Elwood Brehmer

Interior gas project still lacks key deals to move forward

Visible progress has all but stopped on the Interior Energy Project as negotiations on essential agreements chug along. Project officials were expected to present the Alaska Industrial Development and Export Authority board of directors with a recommendation to finalize its partnership with Salix Inc. to expand the small Southcentral liquefied natural gas plant currently serving Fairbanks, but no recommendation was made at the Aug. 10 meeting. AIDEA staff has been working to get a natural gas supply contract in place with a Cook Inlet producer since early this year, which Interior Energy Project manager Bob Shefchik has said is imperative to have before moving ahead on other parts of the complex supply chain. That’s because the cost of gas feedstock is the base upon which every other cost is added. As it has been for some time, the gas supply deal is close but not complete, according AIDEA officials. The gas producer, or producers, the authority is in negotiations with is confidential at this point. “I can appreciate the board members’ frustration that we haven’t moved the ball forward as much as we had hoped,” IEP team lead Gene Therriault said during the Aug. 10 meeting. “I can assure you, though, the members of the team have been very responsive to make sure those entities that we’re negotiating with — that we have quick turnaround to make sure that the entities are not waiting on information from ourselves.” Therriault, a full-time employee with the authority, took over in January as the project lead for Shefchik, an AIDEA contractor, as the second iteration of the Interior Energy Project has transitioned from the planning to implementation stages. Additionally, the IEP team is hashing out terms with Salix for building and operating the expanded LNG plant. In March, AIDEA informally selected Salix Inc., a subsidiary of the Washington-based energy utility group Avista Corp., as its preferred private project partner. A formal agreement between Salix and the state-owned authority for the LNG plant — from which the LNG would be trucked north and then regasified for distribution — has been anticipated since. “We have been working with AIDEA for over a year on (the IEP). It’s AIDEA’s process and we continue to work with them on that process,” Salix spokeswoman Jessie Wuerst said. The expanded Point MacKenzie LNG plant would be ready for increased production sometime in 2018 if a deal with Salix can be reached soon. Much of last year was spent evaluating more than a dozen proposals to get natural gas to Fairbanks-area consumers for $15 per thousand cubic feet, or mcf, of gas. That price is roughly equivalent to heating oil at $2 per gallon, which is the primary source of home heat for a majority of Interior residents. When the legislation establishing and funding the project was passed in 2013, heating oil in the Interior was upwards of $4 per gallon, making it in theory a viable investment to convert to lower-cost and cleaner natural gas for home and business owners. However, the unexpected collapse in world oil markets, which has helped heating oil-dependent residents in the near term, has further strained the financial feasibility of the thin-margined Interior Energy Project. Lower fuel oil prices have forced AIDEA to lessen its estimates on how many residents will convert once natural gas is available. Subsequently, the LNG plant size has been scaled back as well to shrink upfront capital costs, but both are hard on the project’s economies of scale. “The commercial challenges of low (natural gas) demand and the requirement of return of commercial deals are tough for this project,” Shefchik said in an interview. “It’s both gas and liquefaction.” Securing such a small supply of gas — initially in the range of 3 billion cubic feet per year — adds to the obstacles inherent in negotiations, Shefchik said. Fairbanks Natural Gas President Dan Britton has long said his small utility that operates in the heart of Fairbanks would have expanded its services to more customers had it been able to buy more gas from Cook Inlet. While finalizing the paper side of the project has been tough, progress is being made on moving the LNG north, Shefchik and Therriault said. Shefchik said the 13,000-gallon LNG tanker trailer being tested by Fairbanks Natural Gas has performed well and the project team is “looking at buying three or four more” if trucking the gas north from the LNG plant is the preferred option. The trailers would cut transportation costs, which could be up to 20 percent of the $15 per mcf delivered cost, by up to 30 percent over the more standard 10,000-gallon LNG trailers currently employed by Fairbanks Natural Gas. The other transport option being pursued is shipping LNG in large “ISO” containers via rail. Therriault said the Alaska Railroad would be doing a “trial run” of LNG in ISO containers strapped to flatbed railcars in October or November “just to test the logistics” of shipping LNG from the Mat-Su area up to Fairbanks. The Alaska Railroad received approval from the Federal Railway Administration last October to haul LNG and thus became the first railroad operator in the country to gain such approval. Moving LNG from Southcentral to the Interior by rail could potentially cut transportation costs for the IEP by more than 50 percent over the cost of trucking the fuel, according to railroad estimates. LNG by rail would add complexities to what is already a challenging logistical project, as it would still have to be trucked at least a short distance from the LNG plant on Point MacKenzie to the rail line in Houston. Elwood Brehmer can be reached at [email protected]  

Budget cuts manifesting through shuttered state services

From Kotzebue to Ketchikan, the State of Alaska is closing offices and programs as funding runs out. The Department of Labor and Workforce Development announced Aug. 15 that it would be closing AVTEC’s Anchorage campus immediately due to state budget cuts. Formerly the Alaska Vocational Technical Center, AVTEC is Alaska’s primary public vocational and technical college. Its main campus is in Seward. AVTEC’s Allied Health Program, which trained nurses and nursing assistants, is the casualty losing the Anchorage extension. “It is frustrating and disappointing to close a campus that trains Alaskans for rewarding careers in a fast-growing industry like health care. The department’s and AVTEC’s budgets have seen big cuts in the past couple years and we simply can’t afford to keep the Anchorage campus open,” Labor Commissioner Heidi Drygas said in a release announcing the closure. Heather Beaty, director of the Alaska Workforce Investment Board said in an interview that the Allied Health Program run out of Anchorage usually enrolled about 100 nursing assistant students each year. The registered nurse program was shuttered after the 2015 class graduated and the licensed practical nurse program was “put into abeyance” last November, Beaty said. “We’ve been looking for other funding sources to bring that program back online and had people on a waiting list hoping that we could do that, but the continued cuts to the budget caused us to close down all of the Allied Health programs at the campus here in Anchorage,” she said. There were 30 people on the LPN program waitlist, according to the Labor Department. AVTEC’s overall budget peaked in fiscal year 2013 — as did most state agency and program funding — at $16.1 million. By 2015 AVTEC’s budget was down slightly to $15.6 million and this fiscal year, 2017, it received $14.9 million from the Legislature. Beaty said closing the Allied Health Program saved the popular school $705,000 per year, but also meant cutting four full-time instructors. There are no plans to consolidate the program into the Seward campus. “If things changed I’m sure the department would reexamine (the Allied Health Program) because occupations in health care are growing fast and in high demand,” Beaty said. “It was a painful decision to have to close this program because they’re good careers for Alaskans with good wages and opportunities for advancement but we cannot afford it at this point.” As a whole, the Department of Labor budget has shrunk 16 percent from $195.5 million in 2013 to $164.4 million this fiscal year — more than half of which is designated federal money. The decline in Labor’s unrestricted General Fund, or UGF, budget has been sharper. The department has absorbed nearly a 40 percent UGF budget cut since 2013 and a 37 percent cut over the past two years to its current $15.3 million UGF level. The State of Alaska has run budget deficits driven by a loss of General Fund revenue in the $3 billion range the past years and a the drastic and sustained drop in oil markets indicates little end to the deficits in sight with status quo state spending and revenue. Gov. Bill Walker vetoed approximately $870 million from the 2017 budget June 29 after legislators failed to pass the key elements of his administration’s broad fiscal plan to balance the state budget by 2019. His line item vetoes did not directly impact the specific services highlighted in this story. It’s the UGF cuts that led to the Aug. 11 announcement that the Labor Department would be closing the Kotzebue Job Center to save $166,000 annually. That office was scheduled to close Aug. 19. Labor Commissioner Drygas said in a formal statement that the department would continue to assist Kotzebue residents who used the job center through online services. According to Beaty, 413 individuals utilized the Kotzebue Job Center in 2015 and it received 2,200 total visits from residents of the town of about 3,200 people. Job centers in Barrow and Seward were closed last year to save a total of $316,000 per year, a department release states. Beaty said individuals make use of the job centers for “anything from just coming in to do job searches online or filing for unemployment insurance or working one-on-one with our staff for more extensive training and support.” The “more extensive training and support” often includes assessments for appropriate training programs, updating resumes and sharpening interview skills among other things, she said. Beaty added that the department has tried to make sure Alaskans, particularly in rural areas, still have some access to employment resources. “In the case of Kotzebue we’ve donated a few of the computers that were in our office to Maniilaq Association (a local social service nonprofit) so that we can ensure the public still has access to those computers and the Internet connection to get online with our services,” she said. “In Seward, the job center was actually located on the AVTEC campus so that room is still open to the public with computers and a phone that they can use to connect with our Kenai Job Center staff for personal assistance.” Beaty also said she is not aware of any other closures on the immediate horizon, but if budget cuts continue in the 2018 budget the department will have to continue eliminating services and programs. “It’s a tough reality but these are the effects of this budget climate,” Beaty said. On Sept. 15, the Ketchikan Regional Youth Facility will close its doors and 15 full-time Division of Juvenile Justice employees will be let go, the state Department of Health and Social Services announced also Aug. 15. “Youth in detention will now have to be sent further away from their home communities and hard-working state employees will lose their jobs when the facility closes,” DHSS Commissioner Valerie Davidson said in a statement. “But given the financial realities we face in our state, we know closing the Ketchikan facility is necessary.” Young Alaskans at the Ketchikan facility will be transferred to the Johnson Youth Center in Juneau, according to a DHSS release. Juvenile Justice Director Rob Wood said low utilization — certainly a good thing when the topic is youth detention — contributed to closing the Ketchikan center as well. The Ketchikan Regional Youth Facility got $1.86 million in the 2017 budget that includes legislative intent language to convert the facility to an adolescent substance abuse and behavioral health treatment center. The $1.8 million was on par with previous year’s allocations. “It wasn’t being used being used enough as a detention center, so we were looking to see if we would be able to create a treatment program out of it that would have some Medicaid support and it just didn’t work out.” The Ketchikan center has had eight to 10 beds available for the past decade, but on average only three or four of those beds have been used most days, according to Juvenile Justice Division data. Statewide, juvenile detention and treatment facilities had capacity for 257 youth in 2015, down from 295 in 2006.  However, even as the number of available beds has decreased, so has the percentage of beds being used. Utilization of state youth detention and treatment facilities has fallen from about 85 percent of available space in 2006 to less than 70 percent in 2015. “We’ve just had low utilization largely because we’ve got a fairly small juvenile crime rate the last few years,” Wood said. “It’s hard to maintain programs that cost $1.9 million per year when you have those low numbers.” Elwood Brehmer can be reached at [email protected]

Wielechowski: lawsuit ‘highly likely’ if full PFD not restored

Anchorage Democrat Sen. Bill Wielechowski might go through the courts to supersede Gov. Bill Walker’s partial veto of this year’s Permanent Fund Dividend appropriation. In an Aug. 10 letter to Alaska Permanent Fund Corp. Executive Director Angela Rodell, Wielechowski wrote that the corporation has a “statutory obligation” to transfer the full, $1.36 billion amount from the fund’s Earnings Reserve account to the Dividend Fund and subsequently pay the previously expected PFD of about $2,100 to each eligible Alaskan, despite the governor’s June 29 veto. Walker vetoed $666.3 million of the $1.36 billion transfer from the Earnings Reserve to the Dividend Fund contained in the 2017 fiscal year state operating budget passed by the Legislature. The line-item veto was intended to reduce the PFD paid this October to $1,000 per individual, an action Walker has repeatedly said he felt was necessary to help preserve the state’s fiscal health in the face of $3 billion-plus annual deficits and the absence of structural changes to state finances by the Legislature. In addition to crossing out the lump sum dividend amount and writing in his own, the governor also crossed out language in the budget that notes the transfer is “authorized under AS 37.13.145(b).” That is the statute that states the Permanent Fund Corp. “shall transfer” the formula-determined amount from the Earnings Reserve to the Dividend Fund for the annual payouts. The Alaska Constitution gives governors broad authority to make line-item vetoes in appropriations bills, and they regularly use it on budget bills. Walker’s partial veto of the Dividend Fund transfer amount is the first time a governor has touched the money that pays the PFD. Wielechowski, an attorney, acknowledged the veto power, but said in an interview it doesn’t apply to the PFD. “The governor can’t veto a statute. That’s the whole point,” he said. “You’ve got a statute in place; it was debated by the Legislature. It was signed into law by a governor and it says the transfer is automatic.” Wielechowski added it is “highly likely” he, or a group he is a part of, will sue the Permanent Fund Corp. for not following state law if the full $1.36 billion is not transferred. APFC spokeswoman Paulyn Swanson referred questions about how the corporation will proceed with this year’s dividend to Department of Law officials. Law spokeswoman Cori Mills said the department’s opinion since 1983 has been that an appropriation is required to transfer money out of the Earnings Reserve and into the Dividend Fund, which is administered by the Department of Revenue. In his letter to Rodell, Wielechowski cited a 1994 Alaska Supreme Court case, Hickel v. Cowper, which focused the definition of “amount available for appropriation,” but also addressed the fund transfer. The Supreme Court’s analysis determined Fund income “shall be deposited by the corporation into the account as soon as it is received. Therefore, money in the earnings reserve account never passes through the general fund, and is never appropriated by the Legislature.” Wielechowski noted that there have been attorney general opinions that fall on each side of the issue, but also that the Supreme Court has already had the final say. “The Supreme Court has interpreted (the law) to say it is an automatic transfer, so it never had to be in the budget and because it didn’t have to be in the budget, the governor can do whatever he wants; he can cross the language out,” he said. “It’s an agency obligation to make the payment, or a Permanent Fund Corp. obligation to make the transfer. It’s a simple, almost ministerial, statutory function that they have.” Wielechowski voted against Senate Bill 128 earlier this year, which was the administration’s proposal to reformulate how dividend’s are calculated and make money from the earnings reserve account available to fund government services through an annual percent of market value, or POMV, draw from the account. SB 128 passed the Senate 14-5 but died in the House Finance Committee by a 5-6 vote without getting to a floor vote. During the subsequent special session, the Senate refused a House request for a joint session to attempt to override the governor's veto. The bill, which was the centerpiece of Walker’s broader New Sustainable Alaska fiscal plan, also would have set the dividend at $1,000 per Alaskan for the next three years. Elwood Brehmer can be reached at [email protected]

CP still on schedule for Mooses Tooth project

ConocoPhillips is maintaining its long-term positive view of world oil markets as the company preps to build another major project in Alaska. Construction of the $900 million Greater Mooses Tooth-1 project on the far western edge of the developed North Slope is on schedule to start this coming winter as soon as the ice roads can be built, likely in January, ConocoPhillips Alaska spokeswoman Natalie Lowman said. Early work on GMT-1 will primarily consist of laying gravel for the project’s 12-acre well pad, some pipeline work and starting construction on the two bridges along an 8-mile gravel road that will ultimately connect it to the adjacent Colville River field infrastructure. Peak construction will add about 700 jobs to the Slope. The current plan is for GMT-1 to come online in December 2018 after two winter construction seasons, Lowman said. Initially development will entail nine wells, four producers and five injectors, but the project has the potential for up to 33 wells and peak production of about 30,000 barrels of oil per day, according to company estimates. While it was originally planned for startup in late 2017, ConocoPhillips delayed GMT-1 in February 2015 and attributed it mostly to slow-moving federal permitting process and the sudden drop in oil prices that had just occurred at that time. It was sanctioned for funding in last November. However, the project is full speed ahead now and the company is in the midst of engineering, procurement and some fabrication, Lowman said. “(GMT-1) is getting ready to move,” she said. ConocoPhillips’ Greater Mooses Tooth projects are slowly expanding development on the North Slope westward into largely uncharted territory, as resource potential goes, anyway. GMT-1 will be the first development on federal land within the borders of the 23 million-acre federal National Petroleum Reserve-Alaska, or NPR-A. ConocoPhillips’ CD5 project to the east is on Kuukpik Corp. land within the reserve boundary. Mineral rights for GMT-1 are shared by the Bureau of Land Management, Kuukpik Corp. and Arctic Slope Regional Corp. Lowman said “it’s almost 100 miles of ice road” to connect GMT-1 to the long-established Kuparuk field, which along with Prudhoe, is the hub of North Slope operations. About nine miles to the southwest of GMT-1 is ConocoPhillips’ Greater Mooses Tooth-2 prospect, which is about two years behind the former in development. BLM announced July 26 that it would begin reviewing the supplemental environmental impact statement, or SEIS, for GMT-2 and concurrently open a public comment period to identify issues in the SEIS that are deemed to warrant analysis. That public comment period closes Aug. 29. “We’re working with (BLM) right now on the GMT-2 schedule,” ConocoPhillips Alaska Vice President of External Affairs Scott Jepsen said. “We’ll make a decision on funding after we’ve got the necessary permits to move ahead with the project.” That schedule would require the company to secure its federal environmental permits by the third quarter of 2017 to start production in 2020, according to Lowman. There is no production estimate for GMT-2 yet, but she said it would likely require “a billion plus” dollars of investment. GMT-2 is also on federal land in the NPR-A, meaning the State of Alaska would receive half of the federal royalty revenue from the project if it is developed. Because it is in the eastern portion of the NPR-A deemed to have a “high potential” resource discovery, the full royalty rate is 16.6 percent, of which the state gets half. The overwhelming majority of the NPR-A is classified as “low potential,” with a lower associated royalty of 12.5 percent. State revenue from federal royalties must first be paid to communities near the project area through the NPR-A Impact Grant Program to fund local infrastructure and services. After the grant obligation is fulfilled, royalty money is dispersed through state government, as it would be if the project were on state land — 25 percent to the Permanent Fund and other distributions to dedicated funds before the remainder is added to the state General Fund. “GMT-2 will generate revenue for the Native corporations, the villages, the state and the North Slope Borough,” Lowman said. Back to the east, drilling is ongoing at ConocoPhillips’ CD5 development, which produced its first oil on October 27, 2015. In April, the company announced it would spend $190 million to drill another 18 wells at CD5, on top of the 15 in its initial development plan, to fully build out the $1 billion project and hit the peak production target of 16,000 barrels per day. Oil is expected to start flowing from the second round of drilling late next year and CD5 is on pace to hit its production target, according to Lowman. Jepsen also said the coiled tubing drilling rig ConocoPhillips ordered from Nabors Alaska Drilling Inc. in November 2014 is on time and on its way to the Slope. The Nabors CDR3 rig will be employed at the Kuparuk field to work over old wells and pull thin layers of oil out of the existing reservoir that are unreachable with conventional drilling techniques. Elwood Brehmer can be reached at [email protected]  

State proposes additional royalty oil sales to Petro Star

The Department of Natural Resources is looking to sell more of its oil to local refineries a few months after finalizing a royalty oil deal with Tesoro Corp. Under the latest proposed royalty oil sale, the state would sell between 18,800 and 23,500 barrels per day of North Slope crude to Petro Star Inc.’s North Pole and Valdez refineries on a one-year contract starting Dec. 1. A second, four-year contract would kick in Dec. 1, 2017, immediately after conclusion of the first, with up to 20,500 barrels per day sold to Petro Star in the first year. Sale volumes from the state would gradually decrease in subsequent contract years to a maximum of 10,500 barrels per day from December 2020 to November 2021. The second contract would require legislative approval. DNR estimates the royalty-in-kind sales would generate between $30 million and $37.4 million in additional revenue to the state over taking royalty-in-value payments from producers. Petro Star Inc. is a wholly owned subsidiary of Arctic Slope Regional Corp. The State of Alaska collects 12.5 percent to 33.3 percent of oil produced on North Slope state leases through its royalty ownership share. In April, Gov. Bill Walker signed House Bill 373, which authorized a royalty-in-kind contract up to 25,000 barrels per day with Tesoro Corp. for its Nikiski refinery. The five-year contract with Tesoro, which passed the Legislature unanimously, is expected to net the state up to an additional $56 million. The state typically gets more for in-kind oil it sells in-state because the marine transportation costs to otherwise ship the oil to West Coast refineries is subtracted from the price the state receives for its in-value royalty oil, according to the Petro Star sale preliminary best interest finding. However, the added value, or savings, from not shipping the crude south can potentially be lost in pipeline tariffs and line loss deductions, among other costs that are incurred when the oil is refined locally. Since 2008, the difference in royalty-in-kind netback pricing from Prudhoe Bay oil has been as high as $2.02 per barrel in 2013. Conversely, in 2009 — the only year over the period that the average royalty-in-kind netback was negative — in-kind oil sold for 23 cents per barrel less than what the state took in-value, according to the Division of Oil and Gas. Petro Star’s refineries have capacity to process up to 82,000 barrels of oil per day, meaning the proposed state oil sale could initially supply nearly 30 percent of the company’s processing capacity. Combined, the Tesoro and Petro Star contracts could represent between 70 percent and 99 percent of available North Slope royalty oil if the maximum contract volumes are hit. The North Pole and Valdez facilities produced 19,000 barrels per day of refined product in 2014. Most years, a little more than half of what Petro Star produces will be jet fuel, about one-third will be low-sulfur diesel and the remainder will primarily be home heating oil, according to the best interest finding. “Petro Star plays a crucial role in supplying energy for the Interior,” the best interest finding states. “Additionally, Petro Star began construction of an asphalt plant at its North Pole refinery in October 2015 to provide a local source of asphalt for road construction and repair in the Interior.” Since Flint Hills Resources closed its North Pole refinery in 2014, the Tesoro refinery far to the south in Nikiski has been the only source of asphalt — a product that must be kept hot — for construction projects in the northern reaches of the state. Petro Star’s retail subsidiary Sourdough Fuel provides up to 60 percent of the heating oil for the Interior, according to DNR, and its North Pole refinery recently began selling naphtha-blended fuel to Golden Valley Electric Association for power generation. The state Division of Oil and Gas is taking public comments on the preliminary best interest finding for the Petro Star sale through Aug. 29.

Legislature gives LIO owners notice; Stevens signs deal for Midtown office

The inevitable has become official: Alaska legislators are moving out of the Downtown Anchorage Legislative Information Office building. Legislative Affairs Executive Director Pam Varni said during a Wednesday morning Legislative Council meeting that the agency gave 90 days notice to its Anchorage landlord, 716 West Fourth Avenue LLC, and legislators will vacate the building custom-made for them by Oct. 16. That is because Legislative Council Chair Sen. Gary Stevens of Kodiak signed off on a purchase agreement for $11.85 million to buy the Midtown Anchorage Wells Fargo office building on July 18. The estimated closing date for the purchase is Sept. 15. The council meeting was teleconferenced from the current and controversial Anchorage LIO. Varni said the plan is for Anchorage legislators to move into the building “as-is” and for Legislative Affairs to slowly renovate the more than 52,000-square foot building to meet legislators’ needs. A lot of that work will likely be done while the Legislature is in session in Juneau, she said. The Legislative Affairs Agency handles business and operational matters for the Legislature. Stevens highlighted the fact that the $11.85-million sale price is $650,000 below the list price and the $12.5 million the Legislature appropriated in the 2017 fiscal year capital budget for the deal. Additionally, the state should net about $62,000 in fiscal year 2017, which runs through next June 30, and another $125,000 in 2018 because the rent Wells Fargo will pay to keep its bank branch on the first floor of the building, plus its third floor offices, will exceed estimated operating expenses. Wells Fargo, also one of the construction lenders on the Downtown LIO, will lease 5,900 square feet of bank space for 10 years and is expected to move out of the third floor offices after about 18 months, according to Stevens. “We need to start calling it the Benson building rather than the Wells Fargo building,” Stevens commented. The soon-to-be Anchorage LIO is located at 1500 W. Benson Blvd. in Anchorage. Further savings could be wrought by moving Eagle River legislators and Legislative Audit employees into the new space, he added. The current LIO owners filed a $37 million contract claim against Legislative Affairs on July 8 in an effort to recoup the money the private firm invested in the $44.5 million redevelopment project in 2014. The claim is currently before Stevens, in his role as procurement officer through chairing the Legislative Council, but is almost certainly headed for administrative review and possible state court given Stevens’ decision to buy the Wells Fargo property. The Legislative Council voted in March to buy the Anchorage LIO for $32.5 million in March but Gov. Bill Walker threatened to veto that capital appropriation saying at the time it would be inappropriate for the Legislature to spend the money while the state is facing multi-billion-dollar budget deficits. The governor ultimately did not veto the $12.5 million appropriation but urged legislators to find another solution. Public pressure to get out of the 10-year, $3.3 million per year lease for the downtown space while the state grapples with massive deficits pushed the council to consider other options starting late last year. The initial proposal was for legislators to move into the nearby state-owned Atwood Building, also in Downtown Anchorage. Stevens also said that moving to the Atwood Building, which houses executive branch offices, also in Downtown Anchorage, would cost the Legislature $752,000 per year, about $175,000 more than the estimated operating and maintenance costs for the Wells Fargo-Benson offices. On top of that would be the $3.5 million expense to make the Atwood move-in ready for legislators, work which couldn’t be finished until 2018, Administration Commissioner Sheldon Fisher has said. Rep. Sam Kito, D-Juneau, noted that the cost of buying the midtown offices were not factored into Stevens’ purported savings. “We’re spending $11.8 million to realize this savings,” Kito said. The Juneau legislator has consistently voiced his concern — bucking the trend of the majority of Legislative Council members — about the state not fulfilling its financial obligation to 716 West Fourth Avenue, the current Anchorage LIO owner group. Moving out of the downtown space also likely means writing off the $7.5 million the Legislature invested for tenant improvements in the LIO project in 2014. Between that $7.5 million, a year and a half of rent and operating expenses at the Downtown LIO, and the $11.85 million for the Wells Fargo building, the Legislature has spent about $25.3 million on Anchorage office space since 2013. If it is found to be responsible for reimbursing the building owners that amount will likely more than double. Elwood Brehmer can be reached at [email protected]

Prudhoe plan only one ruled incomplete

BP’s plan of development for Prudhoe Bay is the lone plan state regulators have deemed “incomplete” since a January request to all oil and gas operators in the state for natural gas marketing and facility sharing information. As of Aug. 2, the Division of Oil and Gas had received and approved 21 of 22 oil and gas unit plans of development since Jan. 1, was processing five plans and had eight more development plan deadlines upcoming, according to the division. Historically, the annual unit plans of development have been primarily technical documents used to relay specific drilling plans and other development activity to state resource managers within the Department of Natural Resources and its regulatory agency, the Division of Oil and Gas. In January, now-retired DNR Commissioner Mark Myers sent letters to all unit operators in the state requesting information, where available, regarding what the operators have done recently to market potential natural gas reserves and how they share facilities with other operators. The information, according to Myers’ letters, would help determine the viability of developing and monetizing more of Alaska’s oil and gas resources, a portion of the department’s mission. “In order to achieve this goal, it is important that DNR understand how all hydrocarbons available for offtake are being utilized on the unit, are being sold within the state, or are being prepared and/or marketed for potential future sale,” Myers wrote. The iconic Prudhoe Bay unit, operated by BP on behalf of the working interest owners ConocoPhillips and ExxonMobil, with its 26 trillion cubic feet of recoverable natural gas, would supply about three-quarters of the gas for the gas export plan that is the $45 billion-plus Alaska LNG Project. Myers’ original request to BP for Prudhoe was for “the identity of the parties with whom the unit operator has current commercial agreement(s), or with whom the operator intends to have substantive discussions regarding the marketing of unit hydrocarbons including unit gas and heavy/viscous oil resources.” Additionally, commercial terms of the potential agreements as well as gas volumes to be delivered among other specificities were requested. The 2016 Prudhoe Bay Unit Plan of Development turned in to the division March 31 was general and brief in its reference to the new request, stating that major gas sales — the Alaska LNG Project or another gas export plan — from Prudhoe “remains dependent upon a number of factors including market demand and the availability of an acceptable offtake project. In the meantime, the (Prudhoe Bay Unit) working interest owners will continue to use gas to enhance and accelerate oil recovery for (natural gas liquids) production for shipment through TAPS or use in enhanced oil recovery operations.” BP added that the companies will also continue to evaluate plans to optimize resource recovery and “operational changes to position for major gas sales.” After the Division of Oil and Gas deemed the Prudhoe plan lacking, a back-and-forth of correspondence ensued with BP, with the backing of the other unit owners, repeatedly contending the request broke nearly 40 years of precedent set since Prudhoe’s first plan in 1977 and further could violate federal anti-trust laws. Ultimately, an agreement was not reached and the original June 30 deadline for an approved plan of development was extended to Nov. 1. BP has until Sept. 1 to submit a modified plan for review. Oil and Gas Division Director Corri Feige said July 19 that the original request by the department was overly detailed and has been made more general in later communications with BP. Plans of development for other units from other operators approved this year appear to be similarly vague to BP’s in regards to marketing information. Hilcorp Alaska, which operates multiple units in Cook Inlet and on the North Slope sent a two-page letter to Feige March 10 generally outlining its stance on gas marketing and facility sharing for all of its units. On Cook Inlet gas, Hilcorp Alaska Land Manger Kevin Tabler wrote that the company sells nearly all of its gas to the region’s gas and electric utilities. Tabler noted that marketing arrangements and facility sharing agreements “often contain confidential information not appropriate for the public record by inclusion and distribution in a document such as the (plan of development).” He added that Hilcorp representatives would be willing to meet with division officials to discuss the best way to handle potentially sensitive information. Because long-term gas contracts with utilities are public documents filed with the Regulatory Commission of Alaska, the terms of the associated sales are public. As for the Slope, Tabler wrote that Hilcorp doesn’t have natural gas available for a major gas sale. “To the extent gas sales at all are negotiated, they are for the enhancement of those who are fuel gas deficient and thereby supporting the commercialization of royalty bearing hydrocarbons for which the state is the royalty beneficiary,” he wrote. Ultimately all the information the division needed from Hilcorp was collected during regular plan of development discussions, according to the division’s response to questions from the Journal. No additional meetings were required to meet the January request for more information. Feige sent letters to Hilcorp July 5 approving the company’s Duck Island, Milne Point and North Start North Slope unit plans of development. Cook Inlet Energy’s plan of development for the Redoubt Unit submitted Jan. 29 states the independent “currently markets its oil in the (Redoubt Unit) through the Cook Inlet Pipeline and sells it to Tesoro at the Drift River facility. All gas produced from the (Redoubt Unit) is used to power operations at the unit facilities. “Cook Inlet Energy is always interested in entertaining offers to use its spare production capacity at all of its facilities, and is willing to enter facility sharing agreements as reasonable and appropriate.” The Redoubt Unit Plan of Development was approved March 22. Similar to Hilcorp, Cook Inlet Energy’s Redoubt plan document did not warrant any extra discussion with the Division of Oil and Gas beyond what has been normal in the past, according to the division. Gov. Bill Walker said in a July interview with the Journal that he does not feel there are anti-trust issues and that the producers’ request and approval from the Alaska Oil and Gas Conservation Commission for additional gas offtake from Prudhoe and Point Thomson last fall starting in 2025 officially signals an intent for major gas sales at that time. And because the state is dependent upon the producers to pull its share of the gas off the fields it is appropriate for the state to know what they are doing to line up customers for Alaska’s gas worldwide, he said. Walker also said he has had meetings with the Alaska leaders of the major producers about the Prudhoe plan and said he fully expects a solution to be reached. Elwood Brehmer can be reached at [email protected]

CP loses $1.1B in 2Q, sale helps net $54M in state

ConocoPhillips Co. netted $54 million and increased oil production in Alaska in the second quarter, but those local positives were overshadowed by nearly $1.1 billion in losses companywide. ConocoPhillips released its quarterly earnings report July 28. The $1.1 billion second quarter loss means ConocoPhillips absorbed more than $2.5 billion of losses in the first half of 2016. It lost $4.4 billion in all of 2015. About three-quarters of the second quarter loss was attributed to its Lower 48 and Canada operations, where ConocoPhillips lost a combined $698 million, according to the earnings report. ConocoPhillips reported an average realized crude oil price of $48.21 per barrel in 2015. That price has averaged $36.70 per barrel so far this year. “The price environment remains challenging, but our business is running well and we continue to beat our production, capital expenditures and operating cost targets. During the quarter, we successfully completed significant turnaround activity and saw strong performance across the portfolio, which enabled us to improve our full-year guidance for production, capital expenditures and adjusted operating costs,” ConocoPhillips CEO Ryan Lance said in a formal statement. Lance added that the company cut its debt by $800 million and sold $200 million in assets during the quarter, which kept it on track for selling about $1 billion in assets this year. ConocoPhillips also reported quarterly production and operation expenses 20 percent below 2015. The $1.1 billion net loss translated to a loss of 86 cents per share. On July 13 the company announced a quarterly dividend of 25 cents per share that will be paid on Sept. 1. ConocoPhillips stock traded for $39.61 at the end of trading on the New York Stock Exchange Aug. 1. ConocoPhillips’ oil production in Alaska is up 10.6 percent year-to-date at an average daily production of 166,500 barrels per day in 2016. In April, the company’s Alaska offices announced approval to spend $190 million to drill 18 wells and add associated infrastructure to its CD-5 oil development on the North Slope. CD-5 is the company’s latest project in the Alpine field — on the western fringe of the established North Slope. ConocoPhillips expects CD-5 will hit its production target of averaging 16,000 barrels per day this year. Production from $1 billion development began late last October. The company also reported a $56 million asset sale in Alaska. In April, the Regulatory Commission of Alaska approved the $152 million sale of ConocoPhillips one-third interest in the Cook Inlet Beluga River natural gas field to Anchorage’s Municipal Light and Power and Chugach Electric Association utilities. ConocoPhillips has spent $503 million on capital projects in Alaska so far this year. That is down from $781 million in the first half of 2015. Late last year the company announced 2016 capital budget of $1.3 billion for the state, down about 5 percent from 2015 overall. Elwood Brehmer can be reached at [email protected]  

AGDC finance VP quits; Walker vetoes bill to put legislators on board

The Alaska Gasline Development Corp. is moving ahead with its alternative financing concept for the Alaska LNG Project with a couple leadership positions vacant. AGDC Vice President of Finance and Administration Bruce Tangeman resigned July 29, effective immediately. Tangeman joined AGDC in that role in 2014 as the Alaska LNG Project began to take shape shortly after the passage of Senate Bill 138, the legislation that guides the state’s participation in the project. Prior to AGDC, he served as Deputy Revenue Commissioner under former Gov. Sean Parnell from 2010 to 2014. “AGDC will be initiating a search for (Tangeman’s) replacement in the near future. In the interim, all administrative inquiries can be directed to Melissa Boquet, administrative services manager. We wish Bruce the best in his future endeavors and thank him for his two years of service to AGDC,” corporation spokeswoman Josie Wilson wrote in a statement. The change in the financing structure proposed by AGDC President Keith Meyer would fund the $45 billion-plus megaproject primarily through third party financing as opposed to the equity-share model originally agreed to by the state and its producer partners in the project: BP, ConocoPhillips and ExxonMobil. The seven-member AGDC board also remains one member short after former Fairbanks North Star Borough Mayor Luke Hopkins resigned his public seat May 25, about a month after narrowly being confirmed to the board by the Legislature. Gov. Bill Walker has not yet named his replacement. Hopkins, a Democrat, left AGDC to run for the state Senate seat currently held by North Pole Republican Sen. John Coghill. On July 20, Walker vetoed Senate Bill 125, which would have added three legislators to the AGDC board in non-voting roles — one senator chosen by the Senate president, a member of the House selected by the Speaker and a member of the minority caucus. The bill passed the Senate on majority-minority caucus lines and received both bipartisan support and opposition in the House. A March 20 legal opinion from the Department of Law determined the bill would violate the Alaska Constitution if passed because the AGDC seats would constitute dual office holding by the appointed legislators. Supporters of the bill contended it would improve legislators’ knowledge of the happenings at the agency leading the state’s role in the $45 billion-plus AK LNG Project. Some legislators also noted that they are free to attend AGDC board meetings to better follow the corporation’s activities, but rarely do. Sen. Resources Chair Cathy Giessel, as the lone legislator to regularly attend the public gasline meetings, is the exception. Elwood Brehmer can be reached at [email protected]  

Wishbone Hill permit awaits federal call after court order

Usibelli Coal Mine Inc.’s operating permits for its Wishbone Hill coal development are “in limbo” after a July 7 federal court order, according to officials in the state Department of Natural Resources. Alaska Coal Program Manager Russell Kirkham said the state is waiting on a decision from the federal Office of Surface Mining, Reclamation and Enforcement before it acts on the coal permits. “We have not taken the step to terminate the permits,” Kirkham said. “Right now the permits are there but they’re pretty much in limbo until the final order comes out.” Usibelli’s Wishbone Hill is a longstanding proposed surface coal project on state land northeast of Palmer along the Glenn Highway. U.S. District Court of Alaska Judge Sharon Gleason’s July 7 ruling ordered the Office of Surface Mining to reevaluate its November 2014 decision that indirectly validated Usibelli’s permits for the mostly idle project. A group of environmental organizations, including Cook Inletkeeper, Alaska Center for the Environment, the Sierra Club, and the Chickaloon Village Traditional Council, sued the Office of Surface Mining in March 2015, claiming the Interior Department agency did not enforce its own requirement to pull permits if mine work does not start within the permit period. Gleason largely agreed, and determined that the federal regulators failed to follow the law by allowing DNR to implicitly renew and extend the permits without the commencement of mining activities. The permits to operate can be renewed for up to five years or extended for three. The State of Alaska holds primacy over federal coal mining regulations. Thus, DNR handles all permitting and the Office of Surface Mining intervenes only if required to do so. Specifically, language in the federal Surface Mining Control and Reclamation Act stating operating permits “shall terminate” if mining activity has not occurred within the permit period. Gleason wrote, it “is unambiguous, in that a surface mining permit terminates by operation of law if mining operations have not timely commenced under that statute, unless an extension has been granted pursuant to the statute’s terms.” Kirkham said the federal mining regulators are working on a new decision that jives with Gleason’s ruling and the state is waiting for that decision, which is expected soon, before taking further action. “In this case the district court, reversing the federal Office of Surface Mining, held that the termination provision of a federal surface coal mining statute is self-executing. The decision was not, in itself, a ruling on the validity of the Wishbone Hill permits. Instead the court has remanded the matter to the federal agency for further proceedings where that question and others may be resolved.  We are continuing to review the decision and appropriate next steps,” according to a statement from the Alaska Department of Law. Office of Surface Mining Western Region officials, located in Denver, could not be reached for comment. Usibelli acquired the Wishbone Hill project in 1997 from North Pacific Mining Corp., a Cook Inlet Region Inc. subsidiary. The mining company then applied for and received several five-year permit renewals from DNR through 2014. The first state permits to operate the mine were issued to Idemitsu Alaska Inc. in 1991. Idemitsu was granted one extension before it sold the project to North Pacific Mining in 1995. Early coal mining operations started in 2010 when Usibelli began work on a road to the mine site. About that same time, Usibelli started a feasibility study on the project, according to company spokeswoman Lorali Simon. Office of Surface Mining Western Region Division Manager Robert Postle wrote in the November 2014 notice to state coal regulators that DNR was correct in not taking action against Usibelli for operating at Wishbone Hill without permits because the company’s permits had not been terminated. However, that was only because DNR didn’t follow the appropriate procedure when it implicitly granted extensions to the companies that owned Wishbone Hill before Usibelli by not actively pulling the permits, according to Postle. “To terminate a permit, the regulatory authority must take affirmative action based on the record,” Postle wrote in 2014. “In this case, DNR failed to do so, and consequently, Usibelli was not operating without a permit. I find that DNR, consequently, had ‘good cause’ for not taking action against Usibelli for operating without a permit. I also find, however, DNR had a responsibility to issue prompt determinations on the failure of Usibelli’s predecessors to initiate mining and that it failed to do so. This situation cannot be allowed to happen again.” The 2014 notice to the state was spurred by a citizen’s complaint filed with the Office of Surface Mining by several of the same groups that filed the lawsuit against the federal agency. The complaint requested federal action to stop coal mining operations at Wishbone Hill until Usibelli obtained valid permits. Usibelli, which operates the state’s lone active coal mine near Healy in the Interior, has invested millions of dollars in Wishbone Hill and still has plans to bring the mine, Simon said, but a myriad of factors have always prevented that. She said DNR has been continuously apprised of Usibelli’s plans and consequently kept approving the permits and that Gleason “erred because she did not recognize the state’s primacy” over coal mining operations. “Because the ball is in (the Office of Surface Mining’s) court, we’re waiting to see what OSM says to DNR,” Simon said. Elwood Brehmer can be reached at [email protected]  

AEDC forecast: Not the best of times, but not the worst of times, either

It’s certainly not the best of times, but it’s also far from the worst of times for Alaska’s economy, according to Anchorage Economic Development Corp. CEO Bill Popp. Nearly two years after oil prices began to tumble from the $100-plus per barrel plateau, Alaskans are finally starting to see companies in the state’s oil-dominated economy adjust to what many are calling the “new normal” — oil prices mainly between $40 and $60 per barrel. Popp said during AEDC’s annual three-year Anchorage Economic Outlook presentation July 28 that it’s “easy to get caught up in the emotions” of this year’s extra-contentious extra innings budget and tax battle in Juneau, news of layoffs and oil projects being delayed on the North Slope, and think the state is spiraling into oblivion. However, the numbers don’t bear that out, he emphasized. While the AEDC forecast focuses on Anchorage, as the state’s economic hub with more than half of the state’s population in the surrounding area, the city’s economy is often used as the primary indicator of Alaska’s situation as a whole. Total Anchorage employment was down about 2,500 jobs in June compared to a year ago, according to AEDC. Anchorage had a record 156,000 jobs last year, up more than 1,000 from 2014. More specifically, the oil and gas industry is down 700 positions, with the construction and professional and business services sectors each down about 1,000 jobs. Those job losses are discouraging, but Popp noted that Anchorage employment hit an all-time high last summer, which is “exacerbating” the job loss figures this year. Similarly, direct oil and gas employment hit a statewide record-high of 14,800 jobs in March 2015 despite depressed oil prices, so the current industry contraction appears worse than if the job losses were based on historical averages, he explained. Preliminary Labor Department data for June indicates the state is down about 2,500 oil and gas jobs to 12,300 — equivalent to 2011 — from its peak 16 months ago. Popp said current state oil and gas employment is still up more than 50 percent from its recent low in 2005. He added that AEDC has no indication of significant layoffs coming in the industry after both major and independent producers announced job cuts last year and earlier in 2016. State government employment in Anchorage is down 400 jobs in Anchorage, but that has largely been offset by 300 more available federal jobs. The final 2017 fiscal year state budget, which went into effect July 1 and included significant vetoes from Gov. Bill Walker, will mean cuts to another 400 jobs statewide, according to administration officials. Strong tourist seasons the past three years have boosted Anchorage’s, and the state’s, leisure and hospitality jobs over that time. Anchorage added 300 jobs in the in 2015 for total sector employment of 17,200. The number of leisure and hospitality jobs has been steady in the first half of 2016 and that is expected to hold for the rest of the year, according to AEDC. “Global turmoil is Alaska’s best friend” as far as tourism goes, Popp commented. “Alaska is viewed as an exotic but safe domestic destination.” On the positive side of the ledger, Anchorage’s ever-strong health care sector added another 900 jobs last year and another 600 so far in 2016. Popp said AEDC expects that trend to continue as state courts have affirmed the governor’s authority to accept federal Medicaid expansion dollars. He explained that employers should now feel confident enough in the future of that added money to the industry to add more employees as well. The retail sector is also up 200 jobs this year and transportation companies have added 100 positions. All told, AEDC is holding firm on its January prediction of 1,600 fewer jobs — just a hair more than 1 percent of the 2015 workforce — in Anchorage by the end of this year, Popp said. Yet, the job losses are not really revealing themselves in unemployment numbers, he said further. Anchorage’s unemployment rate was 5.7 percent in June, up 0.4 percent from both May and June 2015. Statewide, unemployment was 6.7 percent last month, which was flat compared to May and a 0.2 percent year-over-year increase. However, the slight uptick in unemployment is fairly common in June, according to the Labor Department, because of an increase in job seekers at the end of each school year. There were less than 1,000 initial unemployment claims throughout Alaska in the last week of June, according to AEDC, which is on par with the prior couple years and about 500 than the 2011-13 average. Popp surmised that could be due, at least in part, to the fact that upwards of 30 percent of the state’s oil and gas jobs — the industry that is seeing the most job losses — are filled by nonresident workers. “We also know anecdotally there was a fair number of retirements, which also would not show up in (unemployment) numbers,” he added. Looking beyond 2016, AEDC is projecting Anchorage will absorb losses of another 1,500 jobs next year, with flat employment in 2018 before slight growth again in 2019. That would mean a workforce of 153,000 people over the next two years, a contraction of 1.9 percent from the 2015 peak. Population and housing Closely linked to employment is the city’s population. Anchorage will be down about 3,500 residents from its 2013 peak of more than 301,000 people by the end of the year, AEDC predicts. Identical to the workforce estimates, Anchorage is expected to lose another 1,500 people next year and be flat at 295,900 residents in 2018 before beginning to rebound in 2019. Popp said some city-dwellers are moving to the Lower 48 in search of jobs and cheaper living, but many, if not most that are leaving are heading to the Matanuska-Susitna Borough to escape Anchorage’s excessive housing costs. About 1,300 Anchorage residents did just that last year, he said. Even with nearly 5 percent growth in average single-family home prices in the Mat-Su core of Palmer and Wasilla so far this year, home prices there are still more than $90,000 less than the average sale price of nearly $366,000 in Anchorage, according to MLS data. Popp used Anchorage’s current housing data as proof the city is not on the precipice of the economic black hole feared by some. June single-family home listings in the city are were up 33 percent over the last three years; however the 1,026 homes on the market last month is still the sixth fewest over the last 10 years and falls almost exactly on the average since 2007. The overall market is starting to shift from a very constrained sellers market to favor buyers, but houses listed at less than $400,000 are still going quickly, Popp said. “If you’ve got a good property, your time on the market is measured in days or weeks. We’re seeing a lot of deal flow,” he said. “The market is relatively healthy and it’s just moving and changing.” The average sale price in June of $387,000, above the year-to-date average by $21,000, exemplifies that typical summer demand is still there, Popp added. Budget, consumer concerns Despite economic indicators that are not doom and gloom, Popp said average Anchorage consumers are “markedly pessimistic” about the future despite having healthy confidence in their personal finances, at least based on AEDC’s latest Consumer Optimism survey. A lack of consumer confidence could “make a difficult (economic) situation much worse” and lead to a self-induced recession. “We are a consumer-based economy in no small measure and we have to maintain the confidence of our consumers to maintain our economy,” he said. A significant source of the worry could be coming from Juneau, where six months of wrangling over the budget produced little more than small cuts from the Legislature. Those cuts were followed by $1.3 billion in spending vetoes from Walker, whose pushes for tax increases and using the investment earnings of the Permanent Fund to drastically reduce the states multi-billion dollar deficit were ultimately futile. The AEDC Board of Directors has endorsed using the Permanent Fund’s income to partially pay for state services. “The good old days of oil saving us from ourselves are over,” Popp said bluntly. “We are not projecting significant growth in the price of oil in the coming years and I think we need to embrace that.” He has said in previous interviews with the Journal that the uncertainty created in the business community by a drastically imbalanced state budget can nearly do as much to deter private investment in the state as the immediate situation of any given industry. The “no action plan” or NAP, chosen by a majority of legislators in the House, which failed to pass a substantial budget plan, is simply perpetuating that uncertainty, Popp said. “We need to wake up as a state and solve this critical challenge. Now is not the time to take a NAP,” he concluded. Elwood Brehmer can be reached at [email protected]

Exxon exec corrects Meyer on AK LNG

ExxonMobil Development Co. Vice President Jim Flood sent a letter to Alaska Gasline Development Corp. President Keith Meyer July 22 to correct “inaccuracies” in a July 13 letter from Meyer to state Senate leaders — all regarding the status of the $45 billion-plus Alaska LNG Project. On July 26, AGDC spokeswoman Josie Wilson said the state corporation decided not to comment on questions from the Journal regarding Flood’s letter. Flood’s letter contends Meyer “mischaracterized” ExxonMobil’s position as not wanting to continue pursuing the LNG export plan in Meyer’s July 13 letter to Senate President Kevin Meyer and Resources Committee Chair Sen. Cathy Giessel, as well as in lengthy testimony during a June 29 joint Resources Committee hearing. The letter from AGDC’s Meyer to the senators states the company has a “lack of willingness to chase the project,” a statement Flood objects to in his correspondence. Flood, who is based at the company’s Houston offices, also emphasized that ExxonMobil supports investigating a state-led project, as it may allow the participating parties to capture the state’s federal tax-exempt status and improve the project’s currently strained economics. “As previously stated, we are fully committed to developing a (project) plan that can successfully benefit all parties, including Alaskans,” Flood wrote. Under its current equity share model, the state, BP, ConocoPhillips and ExxonMobil would each provide a financing share equal to their gas ownership. With combined ownership of 32 percent of the gas from the Prudhoe Bay and Point Thomson fields, ExxonMobil would be the largest investor in the project. The state would be next with 25 percent of the gas through its royalty and expected tax as gas shares, and BP and ConocoPhillips each own a little more than 20 percent of the gas from the two major fields. It appears the project would likely be delayed for at least some time because of depressed worldwide LNG and oil markets under the equity structure. Much of the commentary from the producer companies regarding the project is in generalities, but ConocoPhillips representatives said at the June 29 Resources hearing that they don’t foresee the company supporting a decision to advance to the front-end engineering and design, or FEED, stage next year — wholly about a $2 billion investment. Flood made it clear that his employer does not feel the same way as its producer partner. “At no time did ExxonMobil ever suggest we ‘shelve the project,’” he wrote. Additionally, he stated that the company is also comfortable continuing the “stage gate” approach of the original equity-share project process, which AGDC’s Meyer indicated at the hearing may not be as necessary under a state-led plan. Lastly, Flood reiterated that ExxonMobil insists that a long-term fiscal agreement between the state and the company is necessary to underpin the massive project before the company is willing to enter FEED. Commercial negotiations between the companies and the state were suspended in February after months of slow-going, state officials have said, and ExxonMobil “remains ready to re-start discussions on gas sales to support the state-run project,” Flood wrote. “We hope this letter will help clarify the historical facts and allow us to be more successful in working together in the future. We look forward to working with you to transition the project to the state, explore options to reduce the cost of supply, re-engage on gas sales negotiations, and develop the necessary fiscal regime to commercialize North Slope gas,” he concluded. The letter was “cc’ed” to several legislators, Department of Natural Resources Commissioner Andy Mack, officials in Gov. Bill Walker’s office and the Alaska leaders of BP and ConocoPhillips among others. Elwood Brehmer can be reached at [email protected]

After another record quarter, Alaska Air joins S&P 500 Index

Alaska Air Group Inc. netted another record second quarter profit of $263 million, the company announced July 21, and continues to pay down debt as it prepares to close a $4 billion deal to purchase West Coast competitor Virgin America. The $263 million net income is a 14 percent increase over the second stanza of 2015, which was also a quarterly record at the time. It came on the back of $1.5 billion in operating revenue, which was 4 percent year-over-year growth. A July 21 release accompanying its earnings report noted Alaska Air Group joined the S&P 500 Index during the second quarter. Companies represented on the S&P 500 are chosen for their market size and liquidity in a given industry grouping. Collectively, S&P 500 companies and their stocks are intended to reflect the general state of large corporations. They are selected by a group of analysts and economists at Standard and Poor’s. “The fundamentals of our business are strong. We are running a great airline and we believe the merger with Virgin America is going to create a very strong airline with reach across the entire country and with real strength in originating traffic up and down the West Coast,” Alaska Air Group CEO Brad Tilden said in a July 21 earnings call with investors. The company generated about $900 million of operating cash flow through the first six months of the year and translated it into $560 million of free cash flow. Seattle-based Alaska Air Group, which owns Alaska Airlines and regional carrier Horizon Air, is on a run of more than four years of nearly continuous quarterly and full-year record profits. Alaska Air Group’s second quarter performance equated to diluted earnings of $2.12 per share, a 20 percent year-over-year increase. It paid a 27.5-cent dividend per share last quarter and has split its stock twice since March 2012. Alaska Air Group stock traded for $64.55 near the end of trading Friday on the New York Stock Exchange. Company executives have consistently said they wish to make Alaska Air Group a strong industrial-type investment, not just a leading performer in the volatile airline business. Chief Financial Officer Brandon Pedersen said the company has ended the quarter with more than $1.6 billion in cash on hand of about $7 billion in total assets. When adjusted for leases, Alaska Air Group has a net cash position of about $700 million. He added that its debt-to-capitalization ratio of 25 percent puts its balance sheet “in the best shape it’s ever been and positions us well for the planned merger with Virgin America.” The deal announced in April is expected to close sometime in the fourth quarter, according to company leaders. At the end of 2011 Alaska Air Group held debt equal to 62 percent of its capital. “Air Group has built a reputation with both lenders and investors as a conservatively managed company with a strong balance sheet and that’s not going to change,” Pedersen said during the call. “After we complete the transaction, (for Virgin America) we will still have about 20 unencumbered next-gen Boeing 737s and we are going to return to redeleveraging the balance sheet.” The roughly $4 billion merger includes $2.6 billion in cash and assuming about $1.5 billion of Virgin America’s debt, according to Alaska Air Group. Pedersen said the company has secured financing for the deal and ended up “oversubscribed” when seeking out lenders, allowing it to diversify its borrowing base. Fuel prices were down 31 percent for first half of the year to a bottom line cost of $1.41 per gallon for Alaska Air Group, which hedges on fuel, a further major reduction on what is the single biggest expense for most airlines. Low fuel costs undoubtedly contributed significantly to the record quarter, but Tilden also said fuel at $2 per gallon — about last year’s average — would still be profitable in 97 percent of the company’s markets. Alaska Air Group also achieved an impressive 12-month return on invested capital, or ROIC, of 25.9 percent, he said, which put the airline company in the top 10 percent of all S&P 500 companies for the key metric. Alaska Airlines was also once again the top major domestic carrier in terms of on-time performance for the year ending in May 2016. Year-to-date, 88.1 percent of Alaska’s flights arrived on time, up 1.4 percent from 2015, according the its June operational results reported to the federal Department of Transportation. “Our model is based on building preference for our airline and we build this preference with on-time operations, fantastic customer service and of course low fares,” Tilden said. “This model has worked not only in the last couple of years, but in the last 15 to 20 years. Since the first quarter of 2010, we’ve launched 100 new markets and we’ve outpaced industry revenue growth by a factor of three. This is in the midst of one of the bigger competitive incursions this industry has seen in years.” Tilden also pointed out Alaska Airlines won its ninth consecutive J.D. Power and Associates award for customer service during the quarter. Transportation Secretary Fox also announced July 7 that Alaska Airlines is one of eight domestic carriers tentatively approved for flights to Havana, Cuba. Alaska has said its direct flights would originate from Los Angeles, but a start date for the route hasn’t been finalized. Elwood Brehmer can be reached at [email protected]  

Moody’s issues second downgrade to Alaska credit rating

Moody’s Investors Service downgraded the State of Alaska’s general obligation bond rating another notch July 25. The credit rating agency summed up its decision to move Alaska from an Aa1 to Aa2 with a continued negative outlook — equivalent to a downgrade from AA+ to AA on the scale commonly used by other agencies — directly in the second line of its accompanying eight-page opinion. “The downgrade recognizes the state’s political inability — at least for now — to address its severe fiscal challenges,” Moody’s analysts wrote. The trio of major U.S. ratings agencies all downgraded Alaska from formerly sterling ratings in 2016 from AAA to AA+, or Aa2, with a negative outlook earlier in the year, citing the state’s shrinking savings and remaining budget gap. Moody’s initial action on Alaska came in late February. The credit opinion, which is very similar to an informative report on the state issued by Moody’s July 21, references the $4.4 billion 2017 fiscal year budget passed by the Legislature, which when combined with $1.2 billion in expected revenues, left a $3.2 billion deficit. Walker issued $1.3 billion of vetoes to the budget before signing it late last month, resulting in a much smaller deficit — for this fiscal year at least. The state’s primary remaining savings account, the Constitutional Budget Reserve, is expected to have about $3.3 billion at the start of the 2018 fiscal year, according to state Budget Director Pat Pitney. If a deficit exists after the CBR is exhausted, legislators would almost certainly have to turn to the Earnings Reserve account of the Permanent Fund to fill the gap. Gov. Bill Walker, in a statement from his office, called the downgrade “concerning but, unfortunately, not surprising.” “As residents rely on their credit score to secure low-interest loans to buy houses and cars, the state’s rating determines how much it will cost to build projects that create jobs,” Walker added. “The higher the rating, the lower the interest and the more Alaskans those projects can employ. “It is imperative that we implement a sustainable fiscal plan so we are not drawing down on savings. The sooner we fix Alaska, the sooner we can build Alaska.” Revenue Commissioner Randy Hoffbeck has said a one-notch downgrade roughly equates to a 0.25 percent increase on money the state borrows, often through bonds for capital projects. Local governments and school districts also piggy-back on the state’s rating and use the moral obligation of the state to secure lower interest financing for their projects. When S&P Global first downgraded Alaska from AAA to AA+ in January, Walker likened to the downgrade to an additional $1,000 per year on every $1 million the state borrows. The governor all but foretold the downgrade during a July 19 speech to the Matanuska-Susitna Borough Assembly. He said he was told that day “Moody’s is holding an immediate meeting on the bond rating in Alaska; it was originally scheduled for the 9th of Aug.; it’s been scheduled for this week.” While the July 21 informative report from Moody’s did not follow a ratings downgrade, the ratings agencies had indicated they would be forced to move Alaska further down the credit ladder if some sort of budget solution was not reached during what ended up being a marathon 2016 legislative session. Neither the opinion attached to the downgrade or the July 21 report are groundbreaking, but the continued “eye” on Alaska by the credit raters reiterates the seriousness of the state’s fiscal problems, even after budget cuts by the Legislature and Walker’s liberal use of his veto pen. With no structural change to state spending or revenues adopted by the Legislature, either through the administration’s New Sustainable Alaska Plan, centered on using Permanent Fund earnings income to pay down about half of the state’s deficit, or another plan, the ratings agencies were forced to make good. “We have historically taken a positive view of the state’s governance, given its adherence to financial best practices such as multi-year financial planning, the lack of caps on revenue raising or spending, and the governor’s line-item veto authority for the budget,” Moody’s analysts explained. “However, the passage of an imbalanced budget for fiscal 2017 and the current exceptional pace of deficit spending is challenging our view that the state has the capacity to quickly address fiscal problems within its current governance framework. Our baseline assumption remains that the state will come to a political compromise and reach a sustainable solution to its imbalance before coming close to depleting its reserves. Continuing failure to agree on a solution will cast doubt on this assumption and further pressure the state’s long-term credit profile.” Additionally, Moody’s echoed in its reports what Hoffbeck has said repeatedly, that the lack of a long-term fiscal plan would require severe spending cuts — reducing the 2017 budget amount by as much as two-thirds — once the Constitutional Budget Reserve is depleted within a couple years. Some legislators have commented that a state budget that size would be appropriate, given state revenues have fallen along with oil prices by 80 percent over the past two years. A June 20 report on Alaska’s situation calculated that oil prices as high as $60 per barrel, which are in the $45 per barrel range currently, would still cause the Alaska to run out of savings in 2022 absent sharp spending reductions or new revenues. Elwood Brehmer can be reached at [email protected]

Chamber’s Harbert: energy boom will help Alaska over time

Alaskans should take a long and holistic view of energy prices despite the immediate challenges their state faces, according to the leader of the U.S. Chamber of Commerce Institute for 21st Century Energy. Chamber Energy Institute President Karen Harbert said in an interview with the Journal that the long-term benefits the country will see from the Lower 48 fracking revolution that has once again made the U.S. the world’s premier energy producer will eventually reach north. She was in Anchorage July 25 to present Sen. Lisa Murkowski with the institute’s Spirit of Enterprise Award for her positions on “pro-growth, pro-America policies,” she explained. Harbert, who also served as an assistant secretary in the Department of Energy during George W. Bush’s second term, presented Murkowski with the award during an Anchorage Chamber of Commerce luncheon. “(Murkowski) has really stood out as not only putting Alaska and her communities first, but putting the nation first and voting for things — hard votes, tough votes, but the right votes,” Harbert said during the Anchorage Chamber event. Murkowski, who chairs the Senate Energy and Natural Resources Committee, drafted and moved the country’s first comprehensive energy policy reform bill since 2007 this year, along with help from ranking committee Democrat, Washington Sen. Maria Cantwell. The House and Senate versions of the energy bill are set to be taken up by a conference committee after the summer recess. Whether the major piece of legislation will reach the White House in time to be signed by President Barack Obama this year, and whether or not he is amenable to what the conference committee produces, remains to be seen. Harbert later endorsed Murkowski on behalf of the U.S. Chamber of Commerce in her reelection campaign. Those energy upsides could be manifested in Alaska through strengthened national security, closely tied with energy supplies, increased domestic and international trade and other ways. Harbert noted that the world population is expected to grow by about 2 billion people over the next 35 years and the continued modernization of Asia and Africa will drive energy demand over that time as well. She cited a U.S. Energy Information Administration forecast that predicts global energy demand will grow by up to 40 percent over the next 30 years. Alaska’s financial mess — state revenue has fallen by 80 percent in the last three years because of its reliance on oil — has left state leaders fighting over budget solutions and yearning for significantly higher oil prices, which aren’t in anyone’s near-term forecast. “While commodity prices today are low, natural gas prices are low and oil prices are low, and that has been a benefit to some of the consumers, the reality is we’re going to need a whole lot more energy to fuel those 2 billion people in an economy that is industrializing around the world,” Harbert said. “We want to be able to be the provider of energy. Commodity prices are going to come back. We have seen boom and bust cycles before. The Lower 48 and Alaska will have a big part to play in fueling the global energy landscape of the future and we want to make sure that we remain open to investment.” Daily U.S. oil and natural gas liquids production grew more than 35 percent over five years to average more than 15 million barrels of oil equivalent per day in 2015, making the country the world’s largest producer, and it’s not even close. According to the latest EIA data, the U.S. production outpaced Saudi Arabia, the world’s second-largest producer of oil, by more than 20 percent last year. As recently as 2011 the U.S. was third in world oil production behind both Russia and Saudi Arabia. The natural gas picture looks much the same over a slightly longer period. Domestic natural gas production bottomed out in 2005 at just more than 18 billion cubic feet, or bcf, per day. Since, it has grown by about 40 percent to nearly 26 bcf daily in 2014, according to the EIA, to lead the world and exceed Russia, the world’s second-largest gas producer, by more than 20 percent. It’s well documented that numerous LNG import terminals built across the country in the last decade are being converted to export facilities. The U.S. is expected to become a net exporter of natural gas in 2017, Harbert added. She said the remarkable ramp-up in production of traditional energy sources in the country with the world’s largest economy, which heavily dictates global economic health, should help “inoculate that (economic) volatility” that has historically followed oil price swings. She noted that a spike in oil prices has preceded every U.S. recession in the past century. The energy business that was historically limited to the producing states of Alaska, Texas, Oklahoma and California has spread beyond even the newest shale producers of North Dakota, Pennsylvania and Ohio, Harbert said. “Every state in our country is now in the energy business in one way or another. If they’re not a producer they’re part of the supply chain so this is really now embedded in everyone’s economy,” she said. “I don’t think we should ever be in a position to think this is the Lower 48 versus Alaska. I can see the inverse argument currently, but over time all boats rise together.” On the Alaska LNG Project, Harbert said Lower 48 gas exports shouldn’t be seen as competition to Alaska because of the state’s location adjacent to Asian markets — and again, Alaskans need to look at the long game. “(AK LNG) has to work (economically) for the capital to be there and if you look at the long-term demand forecasts the demand is there. It’s what’s going to happen in the next five-to-eight years,” she said. “It will happen. I’m thoroughly convinced that no matter who’s your governor or what the state Legislature looks like it’s inevitable. I think the question is when and who gets what part.” She also said the U.S. Chamber Institute for 21st Century Energy is preparing what it is calling its Energy Accountability Series for later this year, examining the statements and policy goals of candidates running for high office in November. In the presidential race, for example, the potential economic impact of Hillary Clinton’s declaration that she would ban future oil, gas and coal leasing on federal lands will be modeled, Harbert said. On the other side, Donald Trump’s positions on foreign trade will be scrutinized, she added. “Let’s not give them a free pass anymore. Let’s look at what, in our case energy, is being said and let’s start putting the numbers to that,” Harbert said. The intent of the reports, she said, is to give voters detailed and unbiased information on what would happen if the candidates followed through on their campaign promises. Elwood Brehmer can be reached at [email protected]  

Exxon exec rebuts AGDC president on gasline status

ExxonMobil Development Co. Vice President Jim Flood sent a letter to Alaska Gasline Development Corp. President Keith Meyer Friday to correct “inaccuracies” in a July 13 letter from Meyer to state Senate leaders — all regarding the status of the $45 billion-plus Alaska LNG Project. Flood’s letter contends Meyer “mischaracterized” the ExxonMobil’s position as not wanting to continue pursuing the LNG export plan in Meyer’s July 13 letter to Republicans Senate President Kevin Meyer and Resources Committee Chair Sen. Cathy Giessel, as well as in lengthy testimony during a June 29 joint Resources Committee hearing. The letter from AGDC’s Meyer to the senators states the company has a “lack of willingness to chase the project,” a statement Flood objects to in his correspondence. Flood also emphasizes that ExxonMobil supports investigating a state-led project, as it may allow the participating parties to capture the state’s federal tax-exempt status and improve the project’s currently strained economics. “As previously stated, we are fully committed to developing a (project) plan that can successfully benefit all parties, including Alaskans,” Flood wrote. Under its current equity share model, with the state, BP, ConocoPhillips and ExxonMobil each providing a financing share equal to their gas ownership, it appears the project would likely be delayed for at least some time because of depressed worldwide LNG and oil markets. Much of the commentary from the producer companies regarding the project is in generalities, but ConocoPhillips representatives said at the June 29 Resources hearing that they don’t foresee the company supporting a decision to advance to the front-end engineering and design (FEED) stage next year — wholly about a $2 billion investment. Flood made it clear that his employer does not feel the same way as its producer partner. “At no time did ExxonMobil ever suggest we ‘shelve the project,’” he wrote. Additionally, he stated that the company is also comfortable continuing the “stage gate” approach of the original equity-share project process, which AGDC’s Meyer indicated at the hearing may not be as necessary under a state-led plan. Lastly, Flood reiterated that ExxonMobil insists that a long-term fiscal agreement between the state and the company is necessary to underpin the massive project before the company is willing to enter FEED. Commercial negotiations between the companies and the state were suspended in February after months of slow-going, state officials have said, and ExxonMobil “remains ready to re-start discussions on gas sales to support the state-run project,” Flood wrote. “We hope this letter will help clarify the historical facts and allow us to be more successful in working together in the future. We look forward to working with you to transition the project to the state, explore options to reduce the cost of supply, re-engage on gas sales negotiations, and develop the necessary fiscal regime to commercialize North Slope gas,” he concluded. The letter was “cc’ed” to several legislators, Department of Natural Resources Commissioner Andy Mack, officials in Gov. Bill Walker’s office and the Alaska leaders of BP and ConocoPhillips among others.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Alaska Air Group has another record quarter; profits fueling Virgin purchase

Alaska Air Group Inc. netted another record second quarter profit of $263 million, the company announced Thursday, and continues to pay down debt as it prepares to close a $4 billion deal to purchase Wes Coast competitor Virgin America. The $263 million net income is a 14 percent increase over the second stanza of 2015, which was also a quarterly record at the time. It came on the back of $1.5 billion in operating revenue, which was 4 percent year-over-year growth. The company generated about $900 million of operating cash flow through the first six months of the year and translated it into $560 million of free cash flow. Seattle-based Alaska Air Group, which owns Alaska Airlines and regional carrier Horizon Air, is on a run of more than four years of nearly continuous quarterly and full-year record profits. “The fundamentals of our business are strong. We are running a great airline and we believe the merger with Virgin America is going to create a very strong airline with reach across the entire country and with real strength in originating traffic up and down the West Coast,” Alaska Air Group CEO Brad Tilden said in a Thursday morning earnings call with investors. Alaska Air Group’s second quarter performance equated to diluted earnings of $2.12 per share, a 20 percent year-over-year increase. It paid a 27.5-cent dividend per share last quarter and has split its stock twice since March 2012. Alaska Air Group stock traded for $64.55 near the end of trading Friday on the New York Stock Exchange. Company executives have consistently said they wish to make Alaska Air Group a strong industrial-type investment, not just a leading performer in the volatile airline business. A Thursday release accompanying its earnings report noted Alaska Air Group joined the S&P 500 Index during the second quarter. Chief Financial Officer Brandon Pedersen said the company has ended the quarter with more than $1.6 billion in cash on hand of about $7 billion in total assets. When adjusted for leases, Alaska Air Group has a net cash position of about $700 million. He added that its debt-to-capitalization ratio of 25 percent puts its balance sheet “in the best shape it’s ever been and positions us well for the planned merger with Virgin America.” The deal announced in April is expected to close sometime in the fourth quarter, according to company leaders. At the end of 2011 Alaska Air Group held debt equal to 62 percent of its capital. “Air Group has built a reputation with both lenders and investors as a conservatively managed company with a strong balance sheet and that’s not going to change,” Pedersen said during the call. “After we complete the transaction, (for Virgin America) we will still have about 20 unencumbered next-gen Boeing 737s and we are going to return to redeleveraging the balance sheet.” The roughly $4 billion merger includes $2.6 billion in cash and assuming about $1.5 billion of Virgin America’s debt, according to Alaska Air Group. Pedersen said the company has secured financing for the deal and ended up “oversubscribed” when seeking out lenders, allowing it to diversify its borrowing base. Fuel prices were down 31 percent for first half of the year to a bottom line cost of $1.41 per gallon for Alaska Air Group, which hedges on fuel, a further major reduction on what is the single biggest expense for most airlines. Low fuel costs undoubtedly contributed significantly to the record quarter, but Tilden also said fuel at $2 per gallon — about last year’s average — would still be profitable in 97 percent of the company’s markets. Alaska Air Group also achieved an impressive 12-month return on invested capital, or ROIC, of 25.9 percent, he said, which put the airline company in the top 10 percent of all S&P 500 companies for the key metric. Alaska Airlines was also once again the top major domestic carrier in terms of on-time performance for the year ending in May 2016. Year-to-date, 88.1 percent of Alaska’s flights arrived on time, up 1.4 percent from 2015, according the its June operational results reported to the federal Department of Transportation. “Our model is based on building preference for our airline and we build this preference with on-time operations, fantastic customer service and of course low fares,” Tilden said. “This model has worked not only in the last couple of years, but in the last 15 to 20 years. Since the first quarter of 2010, we’ve launched 100 new markets and we’ve outpaced industry revenue growth by a factor of three. This is in the midst of one of the bigger competitive incursions this industry has seen in years.” Tilden also pointed out Alaska Airlines won its ninth consecutive J.D. Power and Associates award for customer service during the quarter. Transportation Secretary Fox also announced July 7 that Alaska Airlines is one of eight domestic carriers tentatively approved for flights to Havana, Cuba. Alaska has said its direct flights would originate from Los Angeles, but a start date for the route hasn’t been finalized. Elwood Brehmer can be reached at [email protected]

Moody’s report addresses little change in budget, politics

Alaska’s credit rating didn’t get downgraded — yet, and again — by Moody’s Investors Service, but a brief report issued Thursday by the ratings agency reiterated that it has not forgotten about the state’s money troubles. The report immediately notes that the Legislature adjourned July 18, when the Senate gaveled out following the House’s wrap-up a few days prior, without progress in addressing the multi-billion dollar budget deficit. “The failure to devise a sustainable fiscal structure is credit negative and means that for at least another year, the state will keep burning through its still-ample reserves, which were accumulated during years of high oil prices,” Moody’s analysts wrote. The trio of major U.S. ratings have all downgraded Alaska from formerly sterling ratings in 2016 to AA+ with a negative outlook, citing the state’s shrinking savings and remaining budget gap. Gov. Bill Walker said during a speech to the Matanuska-Susitna Borough Assembly July 19 that he was told that day “Moody’s is holding an immediate meeting on the bond rating in Alaska; it was originally scheduled for the 9th of Aug.; it’s been scheduled for this week,” the governor said. While the Thursday informative report from Moody’s did not follow a ratings downgrade, the ratings agencies have indicated they would be forced to move Alaska further down the credit ladder if some sort of budget solution was not reached during what ended up being a marathon 2016 legislative session. The report references the $4.4 billion 2017 fiscal year budget passed by the Legislature, which when combined with $1.2 billion in expected revenues, left a $3.2 billion deficit. Walker issued $1.3 billion of vetoes to the budget before signing it late last month, resulting in a much smaller deficit — for this fiscal year at least.  “Alaska Gov. Bill Walker has proposed a fundamental structural overhaul of the government’s fiscal operations to a sovereign wealth fund approach. Under his proposal, the General Fund would be funded (partly) by investment income from the state’s $54 billion Permanent Fund,” Moody’s wrote. “This plan carries it’s own risks and uncertainties. However, the lack of a plan is riskier and more uncertain.” Additionally, Moody’s echoed what Revenue Commissioner Randy Hoffbeck has said repeatedly, that the lack of a long-term fiscal plan would require severe spending cuts — reducing the 2017 budget amount by as much as two-thirds — once the Constitutional Budget Reserve is depleted within a couple years. Some legislators have commented that a state budget that size would be appropriate, given state revenues have fallen along with oil prices by 80 percent over the past two years. A June 20 Moody’s report calculated that oil prices as high as $60 per barrel, while they are in the $45 per barrel range currently, would still cause the Alaska to run out of savings in 2022 absent sharp spending reductions or new revenues.  “We still believe the state will eventually come up with a sustainable solution rather than resorting to draconian cuts to vital public services. However, in the meantime its reserves are shrinking and there is little visibility into when its reserve draws will be abated,” Moody’s observes.   Elwood Brehmer can be reached at [email protected]

Officials defend Prudhoe Bay demands

Lawmakers heard directly from members of Gov. Bill Walker’s administration for the first time about their decision to withhold approval of the Prudhoe Bay oilfield plan of development during July 19 committee hearing in Anchorage. Republican legislators were unsurprisingly tough on Division of Oil and Gas Director Corri Feige and new Department of Natural Resources Commissioner Andy Mack in questioning why the state would change decades-old operating procedure and potentially put its historic cash cow at risk. On June 30, the Division of Oil and Gas elected not to approve the annual plan of development for the Prudhoe Bay Unit for 2016 until BP, the field operator for its other major working interest owners ConocoPhillips and ExxonMobil, provides the state with what it has done to market natural gas from the field in advance of “major gas sales.” In regulatory parlance, “major gas sales” refers to the Alaska LNG Project or any natural gas export plan. Senate Resources Committee Chair Cathy Giessel, R-Anchorage, held the hearing outside of a legislative session to inform legislators on the new policy direction spurred by Walker’s administration. While technically a Senate Resources hearing, House and Senate members from Finance and Resources committees were invited and participated. Anchorage Republican Rep. Craig Johnson, a candidate for state Senate, made his feelings about the issue clear in a statement to Mack, who replaced Marty Rutherford as DNR commissioner on July 1. “As a regulator we are becoming a bully,” Johnson said frankly. Mack responded broadly to questions on the issue that predates his time leading DNR. Senate Finance Co-Chair Anna MacKinnon, R-Eagle River, pressed Mack — consistently referred to by majority legislators as “commissioner designee,” an allusion to him not yet being confirmed by the Legislature — as to whether or not the state is currently negotiating “bilateral marketing agreements” with BP and ConocoPhillips. Mack said he could not disclose the status of negotiations due to confidentiality concerns regarding the Alaska LNG Project, in which the state is partners with those companies and ExxonMobil. MacKinnon countered by saying his answer didn’t jive with the December 2015 Gas Availability Agreement between the companies and the state, which states, “DNR will continue to use reasonable efforts to negotiate in good faith and for the purpose of (ConocoPhillips and BP) entering into a bilateral agreement with the state or its designee on mutually agreed commercially reasonable terms” to sell natural gas into an LNG project if either of the companies choose to back out of the Alaska LNG Project. ExxonMobil did not provide the state with a similar written agreement to sell gas into a project if it withdrew. Rep. Dan Saddler, R-Eagle River, said the administration has been “opaque” regarding its wishes for the gasline and “absent information there will be pushback.” The request for gas marketing information from BP “is a new direction and it’s disconcerting,” he said. Johnson said he has no faith that DNR, which is one of several state agencies working on the Alaska LNG Project, would keep the marketing information separate from the project and confidential within the Division of Oil and Gas. Senate Majority Leader John Coghill, R-North Pole, said he is worried about the state’s ability to uphold its confidentiality requirements as it requests the marketing information. Rep. Geran Tarr, D-Anchorage, a Resources Committee member, said concerns she had when Senate Bill 138 passed in 2014 — the legislation outlining the state’s role in the Alaska LNG Project — about the state “having hands in both baskets” of being a regulator and a commercial partner in the project are coming to fruition in this matter. On the other hand, Anchorage Democrat Sen. Bill Wielechowski was supportive of the administration’s efforts in the hearing. He said to Feige and Mack that the administration is simply following the state Constitution, which requires the state utilize the potential of its resources for the maximum benefit of the people of Alaska. “This is what any prudent resource owner in the world would do anywhere,” Wielechowski said. “This is a perfectly appropriate request and I think the vast majority of Alaskans would support what you’re doing.” In January, DNR Commissioner Mark Myers, who resigned on March 31, sent a letter to the unit operators of all 62 oil and gas units in the state informing them the state would be taking a new policy direction and seek information to better understand what can be done to use undeveloped natural gas reserves for the increased benefit of the people of the state. Shortly after BP submitted its 2016 Prudhoe Bay Plan of Development in late March the Division of Oil and Gas responded with a letter to the producer informing the company that its brief and vague statement about continuing to work towards a gas project was inadequate and thus the plan could not be approved. A back-and-forth of correspondence ensued as BP, backed by ConocoPhillips and ExxonMobil, held firm that the request is beyond the scope of the development plan and the division ultimately denied the plan as written June 30, the day it was set to expire. Oil and Gas then extended the current plan to Nov. 1, giving BP until Sept. 1 to file an amended plan. BP issued a statement during the hearing reiterating that it and the Prudhoe working interest owners believe the plan of development is complete and should be approved. “The level of information provided is consistent with the previous PODs (plans of development) that DNR has approved each year since 2000. This POD satisfies all of the Prudhoe Bay Unit agreements and POD regulations’ requirements,” BP stated. Walker said in a July 6 interview with the Journal that the producers’ joint request in 2015 for additional gas offtake from Prudhoe starting in 2025, in preparation for a gas project, means the state needs to start preparing for a project as well and that preparation includes marketing the gas. Because the state relies on the producers to pull its royalty and possibly additional tax share of the gas off the field, it needs to know what their plans are as well, Walker said. “I thought it was an appropriate question to ask. I’m the first governor to ask that (marketing) question, but you know times have changed and so we want to find out what’s going on in that regard,” he said. Mark Cotham, a Texas-based attorney working on contract with the Department of Law who testified by phone on behalf of himself at the request of the committee, said he understands the challenging position DNR could be put in to not divulge what it shouldn’t within itself if it gets the marketing information. However, Cotham also said it is a reasonable request from the state, absent a commitment to build a gasline project, so the state can have the information to advance the project. Cotham was hired by the Department of Law in 2015 and has previously testified to the Legislature, when counseling the Alaska Gasline Port Authority, about states’ rights to revoke leases in “failure to develop” cases. The Alaska Gasline Port Authority is an unsuccessful Walker-led effort to get North Slope gas to Valdez for export. Additionally, the governor said he has had meetings with the companies’ Alaska leaders and is confident a compromise will be reached before the state would have to go down the road toward defaulting the unit in what is still North America’s largest oil field. In the hearing, Feige mostly echoed the governor’s explanation as to why the change in policy was made and further noted that state oil and gas lease regulations state a plan of development must include “the long-range proposed development activities.” Because the producers got authorization from the Alaska Oil and Gas Conservation Commission to increase gas offtake for a gas project within the next decade, it seems appropriate to ask what their plans are to sell the gas under the “long-term” umbrella, she said. Feige also acknowledged that the initial, very specific request, asking for potential sale dates and pricing scenarios among other things, may have gone too far, and the subsequent and still unfulfilled requests have been more general. Elwood Brehmer can be reached at [email protected]

Walker attempts to correct the record on ‘misinformation’ about state leading AK LNG

Increased state control of the Alaska LNG Project was a concept first proposed by the state’s producer partners as a way to further lower the final cost of the $45 billion-plus natural gas export plan, Gov. Bill Walker said July 18. Walker spoke about the prospect of a state-led LNG project to members of the Anchorage Chamber of Commerce at its weekly meeting. Anchorage Mayor Ethan Berkowitz was originally scheduled to give his “State of the City” address during the chamber lunch and the governor thanked Berkowitz for allowing him to preempt the mayor’s speech, saying he felt it was important he correct the record regarding “misinformation” that has been circulating about what his administration and the producers are doing to continue the project. The producers first floated the idea of growing the state’s 25 percent ownership stake in the project in the April-May timeframe, according to Walker. It could allow the project to capture the benefits of the state’s federal tax-exempt status and reduce its immense cost, particularly at a time when world LNG markets are more competitive than ever, he said. “The tax aspect is a real significant piece of a project this size,” the governor said during an informal press briefing after his dialogue with the Anchorage Chamber. At this point it is unknown exactly how much money being at least partially tax-free could save Alaska LNG, but sources with extensive knowledge of the proposal have said it could be in the low billions of dollars over several decades. Since February, BP, ConocoPhillips and ExxonMobil and the state have been investigating ways to keep the project on track for startup in about 2024-2025, when all involved held a press conference acknowledging a lack of progress on internal agreements and market concerns that could delay or kill it outright if the existing equity share arrangement was continued. Walker further confronted hearsay that a state-led project would mean the State of Alaska would “go it alone” and build the project regardless of economics. “It’s not a build it and they will come,” he said. Walker also emphasized that using the $54 billion Permanent Fund to pay for the project in any way is out of the question. New Alaska Gasline Development Corp. President Keith Meyer roundly dismissed that as well at the corporation’s July 14 board meeting, separate from Walker’s comments. He said Walker has told him using the Permanent Fund to pay for the project “is not even open for discussion.” Senate Resources Committee Chair Cathy Giessel, R-Anchorage, said in an interview that the governor “may have jumped to conclusions that the producers said the state needs to lead this project,” and that she has been told there are different approaches to moving ahead in a low price environment. “I’m concerned the governor wishes to drive ahead a project that is marginal at best and uneconomic at worst,” Giessel said. She added that the administration appears to be abandoning Senate Bill 138, the legislation that passed in 2014 and established the equity share framework. When asked whether the producers brought the idea of a state-led project to the table, ConocoPhillips Alaska spokeswoman Natalie Lowman wrote in a statement that the company is “open to evaluating various options for the (AK LNG) project, including the approach described by AGDC.” ExxonMobil spokesman Aaron Stryk wrote: “As ExxonMobil has stated many times, one of the prerequisites for entering FEED (front-end engineering and design, the next stage of the project) is a mutually acceptable fiscal agreement with the necessary predictability and durability to underpin a project of this magnitude. “Once it became obvious that the governor’s plan (to have numerous agreements in place by early in 2016) was not going to be met, other concepts to potentially progress a project were discussed.” He added that exploring other options to provide access to ExxonMobil’s share of North Slope gas if the state elects a new project structure was part of those discussions. A confluence of depressed LNG and oil markets has challenged the current and more traditional equity financing structure, with each participant — the state, BP, ConocoPhillips and ExxonMobil — financing equal shares of the project that could cost upwards of $50 billion or more. An oversupplied LNG market has chopped the near-term price of the commodity by more than two-thirds over the last two years, which eats into the potential profits of the Alaska LNG Project. And the project’s 800-mile pipeline from the Slope to Nikiski is a major cost that will always eat into its margins. It’s also a major cost most competing LNG projects worldwide don’t have to deal with. Additionally, current oil prices are less than 50 percent of what they were when the current project structure was approved in 2014, which has hit all the producers’ bottom lines and on some level impaired their financial ability to make the requisite $10 billion-plus investment in the Alaska LNG Project, Meyer said. Rather, the state would identify potential third party investors, which could be the exact Asian utilities that are the most likely customers of the North Slope natural gas resources. If investors and market conditions align, the project could move ahead with a new structure, he said. The producers could be lesser investors or simply sell their gas into the project infrastructure while utilizing their expertise to operate the project, according to Walker. Allowing the project to stall without investigating all options could mean shelving it for another decade or more, given LNG market forecasts, the administration and industry analysts alike have said. Meyer: AK LNG needs Legislative support for new direction Meyer directly addressed what he sees as one of the biggest challenges to building a gasline during his first board of directors meeting at the July 14 AGDC meeting, and it had nothing to do with the cost of the project. “AGDC has an observable poor relationship with key legislators and legislative committees. I’ve seen it in the press and I’ve felt it in the (legislative) hearings. This has to change,” Meyer said July 14 during a presentation to the board. About two weeks earlier, legislators peppered Meyer with questions for more than four hours during a marathon joint House-Senate Resources Committee hearing in which he, and representatives from the producers gave their perspectives on the status of the in-flux Alaska LNG Project. The June 29 hearing in Anchorage was the first time legislators were able to hold a dialogue with Meyer in a public forum, so many of the questions naturally focused on his experience in the natural gas industry and his knowledge and view of the proposed North Slope gas mega project. While the lines of questioning from some legislators exuded understandable skepticism in Meyer’s proposal to reshape the financing structure of the project, others bordered on interrogation backed by clear and immediate opposition to nearly everything he said. The significant underlying problem with that, according to Meyer, is it doesn’t sit well with the “other” key partners in a gasline and it becomes a self-fulfilling prophecy. “When the utility buyers or the (potential) investors see ‘AGDC is not experienced enough to do this project,’ who’s going to want to invest in that project if the government is saying AGDC, which is presumably a government entity, isn’t experienced enough to do this and at the same time AGDC is the only dog willing to pull the sled, willing to step into the lead?” Meyer questioned. “Then you’re basically saying the one party willing to lead this project isn’t experienced, doesn’t have the competency, nobody’s going to invest in that if they’re also reading — the Asian buyers, face it, they are our most attractive market — when they read that they’re not welcome investors in this project, well guess what, they’re not going to be. They’re not going to want to be investors.” Giessel said she thinks Meyer is transferring a challenged relationship between the Legislature and the Walker administration to AGDC. She added that the entirely new concept for financing the project is, at least publicly, barely a month old and the back-and-forth is part of the vetting process. Rep. Geran Tarr, D-Anchorage, sits on the House Resources Committee and said the change in administration, from former Republican Gov. Sean Parnell, who was mostly aligned with the Legislature’s majority caucuses, to Walker is at least playing a part in the tension. Tarr said further that the Republican-led SB 138, passed early in 2014, greatly expanded the powers of AGDC and with the change in administration could be leading to a sort of buyer’s remorse. For her part, she said she supported legislation to add non-voting members of the Legislature to the AGDC board. That bill is awaiting the governor’s signature. Tarr also noted that legislators often don’t take the opportunity to attend AGDC board meetings, regardless of their standing on the board. Giessel is the one legislator who is a regular at board meetings. “I just want to know the truth (about the project) and be objective,” Tarr said. Meyer reiterated at the board meeting that AGDC and the Alaska LNG Project needs to be more transparent to better its working relationship with other parts of government, something he emphasized at the June 29 Resources hearing. “Anytime you have an absence of information that is probably filled with the worst possible scenario and I think that’s what’s happening here. There’s not enough information out there. People want to fill in the gaps with a fear scenario,” he said. Shortly after taking the reins at AGDC after his hire was approved on June 9, Meyer laid out his concept for way to keeping the Alaska LNG Project through a new way of financing the project that otherwise is delayed for years in a best-case scenario. He suggested the state, through AGDC, seek out third-party investors that would accept a lower but stable rate of return, such as pension or insurance funds or directly the Asian utilities that would be likely buyers of the project’s LNG, compared to the return needs of the producer companies. The producers have all said they hope to monetize the North Slope gas, but don’t see the current project moving to completion on its current schedule in the mid-2020s for a myriad of factors. Elwood Brehmer can be reached at [email protected]  

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