federal court for violating the Mann Act. A federal law passed in 1910, the Mann Act prohibits transport of individuals across state lines with the intent of engaging in sexual acts with them. The Anchorage Police Department and the Federal Bureau of Investigation first looked into the allegations in 2004 that Allen had paid for Paula Roberds, originally from the Western Alaska village of Goodnews Bay, to fly between Anchorage and Seattle multiple times for sex when Roberds was 16, according to news reports. The U.S. Department of Justice announced in 2010 that it would not prosecute Allen for those allegations. Prior requests for cross-designation by former attorneys general Michael Geraghty and Sullivan himself were denied by the Justice Department with little explanation. In rather unique coalescence, Sullivan, as senator, sponsored an amendment to the Mann Act requiring the U.S. attorney general to approve the cross-designation or provide the state attorney general with “a detailed reason for the denial no later than 60 days after the date on which a request is received,” the law states. President Barack Obama signed the anti-trafficking bill that included Sullivan’s Mann Act amendment into law last year. Alaska Criminal Division Director John Skidmore said documents subpoenaed to a federal grand jury cannot be revealed to parties not authorized to pursue charges on a federal level, thus requiring the cross-designation authority from Lynch. Speculation has persisted — and continued at the press conference in Anchorage —that Allen was not prosecuted due to a deal he may have reached with the feds in exchange for testifying against the late Sen. Ted Stevens in a 2008 political corruption case. Stevens was found guilty just days before the 2008 election and lost to Mark Begich by a narrow margin. The conviction against Stevens was eventually tossed and the Justice Department attorneys were sanctioned for misconduct for withholding exculpatory evidence from the defense. “The guardians of justice for the country may have said, ‘alright, to go after Ted Stevens we are going to throw (out), ignore and not go after the heinous crimes where victims are young girls.’ The Department of Justice should not be doing that if that did indeed happen,” Sullivan said. Richards and Sullivan both emphasized that their criticism of the Justice Department’s silence regarding its denials of previous cross-designation requests is not aimed at Lynch, given she was not the U.S. attorney general when those requests were made. “This is really, I think, the opportunity for the Justice Department to right a wrong and make clear and provide clarity around what really happened,” Richards said. “And if there was a deal cut and the deal was that (seeking) to prosecute Ted Sevens would result that Bill Allen not be prosecuted for sexual crimes against children, then we should know it and if that wasn’t the deal then Alaskans should know that too.” Allen, the former head of the oilfield services firm VECO Corp., pled guilty in 2007 to bribing a handful of Alaska legislators for support of an industry-friendly state tax policy. He was sentenced to three years in prison and fined $750,000. Skidmore said the state has not yet confirmed Allen’s whereabouts and would do so if it chooses — and is allowed — to pursue charges against him.

Utilities purchase share of Beluga gas field from ConocoPhillips

Anchorage’s electric utilities have partnered to purchase part of a Cook Inlet natural gas field, a move that secures a long-term fuel supply and could save ratepayers up to $9 million per year, utility leaders said Monday. City-owned Anchorage Municipal Light and Power and Chugach Electric Association agreed to purchase ConocoPhillips one-third interest in the Beluga River Unit gas field for a total of $152 million. Under the agreement ML&P will own 70 percent of the unit share and Chugach will take the remaining 30 percent. ML&P purchased a one-third share of the Beluga field in 1996, which has already saved its ratepayers more than $239 million when the utility’s cost to produce the gas is stacked against historical market prices, according to ML&P General Manager Mark Johnston. Hilcorp Energy owns the remaining third of the West Cook Inlet field and is the expected operator on behalf of the utilities, Johnston said in a press briefing. “Because we have the city’s business core and commercial and industrial core (in ML&P’s service area) we think it’s very important that we have a stable fuel supply that helps us to have stable fuel prices for the business community that they can rely on,” Johnston said. The latest deal should supply ML&P with all of its natural gas needs and Chugach with about 10 percent to 15 percent of its gas demand for about the next seven years before production begins to significantly taper. Beluga is expected to produce for the utilities through 2033. Johnston said two reservoir analyses concluded there is between 70 billion and 80 billion cubic feet of gas remaining in the Beluga River Unit. Chugach CEO Brad Evans said his ratepayers would likely see overall savings up to 15 percent on the fuel portion of their electric bills, equating to an overall yearly savings of between $2 million and $3 million per year. Johnston said ML&P’s larger share in the field should translate into savings in the $4 million to $6 million per year. “My wife and I did a back of the envelope calculation and we figure it could be worth a couple hundred bucks a year,” in savings to ML&P ratepayers, Anchorage Mayor Ethan Berkowitz said. ML&P’s gas production cost this year is $4.35 per thousand cubic feet, or mcf, from its original share in Beluga, according to the utility; compared to the regulated wholesale market price of $7.42 per mcf for Cook Inlet natural gas. While still a savings, the production cost has nearly doubled since 2013, a consequence of drilling new wells and doing well workovers to maximize production, Johnston said. The cost of production has fluctuated over the 20 years ML&P has held an interest in Beluga, he said in an interview, and the utility could invest about $30 million to $40 million more in the field over the next five years. ML&P expects to be able to pay for its portion of the acquisition with about $80 million from its Deferred Regulatory Liability from Gas Sales Fund along with a $13.5 million underlift and nearly $25 million in available cash. If the Regulatory Commission of Alaska limits the fund draw Johnston said the utility would turn to revenue bonds tied to production from the field. Evans said Chugach will likely use its low-interest commercial paper program for short-term financing with longer-term debt covering any remaining balance. The utilities first partnered to build the $369 million Southcentral Power Project, a 183-megawatt natural gas-fired plant completed in early 2013. Ownership shares in the power plant are reversed from Beluga deal, with Chugach owning 70 percent and ML&P holding 30 percent. ML&P is also finishing work on the new wholly owned 120-megawatt George M. Sullivan Power Plant 2 natural gas-fired plant in Northeast Anchorage. Combining the new, more efficient generation with owned gas reserves enables the utility to provide power at the lowest possible cost, Johnston and Berkowitz said.   Elwood Brehmer can be reached at [email protected]

Anchorage LIO proposal offers savings, settlement to lawsuit; LAA disputes figures

Editor's note: This story has been updated with the state's analysis of the LIO owners' offer and subsequent comments. A proposal by the building owners to keep the Legislature in the Anchorage Legislative Information Office building could save the state millions of dollars and get the legislators out of a political bind. However, Pam Varni, executive director of the Legislative Affairs Agency, which handles business for the Legislative Council, disputed the figures in a Feb. 5 memo to Council Chair Sen. Gary Stevens. The proposal, submitted Jan. 29 to Stevens, suggests the State of Alaska purchase the building for $37.9 million to accrue maximum savings that would outpace projected savings of moving legislators into the nearby Atwood Building, primarily occupied by executive branch agencies. A meeting of the Legislative Council is Feb. 11 is scheduled for 5 p.m. to discuss the proposal. Tax-exempt financing would be “considerably less” than the current lease payments of $281,000 per month the Legislature currently pays, and the equity in the building would serve as an accrued savings account for the state, according to 716 West Fourth Avenue LLC, the building owner group. The leaseholder company name is the Downtown Anchorage address of the LIO and the offer is signed by longtime Anchorage developer Mark Pfeffer, the firm’s managing member. Varni wrote to Stevens that the proposal overstates the costs of moving to the Atwood Building by $11 million over 10 years and by $16.3 million over 30 years by including costs for debt service that is currently set to expire in March 2017. She concludes that purchasing outright or financing a purchase of the building would cost the state from $22.5 million to $94.4 million over 30 years compared to moving to the Atwood Building. The 716 proposal creates a "statistical misperception," according to Varni. "The purpose of statistics is to make something easier to understand; however, when used in a misleading fashion, may trick the casual observer into believing something other than what the actual data show," she wrote. "In this instance, 715 West Fourth Ave LLC, asserts it is less expensive to stay at 716 W. 4th Avenue than the Atwood Building, based on unrealistic and erroneous debt service data." The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. Pfeffer has indicated an intention to sue if the Legislature walks away from its obligation. The proposal also states that 716 has secured a settlement to dismiss a lawsuit brought by Jim Gottstein, owner of the adjacent Alaska Building, against the LIO owner group and the Legislative Affairs Agency. Gottstein’s complaint alleges the LIO lease is illegal because it is neither an extension of an existing lease, nor 10 percent below market value, as statute requires for a long-term extension. To fully settle the suit the Legislative Affairs Agency must agree to waive potential claims to recoup legal fees, according to the proposal document. Last month, the judge in the suit denied Gottstein’s petition to receive a “whistleblower” award of 10 percent of any money saved if the lease is ruled illegal. Trial in the case is currently scheduled for March. A Department of Revenue analysis of the Legislature’s options based on figures provided by 716 West Fourth Avenue — buying the building outright, having another state agency purchase it, break the 10-year lease and move to the Atwood or keep the status quo — found a potential savings of more than 55 percent over the existing lease another state entity finances the purchase for the Legislature. Another stopgap solution offered to lower the existing rent by 5 percent, or $169,000 per year, beginning July 1 until a purchase could be executed. A rent reduction would require lender approval. The lease is paid through May 31, 2016. The owner group also notes it has approval to waive earthquake insurance on the building, which could save another $59,600 per year from the Legislature’s $3.3 million annual bill. Amy Slinker, a spokeswoman for 716, said in a statement that Varni's memo lacks third party analysis. "The Department of Revenue's professional review shows the ability for clear savings," Slinker said. Revenue’s examination of the options put the upfront cost to move out of the LIO and remodel 30,000 square feet of the Atwood at $3.5 million to $5.5 million, with an annual building operating cost of $664,000. Purchasing the LIO in some fashion would require the initial payment and then operating payments of $269,000 per year for 45,000 square feet of usable space. Legislative Affairs concludes the Atwood's annual operating cost to be $613,000, based on Varni's memo. State ownership would also save $231,000 per year in municipal property taxes; however, taking the building off the city’s tax roll has been a reason cited by legislators for why the council did not purchase it initially. Anchorage Democrats, the public and legislators from elsewhere in the state have disparaged the LIO lease terms as far too expensive at a time when the state is facing annual budget deficits approaching $4 billion. On Dec. 19, the Legislative Council unanimously recommended the full Legislature vote not to fund the lease at a meeting in the Anchorage LIO unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days — by Feb. 5. In a statement released prior to the proposal being made public — multiple news outlets were denied a copy when requests were made to Stevens’ office — Slinker wrote the group trusts the council will consider the proposal that meets the council’s terms. “Our discussions with Sen. Stevens over the past 45 days have pushed us to dig deep for short-term, interim savings,” Slinker wrote. “That then set the stage for a long-term solution to save millions of dollars and help avoid any negative financial implications for the state.” The building houses off-season offices for 25 Anchorage legislators and is the de-facto home to much of the general Legislature’s out-of-session activity. The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said. Appraisals of the six-story building plus its underground parking facility have been as high as $48 million, but numerous estimates put its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer. His group first drafted and submitted terms for the state to purchase the building for $37 million plus closing costs Oct. 9; a proposal requested by the Legislative Affairs Agency, which manages business for the council. The original terms agreed to by Legislative Affairs attorneys set a Jan. 31 deadline to act on the sale terms, according to correspondence between attorneys for both sides. 716 waived the deadline in a Jan. 29 letter on conditions that the council votes to buy the LIO by Feb. 5 or appropriate funds for fiscal year 2017 rent in the state budget.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

AG, Sullivan seek permission to investigate sex allegations against Bill Allen

Alaska Attorney General Craig Richards and Sen. Dan Sullivan joined forces in Anchorage Friday morning to announce the state’s intent to pursue longstanding allegations of sexual abuse and trafficking of a minor against former Alaska business leader Bill Allen. Richards sent a letter to U.S. Attorney General Loretta Lynch Friday requesting she cross-designate the State of Alaska with authority to investigate and potentially prosecute Allen in federal court for violating the Mann Act. A federal law passed in 1910, the Mann Act prohibits transport of individuals across state lines with the intent of engaging in sexual acts with them. The Anchorage Police Department and the Federal Bureau of Investigation first looked into the allegations in 2004 that Allen had paid for Paula Roberds, originally from the Western Alaska village of Goodnews Bay, to fly between Anchorage and Seattle multiple times for sex when Roberds was 16, according to news reports. The U.S. Department of Justice announced in 2010 that it would not prosecute Allen for those allegations. Prior requests for cross-designation by former attorneys general Michael Geraghty and Sullivan himself were denied by the Justice Department with little explanation. In rather unique coalescence, Sullivan, as senator, sponsored an amendment to the Mann Act requiring the U.S. attorney general to approve the cross-designation or provide the state attorney general with “a detailed reason for the denial no later than 60 days after the date on which a request is received,” the law states. President Barack Obama signed the anti-trafficking bill that included Sullivan’s Mann Act amendment into law last year. Alaska Criminal Division Director John Skidmore said documents subpoenaed to a federal grand jury cannot be revealed to parties not authorized to pursue charges on a federal level, thus requiring the cross-designation authority from Lynch. Speculation has persisted — and continued at the press conference in Anchorage —that Allen was not prosecuted due to a deal he may have reached with the feds in exchange for testifying against the late Sen. Ted Stevens in a 2008 political corruption case. Stevens was found guilty just days before the 2008 election and lost to Mark Begich by a narrow margin. The conviction against Stevens was eventually tossed and the Justice Department attorneys were sanctioned for misconduct for withholding exculpatory evidence from the defense. “The guardians of justice for the country may have said, ‘alright, to go after Ted Stevens we are going to throw (out), ignore and not go after the heinous crimes where victims are young girls.’ The Department of Justice should not be doing that if that did indeed happen,” Sullivan said. Richards and Sullivan both emphasized that their criticism of the Justice Department’s silence regarding its denials of previous cross-designation requests is not aimed at Lynch, given she was not the U.S. attorney general when those requests were made. “This is really, I think, the opportunity for the Justice Department to right a wrong and make clear and provide clarity around what really happened,” Richards said. “And if there was a deal cut and the deal was that (seeking) to prosecute Ted Sevens would result that Bill Allen not be prosecuted for sexual crimes against children, then we should know it and if that wasn’t the deal then Alaskans should know that too.” Allen, the former head of the oilfield services firm VECO Corp., pled guilty in 2007 to bribing a handful of Alaska legislators for support of an industry-friendly state tax policy. He was sentenced to three years in prison and fined $750,000. Skidmore said the state has not yet confirmed Allen’s whereabouts and would do so if it chooses — and is allowed — to pursue charges against him.   Elwood Brehmer can be reached at [email protected]

ConocoPhillips absorbs $4.4B loss in 2015

ConocoPhillips’ fiscal situation looks a lot like the State of Alaska’s after the company posted a 2015 net loss of $4.4 billion in its year-end financial results released Feb. 4. While Alaska leaders are contemplating cutting the Permanent Fund Dividend to help fill a $3.8 billion budget gap, ConocoPhillips announced it was slashing its dividend from 74 cents to 25 cents per share. Combined with reductions in capital expenditures to $6.4 billion from the $7.7 billion plan announced in December, the two moves will save the company $4.4 billion in 2016. The company’s share price dropped 8.1 percent to $35.50 following the announcement. In Alaska, ConocoPhillips reported earnings of $4 million for the year, compared with more than $2 billion in earnings for 2014. The company posted positive Alaska earnings in the first three quarters, but absorbed a $389 million loss in the fourth quarter as its average realized price per barrel was $40.29 compared to $71.34 in the fourth quarter of 2014. In January, Alaska North Slope crude prices dipped to less than $30 per barrel for the first time in more than a decade. Including special items, ConocoPhillips reported an overall pre-tax net loss of $650 million for Alaska in the fourth quarter. Company spokeswoman Natalie Lowman said ConocoPhillips is estimating its tax and royalty obligation for the year at $665 million, which, when combined with capital expenses, resulted in a negative cash flow exceeding $100 million in Alaska. A $467 million fourth quarter after tax item loss for Alaska is primarily attributable to the company’s federal Chukchi Sea lease holdings, according to Lowman. Following Shell’s lead, the company announced it would suspend development of the Chukchi leases it paid $500 million for in 2008. The company recorded a $412 million impairment as part of its total $467 million in special item expenses in Alaska. New oil from the CD-5 development in the National Petroleum Reserve-Alaska and Drill Site 2S online late in the year helped boost fourth quarter production, Lowman said. ConocoPhillips average daily Alaska production increased 5,000 barrels per day in the third and fourth quarters compared with 2014. Its average daily in-state production for the year was down 4,000 barrels to 158,000 per day, or about 2.4 percent. The harsh financials likely mean a slight decrease to the previously announced $1.3 billion Alaska capital budget in 2016, Lowman said, but she also noted the state continues to have one of the highest capital spend levels of any sector of the company’s worldwide portfolio. “For this year we expect our (Alaska) capital budget will be higher than in 2012,” Lowman said. In November, ConocoPhillips announced the sanctioning of its Greater Moose’s Tooth-1 exploration in the NPR-A, with a projected development cost of $900 million. Elwood Brehmer can be reached at [email protected]

Construction forecast down 18% to 2013 levels

Alaska’s contractors will begin to feel the effects of the new oil reality in 2016 as statewide capital spending declines about 18 percent from last year, according to a construction industry forecast. The University of Alaska Anchorage Institute for Social and Economic Research projects just more than $7.3 billion will be spent on capital projects in 2016. About $8.9 billion was spent on construction projects in Alaska last year. “Our short-term outlook is challenging,” Associated General Contractors of Alaska Executive Director John MacKinnon said during a Jan. 28 presentation in Anchorage. ISER compiles the industry data for AGC of Alaska’s annual spending forecast. MacKinnon noted that the contraction in outlays is neither positive, nor a catastrophe; it takes the industry back to 2013 spending levels. Statewide construction employment in 2013 peaked at 20,700 jobs in late summer and averaged 16,600 workers throughout the year, according to the state Labor Department. Preliminary Labor numbers show the industry averaged 18,100 workers in 2015. Not surprisingly, the spending decline will be led by the oil and gas sector, which is expected to be down 25 percent at $3.1 billion from an all-time capital spending high of $4.2 billion last year, according to ISER Professor Emeritus Scott Goldsmith. The annual wellhead value of North Slope crude has fallen from about $20 billion several years ago to $10 billion in 2015 and is projected to be roughly $5 billion this year, Goldsmith said. Less revenue translates directly, he said, into less spending on exploration and maintenance of existing fields. However, spending on oil and gas development projects is often separate from immediate price fluctuations, as evidenced by the record 2015 industry capital spend in Alaska while oil prices fell throughout much of the year. Several major projects, including Shell’s offshore Arctic exploration, the Point Thomson gas project led by ExxonMobil, and ConocoPhillips’ CD-5 oil development, mostly wrapped up last year, leading to an organic spending vacuum. A bright spot for this year is ConocoPhillips’ $900 million Greater Moose’s Tooth No. 1 oil project in the National Petroleum Reserve-Alaska, which was sanctioned late last year. The age of the North Slope fields — Prudhoe Bay is closing in on 40 years of production — also helps spur workforce demand that is disparate from oil prices, Goldsmith said. “One of the things that is a positive is that jobs in oil and gas related industries — construction related oil and gas — continue to grow as production declines,” he said. “Aging fields require more maintenance and smaller fields require more workers for a given barrel of oil.” Projections were mixed for other industries outside of the dominant oil and gas sector, which supports about 40 percent of the total capital spend in the state. Transportation spending, pegged at just more than $1 billion, will be down slightly due to less work on the state’s ports and harbors. The Matanuska-Susitna Borough’s Port MacKenzie rail extension, which has relied on state capital appropriations, is also stalled this year for lack of money. Large state capital appropriations in the 2012 and 2013 fiscal years have supported many projects across Alaska; however, expenditures from public-supported capital projects will fade in the coming years if the state continues with sparse capital budgets. According to ISER, money from public projects “hits the street” over six years after the initial approval, with peak monies available two years following the appropriation. Gov. Bill Walker’s administration has proposed a $500 million general obligation bond package to fund capital projects in the 2017 budget being debated in Juneau now. Utility spending is expected to be down by a third to $459 million in 2016 mainly because, similar to oil and gas, several large projects wrapped up in 2015. Matanuska Electric Association and Golden Valley Electric Association both commissioned new power plants in 2015 and Anchorage’s Municipal Light and Power is nearly done with its replacement plant started in 2014. Most of the utility spending will be from nearly 50 small projects going on across the state, according to ISER. Long-term, Alaska’s Railbelt electric utilities are currently debating whether major upgrades, estimated at upwards of $900 million, are needed for the region’s transmission system. Defense spending is projected to reverse a several year trend and increase by more than 25 percent to $552 million this year. Work scheduled at Eielson Air Force Base in Fairbanks includes a new flight simulator in preparation for new squadrons of F-35 fighters and upgrades to the base’s heat and power plant. Upwards of $1 billion will be invested in missile defense systems over the coming years at Clear Air Force Station near Nenana and Delta Junction’s Fort Greely. “Anytime that kid in North Korea starts playing with fireworks it bodes well for Defense spending in Alaska,” MacKinnon quipped. Construction spending by Alaska’s large mines will remain flat at about $180 million in 2016, despite depressed metal prices, Goldsmith said. He noted lower oil prices can help the bottom lines of the state’s mines, many of which are remote and rely heavily on diesel fuel for not only equipment but for electrical generation as well. “I was surprised to find that all of the existing world-scale mines in Alaska are spending at higher rates than they have in years past and that’s to upgrade their facilities, to expand their facilities to be able to take advantage of new discoveries that will extend the lives of their mines,” Goldsmith said. Health care’s capital spend will be down about 20 percent at $195 million, ISER projects, again, as new construction in Anchorage, Kenai and Ketchikan is completed. Alaska’s health care industry has grown steadily both on the capital and employment sides for more than a decade. One major hospital project expected to start this year is the Yukon-Kuskokwim Health Corp.’s new $287 million clinic and hospital in Bethel. YKHC received a $165 million U.S. Department of Agriculture loan for the project, the largest single loan the USDA has ever approved, according to corporation leaders. Elwood Brehmer can be reached at [email protected]

Negotiations among producers challenging AK LNG timeline

Progress has slowed in fiscal negotiations among the state’s partners in the Alaska LNG Project, raising concerns that agreements might not be in place to meet critical deadlines. At the top of the list of eight agreements still needing to be resolved is the Gas Balancing Agreement, the foundation necessary for the other issues to fall into place, project leaders told the Senate Resources Committee Jan. 27. Representatives from BP and ExxonMobil stuck mostly to vague boilerplate statements, saying the negotiations are hitting “speed bumps,” that should in a way be an encouraging as a sign the tough issues are being addressed. Bill McMahon, a senior commercial advisor for ExxonMobil, said the project must have “agreeable, competitive and durable” fiscal terms for each party — the State of Alaska, BP, ConocoPhillips and ExxonMobil. “The key is making sure we have a clear understanding of positions and making sure we find ways to bridge those gaps,” McMahon said to the committee. ConocoPhillips Vice President of Commercial Assets Leo Ehrhard offered more telling testimony, saying the project faces “significant economic headwinds” as oil and natural gas prices have fallen. LNG prices in Asian markets have slid by up to 60 percent since early 2014, the beginning of major work on the project, he noted. As it stands, the $45 billion-plus Alaska LNG Project has made it farther than any of the other previous attempts to monetize the massive North Slope natural gas resource. “Should we find an impasse on these agreements, we will not stand in the way of the project and will make our gas available to the state on commercially reasonable terms,” Ehrhard said. In early December, the state received commitments from BP and ConocoPhillips to sell their shares of gas to the state for “commercially reasonable terms” in the event either pulls out of the Alaska LNG Project for any reason. Analysis of the potential purchase found the state would have to come up with $19.2 billion to purchase ConocoPhillips’ 22 percent share of the project’s gas at a price of $4 per thousand cubic feet. That would be on top of the $13 billion-plus the state is already committed to for its quarter-share of Alaska LNG Project construction costs. The three producers and the state are collectively paying more than $690 million for the current preliminary front-end engineering and design phase, or pre-FEED. A decision to move to the full front-end engineering and design, or FEED, will require a commitment of $2 billion or more among the four parties proportional to their ownership shares. “In these times we have to be careful stewards of our cash,” Ehrhard said. Negotiating the Gas Balancing Agreement, also known as the gas supply agreement, is mostly up to the producers, the companies acknowledge. It determines how the parties, each with varying shares of gas in two fields, Prudhoe Bay and Point Thomson, will manage offtake from the fields. After the Gas Balancing Agreement there are seven other issues that must be hashed out. According to Gov. Bill Walker’s administration, they are as follows: byproduct handling terms; field cost allowances; modifications to state leases for the Point Thomson field; marketing agreements; project governance agreements; system use agreements; and in-state gas sales. Department of Natural Resources Deputy Commissioner Marty Rutherford said the state is involved in the negotiations but is not a signatory to the balancing agreement. (Editor's note: Rutherford told the Journal in a follow-up interview that she misspoke in her committee testimony and that the State of Alaska is a signatory to the agreement.)  She noted the producers have been good at recognizing the state’s share in the process. Having two fields to draw from provides security that gas will always be available, but it adds challenges as well. The agreement becomes increasingly complex when accounting for field downtime, for maintenance or otherwise, on top of making sure each party can get its gas off the field when the market wants it. These issues are usually resolved earlier in the process through field unitization that helps simplify the agreements, Ehrhard said. In the case of Alaska LNG, blending varied ownership of multiple gas fields into one pipeline adds to the challenge. “We have probably the only project in the world that’s being sourced from two separate fields with separate interests across those fields,” he said. Once in place, the Gas Balancing Agreement provides the state with a path to its 25 percent share of the project’s gas derived through royalty and tax payments, according to Ehrhard. “We see that it’s unlikely, from just the amount of time that’s left in front of us, to try and conclude an agreement of this complexity,” he said. “On the commercial side, we’re just not as far along as we’d like to be. We’d like to be in a position to have this agreement behind us.” Walker has said for several months the fiscal terms of the project need to be hashed out by sometime this spring in order to hold a special legislative session so the state can give its approval, or not. The long-term commercial agreements will bind the parties together for at least the 25-year initial life of the LNG export project. They also need to be done soon so the administration can draft a constitutional amendment required to allow the state to enter long-term the financial contracts, which amount to tax commitments. The Legislature must vote on and approve the amendment in time to send it to the Division of Elections by June 23, the deadline for placing it on the general November ballot, at which point the voters will take up the issue. Because amendments to the state Constitution must be taken up on a general election ballot, falling short of the timeline likely means delaying the project at least two years. Rutherford told the Senate committee that much progress has been made on the technical side of the project, mainly aimed at reducing costs, but the administration is concerned about the pace of the negotiations, as the governor noted in a Jan. 18 letter to the Alaska leaders of the producers. “We will have to step up the pace in order to meet the spring special session,” Rutherford said. In his letter, Walker wrote that he is “increasingly concerned” about the progress of the negotiations, given a 2015 deadline set out in the original Heads of Agreement to have fiscal terms completed has already passed. “I have been extremely patient in allowing the negotiations to proceed in the hope that the parties will reach alignment on the agreements necessary to move the AK LNG Project forward and thereby commercialize Alaska’s gas,” the governor wrote. He continued to explain that he would seek to move a gas project forward in other ways if the parties fail to reach alignment in 2016. “If the parties do not reach alignment on these important contracts and issues, then I will have no other choice but to consider other options for commercializing Alaska’s gas,” Walker wrote. “In addition, absent any such alignment on all of these agreements and issues, my administration will be unable to support any fiscal contract that the producers may seek, or a constitutional amendment supporting such fiscal contract.” Pre-construction work is all but complete on the state-led Alaska Stand-Alone Pipeline project, but the economic viability of the smaller project is seriously questioned.

‘Permission slip’ offered to use Fund earnings

Politicians are often accused of being childish, and the leaders of some of Alaska’s largest companies and interest groups are asking Alaskans to sign a “permission slip” allowing legislators to use Permanent Fund earnings as the basis for a solution to the state’s nearly $4 billion budget deficit. Led by GCI co-founder and CEO Ron Duncan, the newly formed Alaska’s Future coalition has the singular mission of pushing the Legislature to finally use the $50 billion Permanent Fund for its original purpose: to pay for state operations when resource revenues are depleted. Speaking during a Jan. 29 forum in Anchorage hosted by the policy think tank Commonwealth North, Duncan stressed that state government needs to solve its budget problem not only to save itself, but more importantly to save the private economy. He noted GCI’s capital budget, at $225 million this year, as one of many potential casualties of inaction by the Legislature this session. GCI also employs more than 2,200 people in Alaska. “If in June or July or August or September or whenever the legislators go home this year there is no solution in sight there is no way (GCI) can continue to make that investment because we will be looking out the front window and seeing an economic cataclysm within 18 months,” Duncan warned. The list of Alaska’s Future co-chairs is short but powerful. It includes Duncan, NANA Development Corp. President Helvi Sandvik, Cook Inlet Region Inc. CEO Sophie Minich, former Democratic Gov. Tony Knowles, Alaska AFL-CIO President Vince Beltrami, former Administration Commissioner and founder of the Andrews Group management firm Eleanor Andrews and Fairbanks businessman Steve Frank. Duncan said he took an interest in the daunting issue of closing the multi-billion dollar gap in late summer when he examined what taxes and spending cuts would do to his business. He quickly became consumed by the grim budget situation. Alaska’s Future projects, much like many Alaska economists and general budget gurus have, that the state can maintain its current revenue system and live off its total savings of about $15 billion for three more years — give or take a year with market, oil price and spending fluctuations — before going broke. Spreading a politically ambiguous mantra is Alaska’s Future’s job, according to Duncan. The group, that just formally launched Jan. 26, will employ a broad media campaign to spread the word, he said in an interview. The home page of GCI’s website incorporated a scrolling Alaska’s Future ad Feb. 1. “When we did our focus groups we learned that people believe that there’s a problem; they’re willing to make some personal contributions to solve it, but they don’t believe what their public officials are telling them.” Duncan said. “They do believe their employers; they believe their labor unions; they believe their teachers; they believe people in their community councils and their churches and to get this message out we need to get people who are willing to carry this message to their affinity groups.” Alaska’s Future’s members list included the names of nearly 90 Alaska businesses, nonprofits and influential Alaskans on Feb. 1. If the Legislature does not move to capture the investment earnings of the fund for government operations this session, Duncan predicted businesses statewide will pull back spending and trigger an “economic catastrophe” ultimately resulting in the loss of upwards of 10,000 private sector jobs. Historically, the Permanent Fund’s realized earnings have primarily been reinvested in the fund and paid dividend checks to Alaska residents. The principle of the fund is off-limits to the Legislature per the state Constitution. “If you like the current dividend formula you can keep it for three years,” Duncan said. “You’ll give up your economy in the process, but you can keep the dividend.” Gov. Bill Walker has proposed shifting state resources to what is known as a “sovereign wealth fund,” which would pump revenue that had previously gone directly into the General Fund through the Permanent Fund, so the money can earn an investment return. The state would then draw from the earnings of the Permanent Fund each year to pay for operations. Duncan credited Walker’s overall plan that includes further spending cuts and increased taxes for putting “a target on every special interest in the state,” but emphasized that Alaska’s Future is not endorsing any specific political plan. Sen. Lesil McGuire, R-Anchorage, introduced her own proposal to revamp how the state uses the Permanent Fund last session in Senate Bill 114. “We will cheer for either plan that gets adopted,” Duncan said in an interview. He noted that maintaining a sustainable dividend is a related emphasis of the group. Walker’s New Sustainable Alaska Plan would pay dividends with half of the state’s annual resource royalties, likely cutting the projected size of future dividends. McGuire’s bill would use a similar, but slightly more dividend-friendly formula. While recent dividends have some of the largest the state has paid, it bears noting that future PFDs under the current system are tied to often-fickle financial markets, much the same way Alaska’s General Fund is coupled to a collapsed oil market. SB 114 would sustainably pull roughly $2.5 billion from the fund’s Earnings Reserve account each year and the governor’s plan would put more money directly into the fund each year and draw about $3.2 billion annually. Knowles said factions on either side of the political spectrum that demand more cuts to government spending or revenue generation — taxes in some form — before using the Permanent Fund are missing the point of the argument. “The reason why the cornerstone of the Permanent Fund earnings comes first is because that gives you the time before you lose the crucial mass of your (savings) assets to make other tough decisions,” Knowles said. “It’s not a question of what you like the best, it’s a question of what’s the most effective.” Taking the one big step of revamping how Alaska uses its wealth in the Permanent Fund would give the Legislature and Walker another two years to hash out the finer points of taxes and spending cuts. The state cut about $800 million from its overall 2015 fiscal year budget; however, about half of the reduction came from one-time cuts in the capital budget. Walker’s plan includes additional but smaller cuts to spending over the next two fiscal years. Sandvik said in an interview that she became comfortable with joining Alaska’s Future when she learned that keeping a dividend is part of the group’s mission. Originally from the Northwest Alaska village of Kiana, she said the checks every fall help rural families and struggling urban residents alike pay essential bills. Using the Permanent Fund properly also allows the state to stabilize its finances without wholesale cuts to critical programs. “You feel the pain a little bit sooner in rural Alaska when you start cutting state services,” Sandvik said. Elwood Brehmer can be reached at [email protected]

Anchorage LIO owners submit proposal to Legislative Council

A proposal to resolve the political hot potato that has become the Anchorage Legislative Information Office lease has been submitted to Legislative Council chair Sen. Gary Stevens. The building’s owner group, 716 West Fourth Ave LLC, released a statement Feb. 2 saying it would not release the details of the proposal out of respect for the Legislative Council process, but noted that the group had met the timeline laid out by the council in mid-December and also likely resolved a lawsuit over the terms of the lease. “Our discussions with Sen. Stevens over the past 45 days have pushed us to dig deep for short-term interim savings,” 716 spokeswoman Amy Slinker wrote in an email. “That then set the stage for a long-term solution to save millions of dollars and help avoid any negative financial implications for the state. In addition, the conversations with Sen. Stevens appear likely to result in dismissal of the lawsuit by Alaska Building Inc.” The leaseholder company name is the Downtown Anchorage address of the LIO. The current 10-year lease has the Legislature making rent payments totaling $3.3 million per year for the built-to-suit, six-story office building with underground parking and 45,000 square feet of usable space. It is paid through May 31, 2016. Anchorage Democrats, the public and legislators from elsewhere in the state have disparaged the LIO lease terms as far too expensive at a time when the state is facing annual budget deficits approaching $4 billion. Anchorage attorney Jim Gottstein, owner of the adjacent Alaska Building, filed suit against 716 West Fourth Avenue and the Legislative Affairs Agency, which manages business for the council, last March alleging the LIO lease is illegal because it is neither an extension of an existing lease, nor 10 percent below market value, as statute requires for a long-term lease extension. On Dec. 19, the Legislative Council — at a meeting in the Anchorage LIO —unanimously recommended the full Legislature vote not to fund the lease unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days, or by Feb. 5. Multiple news outlets were denied a copy of the proposal when requests were made to Stevens’ office. A move to the nearby state-owned Atwood Building, home primarily to executive branch agencies, would first require a $3.5 million remodel and then $664,000 per year to operate the 30,000 square-foot space, according to a cost analysis presented at the Dec. 19 council meeting. Purchasing the LIO in some fashion — 716 West Fourth Avenue managing member and project developer Mark Pfeffer has said the group would sell for $37 million plus closing costs — would require the initial payment and covering of operations costs estimated at $525,000 per year for its 45,000 square feet of space. However, the state would immediately begin building equity in the property, Pfeffer has noted. The building houses off-season offices for 25 Anchorage legislators and is the de-facto home to much of the general Legislature’s out-of-session activity. The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, who has announced he will not seek reelection this year, decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said. Appraisals of the six-story building plus its underground parking facility have been as high as $48.5 million by the Alaska Housing Finance Corp., while numerous estimates by lenders involved in the construction and long-term loans appraised its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer. His group first drafted and submitted terms for the state to purchase the building for $37 million plus fees this past Oct. 9; a proposal requested by the Legislative Affairs Agency. The original terms agreed to by Legislative Affairs attorneys in an Oct. 22 letter to Pfeffer set a Jan. 31 deadline to act on the sale terms, according to correspondence between attorneys for both sides. The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. Pfeffer has indicated an intention to sue if the Legislature walks away from its obligation. Elwood Brehmer can be reached at [email protected]

AVTEC gets $5M donation from oilfield co.

Alaska’s primary vocational school is upgrading its Maritime Training Center, for free. AVTEC’s Seward campus will soon receive new equipment and state-of-the-art simulators valued at more than $5 million as part of a donation from Superior Energy Services Inc., a Houston-based global oilfield services company, according to the state Labor Department. “This generous donation comes at a critical time when state dollars for workforce training are dwindling,” AVTEC Director Ben Eveland said in a formal statement. “On behalf of the students and staff at AVTEC, we are so grateful to Superior Energy Services for donating these valuable training resources.” AVTEC’s maritime training programs attract mariners from around the world to Seward to use the school’s vessel simulators. The simulators are a key element to its ice navigation course — the only such certified course in the country and one of a handful worldwide. They have also been used by the Alaska LNG Project to model its prospective marine and jetty facilities planned for Cook Inlet near Nikiski; and the City of Seward engineered its new marine industrial park breakwater by imputing and testing various designs in the vessel simulators. Along with new maritime, crane and vehicle simulators, Superior Energy Services is also donating computers, HVAC units and office equipment. “Alaska’s workforce will benefit from this generosity, and Alaska’s budget will benefit from the money saved,” Labor Commissioner Heidi Drygas said. AVTEC has nearly 900 students and boasts a 77 percent “on-time” graduation rate, according to the state Labor Department.   Elwood Brehmer can be reached at [email protected]

AEDC: jobs down 1% in 2016

It was a message of disconcert, but not dread, at the Anchorage Economic Development Corp.’s annual economic forecast presentation Jan. 27. AEDC projects Alaska’s largest city will lose about 1 percent of its job base in 2016, which totals about 1,600 positions. Nearly hand-in-hand with the job losses will be a general population decline of about 2,200 Anchorage residents. “This is not the disaster some people have been fearful of,” AEDC President Bill Popp said while unveiling the figures. “It’s going to be a pinch, not a punch, based on what we’re seeing.” Popp clarified that the job and population declines include the start of anticipated force reductions at Joint Base Elmendorf-Richardson, plans which are currently under review by Defense officials. Not surprisingly, the oil and gas and government sectors will lead the way, shrinking by a combined 1,100 positions, according to AEDC. The oil and gas decline, pegged at 600 jobs, would be a loss of about 16 percent of the industry’s workforce in Anchorage. Popp noted that the 3,700 oil and gas jobs over the past two years have been record-high numbers, and the projection would only take the city back to 2011-2012 industry employment numbers. A cut of 500 government jobs will come primarily from the state side as opposed to the federal reductions seen in recent years. Anchorage lost about 370 state government positions in the second half of 2015 — the first half of the 2016 state fiscal year, which began July 1 — the first decline in state jobs the city has seen in more than 20 years. “When you cut $800 million from the state budget there are consequences and we’re seeing those consequences in jobs,” Popp said, referring to the state’s 2016 fiscal year budget. Statewide, government positions fell by 1,600 in the latter months of 2015, Popp said. The construction sector and business and professional services sector are both expected to lose about 400 jobs; again, largely due to decreased state and oil industry spending. The finance industry is forecasted to absorb a loss of 100 jobs, a result of Anchorage’s ever-strained real estate market that restricts deal flow and subsequent loan demand. “We have a very tight (housing) market that we need to untangle,” Popp said. Anchorage lost 1,500 people in 2015, but about 1,300 of those folks moved just beyond the municipality to the Matanuska-Susitna Borough in search of cheaper homes, proof that Anchorage’s lack of available housing is directly impacting the economic health of the city, Popp contends. Alaska as a whole, including Anchorage as its economic hub, has been on a remarkable run of growth for 25 years. Statewide employment has increased each year since 1990, with the exception of a 0.4 percent workforce loss in 2009, according to state Labor Department data. The bright spots in the coming year will be in 300 new health care jobs and continued record high leisure and hospitality employment, according to AEDC. Health care has added 5,000 jobs and roughly $500 million in payroll to Anchorage over the past decade, Popp noted. Leisure and hospitality is one of the sectors in the city that benefits from low oil — more correctly low gas prices — as Outside travelers have more money to spend and find it cheaper to get to Alaska. Ted Stevens Anchorage International Airport also benefits from low fuel prices as more passengers move through its gates and the air cargo business improves. The Anchorage airport is the world’s fifth busiest cargo hub. Combined, the airport and hospitality businesses support about 20 percent of Anchorage jobs, meaning a substantial portion of the city’s economy fares better when oil prices are low, Popp said. The future may tenuous, but unemployment in Anchorage remained low at 4.9 percent in December. Economists often consider unemployment in the 5 percent range to be full employment. Statewide unemployment remained flat compared to 2014 at 6.5 percent, below Alaska’s historical average of about 8 percent unemployment. Confidence in the city’s economy has waned among Anchorage business leaders who are uncertain about the future given low oil prices and a state budget deficit approaching $4 billion, according to an AEDC survey, but Popp noted that survey respondents still consider the ability to find qualified employees a major impediment to growth. “If you can pass a pee test, be on time and not look at your phone every five minutes, you can probably find a job,” he quipped. He urged business leaders and consumers alike to not overreact during uneasy times, saying that pessimism can lead to a “vicious downward cycle” and artificially hurt an otherwise adequate, but not great, economy.   Elwood Brehmer can be reached at [email protected]

UA plan focuses on campus strengths

The University of Alaska Board of Regents and university President Jim Johnsen have agreed on a framework to restructure the system’s campuses at a time when saving money is paramount. “Each main campus — Anchorage, Fairbanks and Juneau — will focus its research, teaching and service on its unique strengths, capabilities, advantages and opportunities. “The ‘lead campus’ model will eliminate duplication and strengthen degree programs, reduce duplicative administration and put a greater emphasis on delivery of courses through technology,” Johnsen said in a formal statement. The draft strategic outline resulted from a two-day regents work session held in Anchorage Jan. 21-22. The unrestricted General Fund portion of the University of Alaska’s budget has been cut significantly in recent years and Gov. Bill Walker’s 2017 fiscal year budget would cut it by another $15 million, to $335 million next year. Under the university plan, the University of Alaska Anchorage, for example, would focus on workforce development in nursing and lead economic and policy sciences research, a UA release states. The University of Alaska Fairbanks would focus on technological and engineering research — its historic strengths; and the Southeast campus would focus on interdisciplinary studies and programs to support the maritime and mining industries. General education classes required as prerequisites for most all coursework would still be available at all campuses, according to the university system. “While this will have impacts on students, communities and university employees, restructuring will preserve excellent and diverse program options across the system and respond to the unprecedented reductions in our budget,” Johnsen said. “The board of regents and university leadership believe this is the best way to use increasingly scarce resources to meet the needs of students and our state.”

Walker bills would shift tax credits to development loans

After more than six months of speculation, Alaska got its first look at Gov. Bill Walker’s solution for what he calls an “unsustainable” oil and gas industry incentive program Jan. 19 when Senate bills 129 and 130 were read for the first time on the Senate floor. Walker jumpstarted the oil and gas tax credit debate last June when he nixed $200 million in credit payments from state operating budget before signing it. What started as a $10 million per year tax credit program in 2003 has grown to a $700 million obligation this year and that payment could eventually hit $1.2 billion if left untouched, the governor contends. SB 130, if enacted, would significantly trim the current credit program and nearly immediately save the state an estimated $500 million at a time when oil prices below $30 per barrel have edged the state’s budget deficit ever closer to $4 billion. The bill would cut spending by eliminating the Qualified Capital Expenditure and Well Lease Expenditure refundable credits applicable to Cook Inlet basin work. When combined with closing a loophole that currently allows some North Slope companies producing “new oil” to claim a 20 percent Gross Value Reduction Credit on top of a net operating loss, repealing the credits would save about $200 million per year. The Qualified Capital Credit reimburses up to 20 percent of all capital development costs and the Well Lease Credit covers up to 40 percent of drilling expenses. Both of the Cook Inlet credits are transferrable. Another $200 million in savings would come by way of adding stipulations companies must meet before the state will directly repurchase tax credits from small producers, according to a fiscal analysis of the bill. Walker’s proposal would cap annual repurchases at $25 million per company and directly tie the refundable percentage of a credit certificate to a company’s — and its contractors’ — Alaska resident hire rate. The remaining credit amount not eligible for a refund based on Alaska hire limits could still be applied to a tax liability. Small producer credits would still be transferrable; however, companies not meeting the stricter guidelines would have to hold the credits until they accrue a tax liability with the state. Credits held for too long would expire after 10 years. Finally, SB 130 would “harden” and raise the minimum gross production tax for oil from North Slope fields not eligible for the Gross Value Reduction Credit. It would prevent several credits, including the Net Operating Loss, or NOL, Credit from being applied to take a production tax obligation below the minimum, often referred to as the tax “floor,” which is currently at 4 percent. That 4 percent minimum production tax would go up to 5 percent in the governor’s bill, a move that would generate about $100 million per year to the state in additional revenue. The increased floor would be applied to all North Slope fields, even new fields eligible for the 20 percent Gross Value Reduction. In its final report, the Senate Oil and Gas Tax Credit Working Group assembled over the summer by Resources chair Sen. Cathy Giessel also recommended hardening the tax floor to prevent large producers from paying no production tax, but the group did not weigh in on raising the minimum tax. Everything the working group proposed was with the future in mind, Giessel said in an interview Jan. 26, and Walker’s bill, as currently constructed, would make the tax floor change retroactive to Jan. 1, 2016. She also called raising the minimum tax to 5 percent a “blatant change” to the More Alaska Production Act, better known as Senate Bill 21, something Walker said he would not do after it was upheld by the voters in an August 2014 referendum. SB 129 Senate Bill 129 would form an Oil and Gas Infrastructure Development Program within the Alaska Industrial Development and Export Authority. A $200 million appropriation would be needed to jumpstart the fund, which would finance oil and gas infrastructure development projects on proven reserves for small and medium-sized companies in lieu of some credits. AIDEA, as the state’s financier, manages revolving loan funds aimed at economic development and holds business interests around the state. The authority typically invests with market returns in mind, but its goals can change with legislative direction. Revenue Commissioner Randy Hoffbeck said during a Jan. 22 press briefing that there is flexibility within the loan program, but AIDEA should be able to recover a competitive rate of return and still offer more attractive financing than private lenders. “What we’re trying to do is build a loan program that steps in where some of these companies are paying venture capital rates or private equity rates that run in the neighborhood of 18 to 20 percent on some of these projects,” Hoffbeck said. “We feel that we can step in and give (companies) a rate that’s a little more reflective of a project that’s a little further down the road because we see a little more certainty in what they’re doing than what they’re finding in the marketplace.” Smaller companies often use the cashable credits as collateral for loans to fully cover exploration costs. AIDEA board member and former Fairbanks-area state senator Gary Wilken said he is excited about the prospect about helping support Alaska’s premier industry and has no qualms about the authority’s ability to meet the challenge. “I think the seven people on the board, including myself, will have the talent to figure out how to execute this if we’re given the responsibility,” Wilken said in an interview. “I think we see the vision; I think we see the benefit and I just have to believe that we’ll reach out and get whatever it takes. If it’s beyond our resources we’ll go get the proper resources to do this right.” While under the auspice of the Commerce Department, AIDEA is a self-funded, for-profit entity that is not bound by the state’s current budget challenges and therefore could expand to manage an additional program. Giessel said the idea of running a loan program through AIDEA would put the state in competition with private lenders, a move that “makes no sense.” The authority on its own has partnered with small producers to finance development projects on the Slope and in Cook Inlet in recent years. It would also mean money already in Alaska would be recycled through the program, while the tax credits, as loan collateral, are bringing in new money from Outside lenders, she said. Impact of changes Walker’s remodel of the oil and gas tax credits is without question a substantial shift from the status quo, something the Oil and Gas Tax Credit working group report urged against — at least right away. His $200 million deferment from the 2016 fiscal year still left the state paying $500 million of what was a $700 million General Fund line item. The remaining $200 million from 2016 is included in a transition fund of nearly $1 billion to pay off credits expected to be earned before the legislation could be enacted. From there, the state’s obligation would shrink to about $200 million per year through 2022, a projection based on the remaining tax credits. Under the current system, the State of Alaska pays upwards of 65 percent of development costs on many projects and up to 85 percent of the cost of exploration because of the ability to “stack” credits, according to the Department of Revenue. A sea change is exactly what representatives from the industry and their supporters in the Legislature have said they don’t want. Walker said in an interview with the Journal that his administration met with each independent exploration and production company that has used the tax credit system to make sure none “fall through the cracks” during a shift away from the current credit structure. “We’re unique with the credit program across the country and (the companies) realize that,” Walker said. His critics on the issue largely agree with the governor that Alaska is unique; they contend the state has a uniquely high cost of doing business, and therefore the credits are essential to spurring development. Alaska Oil and Gas Association President Kara Moriarty said in an interview that she understands the fiscal pickle the state is in, but changing the tax credit system at a time when the companies are also cash-strapped brings about the ever-dreaded political uncertainty. “Policymakers cannot control the price of oil, so you want to have policies that attract investment even when the price of oil is low,” Moriarty said. A member of Giessel’s working group, she also questioned the equity of hardening the production tax floor and not allowing producers to claim a loss against future tax burdens that would take them below the minimum tax threshold. Moriarty said allowing oil and gas producers to claim NOLs, regardless of the minimum tax, is no different than companies in other industries deducting losses on future corporate tax liabilities. On raising the minimum tax, Moriarty was clear: “That will impact production, it just will.” A Revenue Department analysis of SB 130 states that — based on the department’s Fall 2015 Revenue Sources Book — Alaska North Slope crude prices should rebound by 2019 to a point where hardening and raising the production tax floor to 5 percent will no longer factor into tax payments for producers. Revenue is predicting an average ANS price of $68.95 per barrel in fiscal 2019. Now, early in 2016, the state has 12 credits available to explorers and producers across the state. Most are specific to the Slope and Cook Inlet basins, while two are for “Middle Earth” exploration and development credits for work outside of the developed areas, such as Doyon Ltd’s drilling in the Nenana basin near Fairbanks. Four of those credits will sunset by Jan. 1, 2017, if the program continues unchanged. The governor’s proposal to eliminate two of the Cook Inlet capital credits would leave six on the table at the start of next year: three nontransferable and one refundable Slope credit; a refundable Middle Earth exploration credit; and a lone 25 percent Carry Forward Annual Loss Credit for Cook Inlet. Sen. Bill Wielechowski, D-Anchorage, another working group member, has said the state has employed a “scattershot approach” to the credits without thoroughly vetting their benefit. Credit benefits A brief Department of Revenue report examining the fiscal pros and cons of the North Slope credits made public over the summer determined that the credits don’t represent a sound financial investment for the state. Hoffbeck said the seven-page report was incomplete and should not have been released because it limited the benefits to historical production and did not include assumed future production aided by the credits in its analysis. Definitively concluding whether the credits are a good investment for the state is “almost an unanswerable question,” Hoffbeck said in an interview. It’s unknowable whether certain projects would have moved forward or not without the state’s help. The department is more focused on figuring out what’s affordable for the future rather than analyzing historical credits, he said. Those wary of major changes to the credits at a time when North Slope producers are faced with production and transportation costs — in the $48 per barrel range, according to the Revenue Department — far exceeding oil prices that have slid to less than $30 per barrel, say the benefits of the subsidies go well beyond the state’s bottom line. Pat Galvin, chief operating officer for Great Bear Petroleum LLC and a former Alaska Revenue commissioner, recalled during a Jan. 8 discussion panel on the issue a conversation he had with a member of the Walker administration, who said the state will go from paying two-thirds of most exploration costs to about 30 percent under the governor’s plan, with the anticipation the companies themselves will be willing and able to cover the gap. Great Bear Petroleum, founded in 2010, conducted a $50 million exploration drilling last winter on its Slope prospects south of Prudhoe Bay. Galvin said just the exploration credits already set to expire July 1 with the start of the 2017 fiscal year would directly impact activity. “By taking on that exploration risk, the state is allowing for more exploration activity,” Galvin said. “Exploration leads to discoveries; those lead to development, which leads to production. If you don’t get enough projects in the hopper you don’t get enough exploration activity taking place you’re going to get less discovery, less development and less production at the end of the day.” Increasing exploration is the best way for the state to assure future production, he said. He added that if AIDEA is too risk averse and won’t lend to explorers, the loan program won’t accomplish much. Kenai Peninsula Borough oil and gas expert Larry Persily said during the Jan. 8 panel that the credits should be examined not only by their contribution to the state treasury, but what they do for local economies. A study commissioned by the Alaska Oil and Gas Association calculates each direct Alaska exploration and production job supports another nine private sector positions. While Cook Inlet oil carries no production tax and gas from the basin has a minimal tax, the production still contributes royalties, property and corporate income taxes to the state, Persily said. He also noted that incentivizing Cook Inlet gas production helped stave off the natural gas shortages that were feared in Southcentral just three years ago. “There’s no question that tax credits have been good for Cook Inlet, good for utilities, good for customers, good for production — certainly good for the local economy and jobs. Whether they’ve been a net plus, a net gain to the state General Fund is a separate question,” Persily said. Lease expenditures in Cook Inlet have increased fourfold since the state focused in incentivizing activity in the basin in 2010, according to Persily. Giessel concurred with him, saying even small producers not paying production tax bring back three to four times to state coffers what they receive in credits. “This oil tax credit program is a rebate. Folks do not get this money unless they spend money,” Giessel said. “It’s not a giveaway.” The Senate Resources Committee will take up the bills in a couple weeks and get plenty of illumination from the administration on the legislation’s finer points, she said. “I need more clarity as to how it increases production,” Giessel said. She added that she certainly has ideas on how to adjust the tax credit system and a separate bill could be on the way in several weeks as well. Transparency Giessel’s working group also encouraged opening the books, at least a little, so the public can see what the state’s oil and gas tax credit investments are returning. “Though it is not advocated for the names of the operators to be disclosed at this time, the public disclosure of investment amounts can better inform both the public and policymakers, on any other changes to make to the credit system,” the working group report concluded. “Alaskans deserve to know what the other side of the table is spending on a project if their money is investing in its success.” Walker would support more disclosure of the tax credit program, he said, but current statutes tightly restrict what data the state can release and his bills do not address the issue of transparency. He said if the state goes to a broad-based tax on residents while continuing to fund the credits it would definitely be more appropriate for Alaskans to understand what the state is investing in. Moriarty said she believes her member companies are forthright in explaining what the credits have done for them, but contended narrowing disclosures to specific projects “would really allow policymakers and the public to pick winners and losers” amongst the companies, a situation she is not comfortable with. “We’re open to ideas to be more transparent as long as that information is not used against us by other policymakers,” she said. In most years the governor’s 38 pages of oil and gas tax credit and loan program legislation would be enough to dominate the Legislature’s time, as oil industry policy has in the past. This year, however, even bigger budget issues, the Alaska LNG Project and criminal justice and Medicaid reform make oil and gas tax credits just another item on the Legislature’s daunting to-do list. Elwood Brehmer can be reached at [email protected]

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