Elwood Brehmer

Walker picks former state Sen. French for oil and gas commission

Gov. Bill Walker appointed former Anchorage Democratic state Sen. Hollis French to the Alaska Oil and Gas Conservation Commission Wednesday, making the three-person commission whole again for the first time in more than a year. French, who served in the state Senate for 12 years until 2014, will take the public seat on the commission. The other two seats, held by Dan Seamount and commission Chair Cathy Foerster, are by statute reserved for individuals with extensive experience in oil and gas engineering and geology. “I am pleased to appoint Hollis French to the Alaska Oil and Gas Conservation Commission. AOGCC plays an integral role in the state’s natural resource development efforts, and Hollis’ experience in Alaska’s oil and gas industry will make him a valuable addition to the commission,” Walker said in a release from his office. French’s oilfield experience dates back to 1978 when he began working for Shell on Cook Inlet’s offshore platforms. From there, his career with Shell moved to the North Slope where he became a production operator and later a lead operator with ARCO until he left oil to study law in 1992, according to the governor’s office. The highly technical commission is tasked with preventing waste of the state’s hydrocarbon resources, evaluating drilling operations, maintaining production and well records and ruling on disputes between resource owners. Walker’s original appointment to the public AOGCC seat, Mike Gallagher, was rejected by the Legislature in April 2015. The seat has been vacant since. Walker had appointed Gallagher to replace Parnell’s appointment Dave Mayberry, who had not yet been confirmed by the Legislature. French was once Lt. Gov. Byron Mallott’s running mate in the 2014 gubernatorial election. He stepped aside to allow Mallott, who took the lieutenant governor position, and Walker to join campaign forces against incumbent Parnell. He will begin serving on the commission July 25. Elwood Brehmer can be reached at [email protected]

Walker attempts to correct the record on state-led 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 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 equal-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 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 equal 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. Elwood Brehmer can be reached at [email protected]

Walker creates new cabinet position for oil and gas advisor

Gov. Bill Walker’s cabinet is changing again, this time by way of addition. Walker announced Monday longtime oil industry professional John Hendrix has been appointed as his chief oil and gas advisor, which is a newly created cabinet level position. He introduced Hendrix during a luncheon held by the Anchorage Chamber of Commerce. Most recently, Hendrix, who has a degree in civil engineering, was general manager for Houston-based Apache Corp.’s Alaska operations. Apache announced in March that it would be pulling out of Alaska largely due to depressed oil prices. The company had been exploring for oil and gas in Northern Cook Inlet since about 2010. “As Alaska navigates this new reality of low oil prices and production, the industry itself is grappling with ways to innovate amidst this economic downturn. I am pleased that John Hendrix will join my team to help steer the conversation between the state and the industry so the relationship is mutually beneficial. Given John’s nearly four decades of oil and gas experience, his insight is much needed and respected,” Walker said. “I think there’s so much more we can do working with the industry and John will be a great liaison for that.” A graduate of Homer High School, Hendrix started his career with in 1980 with Schlumberger Oilfield Services on the North Slope. He also spent 18 years with BP in Alaska, Russia and Britain before joining Apache in 2005. He has also served on the Alaska Oil and Gas Association Board of Directors and been the trade association’s vice president. In recent months Walker has discussed ways for the state to collaborate with industry on the Slope to develop shared infrastructure as a way to drive down the cost of developing green field projects. He has used the Alaska Industrial Development and Export Authority’s direct investment in the processing facility at Brooks Range Petroleum’s small Mustang oil field on the North Slope as a concept the state could expand elsewhere. Hendrix’s salary will be $185,000, according to Walker’s spokesman Corey Allen-Young, but it will not add to spending for a government that is in the midst of a hiring freeze and trying to reconcile a daunting budget deficit. “We’ve made room (for Hendrix) without increasing our budget at all,” Walker said. While a cabinet change of a different kind, Hendrix is the latest of several new faces in the Walker administration in 2016. Earlier this year former Natural Resources Commissioner Mark Myers announced his retirement. Myers’ interim replacement Marty Rutherford then retired at the end of June, but was also appointed to the Permanent Fund Board of Trustees. Former Attorney General Craig Richards resigned abruptly in June as well, citing a need to spend more time with his family. The attorney general position was quickly filled by Jahna Lindemuth, who will officially take the reigns as the state’s top lawyer in August. Richards may be coming back to Walker’s administration in another capacity. Spokeswoman Grace Jang has said no contract has been finalized, however. Elwood Brehmer can be reached at [email protected]

AGDC’s Meyer: AK LNG hinges on better relations with Legislature

New Alaska Gasline Development Corp. President Keith Meyer directly addressed what he sees as one of the biggest challenges to building a gasline during his first board of directors 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 BP, ConocoPhillips and ExxonMobil gave their perspectives on the status of the $45 billion-plus 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 export plan. 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 said. “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.” He reiterated at the July 14 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. One of those “fear scenarios” is a rumor that AGDC and Gov. Bill Walker’s administration would seek to finance the project by using the $54 billion Alaska Permanent Fund as collateral if third party financing doesn’t pan out, he said. Meyer roundly dismissed that. He said Walker has told him using the Permanent Fund to pay for the project “is not even open for discussion.” 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. 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. According to Meyer, they are supportive of the state taking the lead in the project and the third-party investment model, with the producers selling gas into the project or still investing on a smaller scale, is a way to accomplish that. Slowing or stopping the project now means missing a “demand window” that could kill Alaska LNG for another decade or more, he said. Also at the meeting, the board approved opening a marketing office in Houston, but according to the Alaska Dispatch News, board chair Dave Cruz shot down Meyer’s suggestion that his daughter be hired to work for the state agency. Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Senate Finance takes testimony on Walker's oil tax increase bill

Legislators heard Wednesday from Gov. Bill Walker’s administration for the first time this special session on the latest oil and gas tax credit reform bill. State Tax Division Director Ken Alper testified before the Senate Finance Committee that Senate Bill 5005 is projected to save from the budget and generate revenue collectively totaling up to $300 million per year once the provisions of the bill would take full effect after fiscal year 2018. This bill is aimed at the North Slope, particularly phasing out the Net Operating Loss credit and hardening the 4 percent oil production “tax floor.” It would build on the tax credit bill the Legislature passed last special session, which foremost phased out refundable tax credits available to companies operating in the Cook Inlet basin. SB 5005 would also increase the production tax to 5 percent when Alaska North Slope Crude prices hit $55 per barrel. “The changes in this bill are a tax increase between $55 and $80 a barrel,” Alper said. Above $80 per barrel the progressive tax structure laid out in Senate Bill 21 would take back over, he said. Finance co-chair Sen. Pete Kelly, R-Fairbanks, emphasized prioritization of oil production as opposed to budget savings or tax increases. “What I want to see from the governor is a tax regime or a credit regime that increases production,” Kelly said to Alper. Kelly and other committee members highlighted that while the state has paid nearly $8 billion in oil and gas tax credits since 2007, either through direct payments or deductions that offset production tax liability, the state also received more than $60 billion in revenue from the industry over that time. “Most people would say, ‘Dang, that’s a pretty good deal,’” he said. Alper retorted that most of that revenue came from the older, legacy oil fields such as Prudhoe and Kuparuk that were in production long before the credit system was in place. He also stressed that the administration is not singling out the oil industry to solve the state’s multi-billion dollar budget deficit. “It’s important to view this bill as part of the (fiscal) package that was introduced Monday,” at the start of the special session, Alper said. That fiscal package included much of the same tax increases on other industries, broad-based taxes and the proposal to use Permanent Fund earnings for government that Walker put forth at the start of the regular session. Walker also included a statewide sales tax for the first time his administration projects to raise $500 million. “(SB 5005) is simply out of the fiscal reality that we don’t believe we can afford the same amount of investment (in credits) we have had in the past,” Alper said. He also noted the Senate passed the Permanent Fund plan, which is the lynchpin to the governor’s path for Alaska to dig itself out of its budget hole. Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Here we go again: Fifth session begins

Lawmakers officially have their to-do list from Gov. Bill Walker for the fifth special session of the 29th Legislature. What they will do with it is anyone’s guess. First and foremost is legislation to use investment income from the Permanent Fund for government services along with restructuring how the Permanent Fund Dividend is paid — the primary reason for the special session call. The governor’s latest bill aligns with what passed the Senate just a few weeks ago on a 14-5 vote in the fourth special session that followed an extended 120-day regular session. However, because it is a new call, it will have to go through the committee process in the Senate again. The Permanent Fund bill would establish an annual draw from the Fund’s Earnings Reserve account equal to 5.25 percent of the Fund’s total market value on a five-year rolling average. The percent of market value, or POMV, draw is very common for endowment-style funds such as the Permanent Fund. With the Fund having steadily grown to its current value of roughly $54 billion since the market collapse of 2008-09 — which includes the constitutionally protected principal and the Earnings Reserve available for appropriation — the fiscal 2017 POMV payout has been calculated at nearly $2.4 billion. But not all of that would go toward paying down the state’s massive budget deficit, which stood at upwards of $3.3 billion before the governor’s $1.3 billion worth of line item vetoes to the operating budget announced June 29. Nearly $700 million of the $2.4 billion available under the administration’s Permanent Fund proposal would pay dividends, leaving $1.7 billion to $1.8 billion to go to the General Fund, leaving a fiscal 2017 deficit in the hundreds of millions of dollars after the governor’s vetoes are accounted for as opposed to the $4 billion the state was facing a few months ago. At least a portion of the $1.3 billion in vetoed funding would likely be added back to the fiscal year 2018 budget, which begins July 1, 2017, and thus add back to that year’s deficit. The administration’s latest oil and gas tax credit bill would do much the same on the North Slope as House Bill 247, passed in the last special session, did in the Cook Inlet basin — eliminate the tax credit program by 2018. Phasing out the net operating loss, or NOL, credits used by Slope producers at times of low oil prices would effectively “harden” the minimum tax floor at 4 percent. The North Slope credit bill would also raise the minimum tax to 5 percent at prices above $55 per barrel for Alaska North Slope crude. Walker also added a 3 percent statewide sales tax bill to the suite of industry tax increases and income tax he has pushed since unveiling his New Sustainable Alaska Plan last December. Many legislators have said they could stomach — if forced to choose — a state sales tax over an income tax, on the theory that a sales tax would capture more revenue from the Alaska’s nearly 2 million visitors every year. On the flipside, Tax Division officials have testified in legislative hearings that up to 20 percent of the revenue generated from an income tax would come from nonresident Alaska workers. The Revenue Department estimates a 3 percent sales tax would generate about $500 million per year, as opposed to the $200 million brought in by the administration’s income tax bill. Standing in the way of passing any of Walker’s high-priority fiscal plan proposals is a Legislature that is being pulled in too many directions to count at once. The state Constitution gives the Legislature five days after the start of a special session to override a governor’s veto. However, floor sessions have been delayed and cancelled as leadership gauges whether there is enough support — a three-fourths vote of the whole Legislature — to override the budget vetoes, starting with Walker’s halving of this year’s PFD appropriation. Not long ago the one thing that could have brought legislators together would seemingly have been restoring PFD funding. Additionally, the Aug. 16 primary is fast approaching for the 40 legislators up for election this year, making a tough vote on taxes or using the Permanent Fund to pay for government even tougher for at least a portion of that group. Committee hearings on the proposed legislation were scheduled to start on the Senate side the afternoon of July 13. Senate hearings are being held at the Legislative Information Office in the home area of the committee chair, with floor sessions occurring in Juneau to follow the special session call. The governor implored legislators once more to act on his collection of fiscal proposals in a July 13 release. “I have said many times: our new fiscal reality only constitutes a ‘crisis’ if we fail to act. Unfortunately, after a regular, extended, and special legislative session this year, 90 percent of our fiscal problem remains — with little optimism for reasonable compromise. It’s clear now; we have a serious fiscal crisis,” Walker said. “How we deal with this crisis will define us all — with no less than Alaska’s future hanging in the balance. I therefore expect, and all Alaskans should demand, compromise and affirmative action by this Legislature on a comprehensive solution to our massive budget deficit during this special legislative session.” Walker further commended the Senate for passing Senate Bill 128, the Permanent Fund bill that died in the House Finance Committee shortly thereafter, last special session. The Office of Management and Budget also released a six-page memo detailing the “other two” options for Alaska’s state budget going forward beyond Walker’s fiscal plan: a no-action plan, which would require the budget be cut to about $1.5 billion in 2019 to match projected revenue; and a Permanent Fund earnings-only plan, with new taxes, allowing for a $3.4 billion budget. The no-action alternative would reduce state agency spending to about 20 percent of current levels, roughly equivalent to late-1960s spending; eliminate state support for the university system — cutting its overall budget by about a third; reduce K-12 education funding by about two-thirds; and force the state to drastically shrink the state ferry system and close many of the 240 state-owned rural airports among other impacts, according to OMB. Passing a Permanent Fund bill alone would reduce agency operating budgets by another 25 percent; reduce school funding by about 20 percent; eliminate community revenue sharing; cut Public Safety funding and State Trooper levels by an additional 10 percent; and reduce state support of the university system by another 25 percent beyond existing budget cuts, OMB projects. “After Alaskans become familiar with the type of Alaska each of these three plans represents, voters will be much better informed about who should represent them in Juneau,” Walker said.

Anchorage LIO owners file $37M claim against Legislature

The owners of the Anchorage Legislative Information Office building filed a claim for just more than $37 million against the Legislative Affairs Agency on July 8 as the Legislature prepares to buy other office space in Anchorage. In a 19-page claim signed by longtime Anchorage real estate developer Mark Pfeffer, who is the manager of the building owner group 716 West Fourth Avenue LLC, $37.01 million is being sought from the Legislative Affairs Agency. The figure is the amount the owners invested in the six-story Downtown Anchorage office project in 2014. The claim technically goes to Kodiak Republican Sen. Gary Stevens, because he currently chairs the Legislative Council. As chair of the council, Stevens is the de facto procurement officer for the Legislative Affairs Agency, which handles business matters for the council and the full Legislature. According to State of Alaska claims process, Stevens has 90 days to decide on the claim. If he denies it, the claim then goes to an administrative law judge within the Department of Administration and then before the commissioner of Administration before heading to Superior Court as a lawsuit. This spring, the council voted to buy a Midtown Anchorage office building owned by Wells Fargo bank at a price of up to $12.5 million. The money was included in the otherwise bare bones capital budget and Gov. Bill Walker did not veto the appropriation when he signed the budget on June 29. However, the governor did urge legislators to find another, more cost-effective option for Anchorage offices. Stevens Chief of Staff Katrina Matheny said the claim does not immediately change plans to purchase the Wells Fargo property and that it has been turned over to Legislative Legal Services for review. Stevens originally hoped to finalize a purchase agreement for the building by July 15, but scheduling conflicts have likely delayed signing the deal for about a week, she said. Stevens was traveling and unavailable for comment, according to Matheny. Public pressure to get out of the 10-year, $3.3 million per year lease for the downtown space while the state grapples with yearly multi-billion dollar budget deficits pushed the council to consider other options starting late last year. Last December, the council voted unanimously to not continue to fund the lease and to explore the cost of moving to the nearby state-owned Atwood Building versus a purchase of the LIO. The council later voted to purchase the building for $32.5 million based on a cost analysis that found it to be cost competitive over 20 years compared to moving to Atwood. After Walker said he’d veto that appropriation, saying it would be inappropriate to spend the money given the state’s bleak financial situation, it emerged that Wells Fargo would sell its Midtown building for $12.5 million and the council voted May 2 to rescind its offer on the LIO and purchase the Wells Fargo building. In March, state Superior Court Judge Patrick McKay ruled the lease invalid because the council violated state procurement code when it signed the deal for the building project in 2013. Rep. Mike Hawker, R-Anchorage, chaired the Legislative Council at that time and signed off on the deal, which totaled $44.5 million. The Legislature invested $7.5 million in the redevelopment project. “Under Alaska law, despite the (Superior) court’s order, the Legislature cannot impose the entire cost and burden of its flawed procurement process, and the effort and expense contractually required of 716, on 716’s shoulders,” the claim states. “Public policy and the need for the public to have faith in the state’s contracting obligations require that the Legislature bear the cost and consequences of its decision to abandon the (Anchorage) LIO building.” Pfeffer has said repeatedly that the building, finished in late 2014 and occupied by the Legislature shortly thereafter, was custom-built to meet the Legislature’s needs. “We still believe we can achieve a pathway to savings and are disappointed that we are forced to take this step. We are willing to work with the Legislature to achieve savings but without the Legislature’s cooperation, we have no choice but to seek legal recourse,” 716 spokeswoman Amy Slinker wrote in a formal statement. In May, shortly after the Legislative Council announced a preliminary deal to purchase the Wells Fargo building, Florida-based EverBank wrote a letter to the Legislative Affairs Agency demanding the state follow through with its lease obligations upon which the bank based its $28.6 million loan to 716 for the LIO. “In the future, if the McKay (court) order is upheld, EverBank will present its claim against the state,” an attorney for the bank wrote to the council.

NANA debt downgraded after poor year, oil exposure

NANA Regional Corp. and its subsidiary NANA Development Corp. are facing similar financial challenges to the State of Alaska, albeit to a much lesser extent. Moody’s Investors Service downgraded about $300 million of NANA Development Corp.’s corporate family debt rating from Caa1 to Caa2 on June 30. NANA Development’s probability of default rating was also downgraded a single notch to Caa2 and the company’s secured debt rating was lowered to from Caa2 to Caa3 as well. The outlook for the different ratings was changed from stable to negative, according to a Moody’s release. In fiscal year 2015, which ended Sept. 30, NANA Regional Corp. had a total loss of $23.9 million. Two years prior, NANA Regional lost $81.7 million and did not pay a dividend in fiscal year 2014. The downgrade from Caa1 to Caa2 is equivalent to a change from the AA+ to AA ratings used by other ratings agencies, and the Caa3 rating aligns with an AA- rating. NANA Development Corp. is a subsidiary of NANA Regional Corp. and operates businesses for the Alaska Native regional corporation, primarily in the oil and gas and federal contracting industries. The downgrade was driven by “significant deterioration” in NANA Development’s core businesses, namely the company’s oil and gas segment, according to the Moody’s report. The State of Alaska’s formerly sterling AAA credit rating has been downgraded to AA+ with a negative outlook by ratings agencies S&P Global Ratings and Moody’s since January. Fitch has kept the overall AAA rating but downgraded some general obligation bonds to AA+ that were for sale in January. Depressed oil prices have cut state revenue — derived primarily through oil and gas taxes and royalties — by nearly 80 percent since 2013. NANA Development operates more than a dozen oil and gas service companies, and times are tough for them, as they are for most in the industry, spokeswoman Blythe Campbell said. “Certainly we don’t like a downgrade and we’d like our performance to be better, but every company in the oil and gas industry kind of wants that right now,” Campbell said. The negative outlook was driven by the analysts’ belief that NANA’s operating performance will continue to struggle to break even over the next year, the report states. “In addition, the company’s federal segment remains under pressure as intensifying price competition drives lower margins and as the government further reduces the number of higher-margin, multi-year sole-source contract awards,” the report reads. It is that statement that Campbell said NANA Development takes issue with. “We think our federal sector is in great shape. It’s half our revenue and it’s strong; it’s equal to last year. We’re feeling very good about the federal sector (business),” she said. NANA Regional spokeswoman Shelly Wozniak said in a statement to the Journal that the parent company is monitoring NANA Development’s performance closely. Many Alaska Native corporations have taken advantage of federal contracting guidelines in what’s known as the 8(a) program established through the Small Business Administration that provide them preferential bidding status for federal work. NANA Regional Corp., through its ownership of NANA Development, was listed as the 85th largest federal contractor in 2014 in terms of the overall value of the company’s contracts, according to an annual list of such companies compiled by Bloomberg Finance. That year, NANA was awarded $707 million in federal contracts. Changes in 2010 to Small Business Administration regulations have made it harder for Native corporations and their subsidiaries to earn sole-source government contracts for more than $20 million; however, NANA’s business with the federal government appears to be steady, as Campbell said. Moody’s furthered its rationale for the downgrade with a statement that NANA Development’s debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) was 6.5-to-1 for the year ending March 31, compared with a 5.7-1 ratio a year prior. Additionally, Moody’s forecasts that debt-EBITDA ratio could increase to upwards of 8-to-1 over the next 12 to 18 months. Interim NANA Development Chief Financial Officer Jamie Clark wrote in statement that the company’s debt coverage will likely continue to soften this year, but should improve after that. He noted that Moody’s does not factor proceeds from the Red Dog zinc mine, which is on land owned NANA Regional, in its debt calculation. NANA Development’s actual debt coverage will peak at 4-1 and then begin to improve, according to Clark. Red Dog’s operator, Teck Resources, is in a court battle with the Northwest Arctic Borough over the local government’s attempt to institute a severance tax on the mine that would replace the current payment-in-lieu-of-taxes, or PILT, structure. Teck argues the new tax could severely hurt the mine’s profitability, which is also at the mercy of often-volatile commodity prices. A change in Teck’s business could also impact NANA Regional, as the resource owner. On its website, NANA Regional states: “We are concerned about jobs. A reduced operating budget for the mine will mean fewer jobs for NANA shareholders. Since 1989, NANA shareholders have received more than $469 million in wages by working at Red Dog. In 2015, approximately 603 NANA shareholders worked at the mine earning $39.3 million in wages.” NANA Regional, which draws revenue from Red Dog, NANA Development and its other investments, also had a rough 2015. The Northwest Alaska Native corporation lost a total of $23.9 million on $923.6 million in total assets in 2015, according to its annual report. The company’s fiscal year ends Sept. 30. NANA Regional’s total revenue in 2015 declined only 1.1 percent to just less than $1.6 billion, but its expenses also increased 0.5 percent from 2014 when it had a net income of $12.6 million. Revenue from the company’s federal and oil and gas business lines grew, but was outpaced by expanding expenses in those sectors. Wozniak, of NANA Regional, said the company anticipated a “tight fiscal year” in 2016 and relayed that message during its annual shareholder meeting in March. “The continued slowdown in the Alaska oil and gas economy is impacting our company as well,” Wozniak said. “Like other Alaska companies, we are working to reduce expenses to maximize profits for shareholders this year. We are also focused on new business opportunities associated with an opening Arctic.” Elwood Brehmer can be reached at [email protected]

Federal court vacates oft-renewed Wishbone Hill permit

Usibelli Coal Mine Inc. is reviewing its options for the proposed Wishbone Hill mine after a July 7 ruling in the U.S. District Court of Alaska that vacated permits for the project. District Court Judge Sharon Gleason ordered the state and federal permits for the planned surface coal mine north of Palmer vacated because Usibelli failed to develop the mine within the time allowed by the permitting process, according to her 35-page order. A group of environmental organizations, including Cook Inletkeeper, Alaska Center for the Environment, the Sierra Club, and the Chickaloon Village Traditional Council sued the federal Office of Surface Mining Reclamation and Enforcement in March 2015, claiming the Interior Department agency did not enforce its own requirement to pull permits if a mine is not operational within three years of permits being issued. The mine site is between Palmer and Sutton on state land near the Glenn Highway. The State of Alaska, which has assumed primacy, or management, of the federal permits, was an intervenor defendant in the suit, along with Usibelli. Lisa Wade, a member of the Chickaloon Traditional Council, called it “shameful” that the state Department of Natural Resources and the Office of Surface Mining allowed Usibelli to hold the permits for so long. “Usibelli is trying to start up a toxic coal strip mine on lands that are sacred to us, using a permit that was issued 25 years ago. This mine threatens our children’s health, our salmon, our water and air quality, our traditions and our way of life,” Wade said. Usibelli operates its namesake coal mine near Healy, about 120 miles south of Fairbanks along the Parks Highway. It is the only active coal mine in Alaska and is the oldest continuously operating mine in the state. Usibelli has said the Wishbone Hill would produce about 500,000 tons of coal per year and employ between 75 and 125 workers. The majority of the company’s current production is sold in state. Coal exports to Asia and Chile have slipped in recent years as a strong U.S. dollar has made exports expensive. The company made a single export sale in 2016, sending a load of 75,000 tons to Japan this summer. The first two Wishbone Hill permits were issued to Idemitsu Alaska Inc. in 1991. After DNR issued one extension, Idemitsu sold the project to North Pacific Mining Corp., a subsidiary of Cook Inlet Region Inc. in 1995. Usibelli acquired the project in 1997 and requested several five-year permit extensions through 2011 that were granted by DNR. “Neither Usibelli’s 2001 permit renewal request nor its 2006 permit renewal request contained a request for an extension of the time to commence mining operations; likewise, each permit renewal by DNR was silent in that regard,” Gleason wrote. 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, company spokeswoman Lorali Simon said. Usibelli, which Simon said found the ruling “surprising,” is analyzing its path forward, but still sees significant value in Wishbone Hill. She said the company has invested millions of dollars in the project based on the assumption that it was properly permitted, but “the planets never aligned” to bring it into production. “(Wishbone Hill) remains important to us. It is something that we are very determined to further develop,” Simon said in an interview. She noted that DNR and the Office of Surface Mining were always well informed about Usibelli’s plans and thus kept approving the permits. Despite that, Gleason concluded that the letter of the law, which states, “(A coal mining) permit shall terminate if the permittee has not commenced the surface mining operations within three years of issuance of the permit,” according to her ruling, trumps any extenuating circumstances in regards to Wishbone Hill. Simon said lawsuits such as this one just brings “further divisiveness” between companies like Usibelli and anti-development groups. “This is another indicator of how this country’s regulatory system is based on process versus purpose,” she said.  

Anchorage LIO owners file contract claim against Legislature

The owners of the Anchorage Legislative Information Office building filed a claim for just more than $37 million against the Legislative Affairs Agency on July 8 as the Legislature prepares to buy other office space in Anchorage. In a 19-page claim signed by longtime Anchorage real estate developer Mark Pfeffer, who is the manager of the building owner group 716 West Fourth Avenue LLC, $37.01 million is being sought from the Legislative Affairs Agency. The figure is the amount the owners invested in the six-story Downtown Anchorage office project in 2014. The claim technically goes to Kodiak Republican Sen. Gary Stevens, because he currently chairs the Legislative Council. As chair of the council, Stevens is the de facto procurement officer for the Legislative Affairs Agency, which handles business matters for the council and the full Legislature. According to State of Alaska claims process, Stevens has 90 days to decide on the claim. If he denies it, the claim then goes to an administrative law judge within the Department of Administration and then before the commissioner of Administration before heading to Superior Court as a lawsuit. This spring, the council voted to buy a Midtown Anchorage office building owned by Wells Fargo bank at a price of up to $12.5 million. The money was included in the otherwise bare bones capital budget and Gov. Bill Walker did not veto the appropriation when he signed the budget on June 29. However, the governor did urge legislators to find another, more cost-effective option for Anchorage offices. Staff to Stevens wrote in an email to the Journal July 8 that a purchase agreement with Wells Fargo was in draft form, with hopes that it would be signed within a week. Public pressure to get out of the 10-year, $3.3 million per year lease for the downtown space while the state grapples with yearly multi-billion dollar budget deficits pushed the council to consider other options starting late last year. Last December, the council voted unanimously to not continue to fund the lease and to explore the cost of moving to the nearby state-owned Atwood Building versus a purchase of the LIO. The council later voted to purchase the building for $32.5 million based on a cost analysis that found it to be cost competitive over 20 years compared to moving to Atwood. After Walker said he’d veto that appropriation, saying it would be inappropriate to spend the money given the state's bleak financial situation, it emerged that Wells Fargo would sell its Midtown building for $12.5 million and the council voted May 2 to rescind its offer on the LIO and purchase the Wells Fargo building. In March, state Superior Court Judge Patrick McKay ruled the lease invalid because the council violated state procurement code when it signed the deal for the building project in 2013. Rep. Mike Hawker, R-Anchorage, chaired the Legislative Council at that time and signed off on the deal, which totaled $44.5 million. The Legislature invested $7.5 million in the redevelopment project. “Under Alaska law, despite the (Superior) court’s order, the Legislature cannot impose the entire cost and burden of its flawed procurement process, and the effort and expense contractually required of 716, on 716’s shoulders,” the claim states. “Public policy and the need for the public to have faith in the state’s contracting obligations require that the Legislature bear the cost and consequences of its decision to abandon the (Anchorage) LIO building.” Pfeffer has said repeatedly that the building, finished in late 2014 and occupied by the Legislature shortly thereafter, was custom-built to meet the Legislature’s needs. “We still believe we can achieve a pathway to savings and are disappointed that we are forced to take this step. We are willing to work with the Legislature to achieve savings but without the Legislature’s cooperation, we have no choice but to seek legal recourse,” 716 spokeswoman Amy Slinker wrote in a formal statement. In May, shortly after the Legislative Council announced a preliminary deal to purchase the Wells Fargo building, Florida-based EverBank wrote a letter to the Legislative Affairs Agency demanding the state follow through with its lease obligations upon which the bank based its $28.6 million loan to 716 for the LIO. “In the future, if the McKay (court) order is upheld, EverBank will present its claim against the state,” an attorney for the bank wrote to the council. The Legislative Council has a meeting scheduled for Monday, July 11, at 5 p.m. The Anchorage LIO matter is not part of the published agenda. Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Dispute continues over gas marketing

The state Division of Oil and Gas has officially rejected BP’s 2016 operational plan for Prudhoe Bay, but is extending last year’s plan until Nov. 1 in hopes the company will provide information on its efforts to market natural gas from the oilfield. Oil and Gas Director Corri Feige wrote a 15-page letter to BP Alaska Reservoir Manager Scott Digert June 30 rebutting several arguments BP and the fields primary working interest owners, ConocoPhillips and ExxonMobil, have made over the past few months as to why they cannot give the state what it wants. In the letter Feige contends the state needs to be able to plan for “major gas sales” — a natural gas pipeline and export project — and doing so requires BP and the working interest owner companies sharing specific work they’ve done to market the gas worldwide. “Major gas sales, in the relatively near future, are necessary to realize the benefit of the enormous gas resource within the (Prudhoe Bay Unit) to the people of Alaska, and planning for (major gas sales) must be done now,” the letter states. Prudhoe holds roughly three-quarters of the natural gas planned for export in the now-tenuous Alaska LNG Project. The 2015 Prudhoe Bay Plan of Development was set to expire June 30. The renewal dates of the annual operational plans for oil and gas units vary because they are based on when the original plan was approved and thus often do not follow a calendar year. BP has until Sept. 1 to submit a modified plan of development for review by the division, according to the letter. Subsequently, the 2015 plan has been extended until Nov. 1 “to allow continued operations at (the Prudhoe Bay Unit),” the letter states. If the issue cannot be resolved, the Alaska Oil and Gas Conservation Commission would likely hear it, according to commission officials. The Division of Oil and Gas has said court action could also be a final remedy if it can’t be settled through administrative appeals. According to sources, BP and DNR have an agreement under the Alaska LNG Project that covers gas marketing information. “That agreement expressly prevents the parties from sharing the very information DNR is demanding from BP,” a source said. In January, now-retired DNR Commissioner Mark Myers sent letters to all the unit operating companies across the state informing them the department, through the Division of Oil and Gas, would be requesting additional information in future unit development plans about natural gas production and sales. The information would be used to better understand how the state can maximize those resources, either through instate uses or export sales, Feige explained in a previous interview with the Journal. BP submitted its Prudhoe plan just before the submittal deadline in late March. The plan document contained a few short and general paragraphs that indicated BP has significant interest in selling its gas from the North Slope field, but lacked any further detail. Feige responded in a letter dated April 11, stating the plan needs to contain “a detailed discussion of the efforts to market gas from the unit during the preceding year, and a detailed plan for marketing efforts the (working interest owners) or unit operator will undertake under the proposed (plan of development).” More specifically, the division has demanded information about which, if any, potential gas buyers the companies have talked to as well as potential pricing terms that would make gas sales viable. The company held firm that the original plan document is complete in a back-and-forth of letters with the division since, stating much of the information the state wants does not exist, and if it did sharing it with the state could violate antitrust laws because the state is a potential competitor with the companies whenever the gas from the field is sold. ConocoPhillips and ExxonMobil have stood behind BP in their own correspondence with the division, saying they also believe the plan is complete. Gov. Bill Walker said in an interview July 6 that he doesn’t believe there are antitrust issues but also that he doesn’t have an issue to the companies pushing back on the request. He has had meetings with Alaska leadership from all three of the producers in the last week and is convinced there is middle ground to be had. Walker said the discussions included alternative ways, such as a workshop setting, for the companies to provide the gas marketing information the administration seeks. “I’m confident that we’re going to reach some sort of understanding of what information they can provide and that they’re comfortable providing and would be acceptable to us,” the governor said. “It looks from the outside more onerous than it really is. I’m very optimistic that we’re going to receive something from them by Sept. 1. There were some suggestions around the table about how that might be done.” The companies also contend the new demands are a significant departure from the precedent that has been set over the nearly 40 years that the state has been approving development plans for Prudhoe. The first one was approved in 1977. On the other hand, the state argues it needs the marketing information to being preparing for major gas sales in about 2025, because that’s when the producers sought and got approval from the Alaska Oil and Gas Conservation Commission last October to start taking gas from the Prudhoe and Point Thomson fields. Walker said that he thinks updates on the companies’ efforts to sell North Slope natural gas are appropriate now, particularly given how far along the state is in the Alaska LNG Project with these same companies. “We’re about to face a (front-end engineering and design investment) decision. Going forward, we’re looking at a way of restructuring the project. We just want to make sure that there’s efforts on their part to market the gas,” Walker said. “If asking for more information is a deal killer for anybody I have to sort of scratch my head and go, ‘So what are we doing putting hundreds of millions of dollars into a gasline if no one wants to talk about, by the way, what they’re going to do on the marketing side.” Walker has said repeatedly that solidifying the market, with all other challenges facing the mega gas project, is among the most critical to overcome quickly. “Our royalty share (of the natural gas) comes from their gas leaving the field, so that’s why its important to us because if their gas doesn’t leave the field there’s nothing we have to market on our side. We need to know that we’re all in alignment on taking gas to market at some point in the future,” he said. Further, the state has cited the companies’ “duty to produce” the gas resources repeatedly since the disagreement arose. While each side’s argument has largely remained the same in multiple letters, Feige, in her June 30 letter, referenced lines in the original 1977 Prudhoe Bay Plan of Development that states BP planned “to commence gas pipeline deliveries of 2 (billion cubic feet per day) as soon as a pipeline and plant to condition the gas to specification can be completed. This is currently estimated to be about five years after the start of oil production,” for the first time.

On eve of fifth session, Walker done appealing to legislators

Round five starts Monday, July 11. Including last fall’s “gasline special session” when the Legislature approved a buyout of TransCanada Corp.’s interest in the Alaska LNG Project, the pending special legislative session is the fifth in less than 15 months and is beginning to resemble a heavyweight fight between the Legislature and Gov. Bill Walker. However, it’s far from déjà vu all over again. Last month the Senate passed a version of the governor’s vision to restructure how the Permanent Fund’s investment earnings are used: from just paying dividend checks to splitting the revenue between PFDs and general government services as the state continues to grapple with budget deficits well in excess of $3 billion. The Senate’s vote was by a wide 14-5 margin, meaning the House is Walker’s sparring mate this time. And it’s a House divided. Last special session — the fourth of the 29th Alaska Legislature — the House Finance Committee vote on the Permanent Fund legislation that ultimately killed the bill was split almost every way possible for as many different reasons as there are committee members. Sources within the Legislature told the Journal some of the votes against Senate Bill 128 were less about legislators disagreeing with the necessity of the bill and more about them following constituent sentiment. Retooling the Permanent Fund to put a significant dent in the annual budget deficit — SB 128 would add about $1.8 billion per year to spendable state revenue and roughly cut the current deficit by half — also means a future with dividend checks that are likely half of near-term projections. That is, unsurprisingly, unpopular. Rep. Tammie Wilson, R-North Pole, said repeatedly and defiantly in committee meetings and on the House floor that she will never vote to change the PFD. Other majority members said they needed to see more budget cuts before they could ask their constituents to accept potential PFD reductions. House Minority Leader Rep. Chris Tuck, D-Anchorage, said in an interview that only demanding a Permanent Fund plan is not a comprehensive fiscal plan and that calling the Legislature back so soon after the last session ended unceremoniously in late June will simply “embolden people against his plan.” Walker has pushed for personal and industry taxes also, but his main focus has been on the Permanent Fund, given it is the single biggest way to fill the deficit and there is little appetite to pass additional taxes on top of that. Tuck suggested revisiting the idea in next January’s regular session, after the November elections when the Legislature could look much different and lawmakers could be refocused without a pending election to worry about, particularly in the House, which has two-year terms. He emphasized the Legislature’s original budget cuts that took several hundred million dollars out of the 2017 budget, although some were one-time savings, as well as the omnibus criminal justice and Medicaid reform bills that will hopefully save significant money long-term as evidence of the Legislature’s successes. “We’ve done a lot of work this year trying to save money in the budget,” he said. On the positive, Tuck said he thinks the dissolving caucuses, at least in the House, is a good thing. “It doesn’t mean the system is breaking down; it means it’s coming together,” Tuck said, as factions of each caucus have joined forces this year on contentious budget issues. The difference with this round, Walker said in a July 6 interview, is that he took away as many of the “excuse de jours” that legislators have used against the Permanent Fund bill as he could when he rolled out a state budget with $1.3 billion in vetoes June 29. Walker said legislators told him in private meetings they needed him to take the political heat for steep budget cuts and reducing this year’s PFD from about $2,000 to $1,000 per Alaskan. He did it. Walker cut the dividend appropriation in half; cut the 2017 fiscal year oil and gas tax credit appropriation by $430 million to the statutorily required amount of $30 million; and among other agency reductions, cut combined education funding by nearly $70 million. “Now we’re going back to go back to and see if those that said, ‘You do this; we’ll do that,’ we’ll see how that goes. If nothing happens in this session and they gavel in, gavel out, I will have an address to the state because at that point it’s clear that the legislative process is not going to fix this problem,” an at times exasperated Walker said. To legislators who have said the governor needs to do more to gain public awareness on the state’s budget crisis: “Trust me, I’ve got the public’s attention as a result of what I did (with the vetoes). All eyes are focused on me as a result,” Walker said. To legislators hesitant to make a politically unpopular vote to change how the PFD is paid: “They owe it to their constituents that Alaska has a future. So while some are fighting for a dividend check I’m fighting for Alaska’s future. I’m looking at the next 10 years, the next 15 years, the next 50 years for Alaska.” To those in the oil industry that have been sharply critical of the second straight year of credit payment vetoes: “Remember, my fiscal plan was to pay off all those credits in totality. That’s still available, but we need to have a fiscal plan as well. “They pushed back to me and I pushed back to them. My push back to them was, ‘What are you doing to help on the fiscal plan in Alaska? What are you doing other than just fighting for your slice of the pie? What are you doing about the rest of the pie?’” While the version of tax credit reform that ultimately passed the Legislature and was signed by Walker was milder and more gradual in fading out some of the credits than his original proposal, the administration’s bill had a $1.5 billion appropriation to pay all past and future expected credit obligations. Elwood Brehmer can be reached at [email protected]

Edison Chouest to build new vessels to take over SERVS contract

Edison Chouest Offshore will be adding new vessels to its fleet when it takes over the oil tanker escort and spill response duties out of Valdez in July 2018. Linda Leary, president of Edison Chouest Alaska subsidiary Fairweather LLC, wrote in response to questions from the Journal that the maritime services provider parent company plans to take advantage of its in-house shipbuilding capabilities to execute its 10-year ship escort-response vessel system, or SERVS, contract with Aleyska Pipeline Service Co. Louisiana-based Edison Chouest announced in early June that it was selected by Alyeska to provide tanker escort and spill response services in Prince William Sound. The company will take over for Crowley Marine Services after a detailed two-year transition process. “(Edison Chouest) will be building new state-of-the-art tugs and new response barges for SERVS Prince William Sound operations. These tugs and barges will include the latest technology and comply with the latest regulations,” Leary wrote. The company owns five shipyards along the East and Gulf coasts from Virginia to Louisiana that allow it to build “mission-specific” craft, Leary added. Crowley has provided tanker docking services in Valdez since the startup of the Trans-Alaska Pipeline System in 1977. It added the Prince William Sound escort and spill response duties to its work in 1990, a year after the Exxon Valdez oil spill. Since then, Crowley has executed the SERVS contract virtually without issue. In February, Crowley announced it had gone 7 million work hours, or about six years, without a lost time injury in its Valdez operations. Alyeska Pipeline Service Co., which is owned by the “big three” North Slope producers BP, ConocoPhillips and ExxonMobil, manages TAPS operations and oversees the associated oil tanker activities in Prince William Sound. Alyeska spokeswoman Michelle Egan said cost was a factor in deciding to make the change from Crowley to Edison Chouest, but also noted the companies were “very, very close on cost” in their bids. She said the complexity of the contract makes it impossible to narrow the selection to a single issue. “One of the things that was particularly appealing about Edison Chouest was the new equipment that they plan to bring into the system — more modern technology, new vessels and then of course just their expertise and experience,” Egan said in an interview. She said Alyeska is obviously aware of and factored Edison Chouest’s involvement in the grounding of the Shell drill rig Kulluk during a winter storm near Kodiak Island late in 2012 into its decision. A 2014 U.S. Coast Guard report on the incident determined design flaws in Edison’s tow vessel caused fuel system issues that caused all four of the tug’s engines to fail and contributed to the grounding. However, most of the blame was placed on Shell for instructing Edison make the tow from Dutch Harbor to Seattle despite a significant storm forecast in the Gulf of Alaska. “Every company has events in its history and what’s really important is what gets learned and applied from those events and then also the overall record of the company and Edison Chouest has a superior (performance) record relative to its industry,” Egan said. “We look at it holistically.” Specific information regarding the new vessels and equipment won’t be made public at least until the SERVS contract between Alyeska and Edison Chouest is finalized. That is expected to happen later this summer, according to Egan. She noted that Crowley and Edison Chouest work cooperatively in other areas and said Alyeska does not foresee any significant issues during the two-year transition process from one SERVS operator to the next. According to Leary, Alyeska is developing a transition plan to integrate Edison Chouest personnel and equipment into existing operations over the next two years. “(The transition plan) will include specific milestones and areas of focus like vessel construction and assurance, contingency plan compliance, personnel training, regulatory and stakeholder engagement and operational continuity,” Leary wrote to the Journal. “Both Edison Chouest Offshore and Crowley will be active partners in the process, and both have committed to a thorough and professional transition.” Florida-based Crowley CEO Tom Crowley said in a release when the company announced it was unsuccessful in its bid to renew the SERVS contract that the company will “continue to work constructively” with Alyeska until its current contract expires in 2018. “Crowley and Alyeska agree that there is nothing more important than the continued protection of Prince William Sound,” Crowley said. The Prince William Sound oil spill response contingency plan, managed by the state Department of Environmental Conservation, sets mandates for much of the SERVS contract and should quell fears by some about a new company in the mix, Egan said. “It’s not like a new operator can come in and do things in a completely different fashion,” she said. Additionally, Alyeska has a continuous and “pretty rigorous” improvement process for all of its contractors, she said. Prince William Sound Regional Citizens’ Advisory Council Executive Director Donna Schantz said the SERVS contract selection process was tightly held and confidential. However, Schantz also said it is not in the council’s purview to recommend which contractors Alyeska should chose. The Prince William Sound Regional Citizens’ Advisory Council was established at the behest of a group of Cordova fisherman shortly after the Exxon Valdez spill in 1989 as a means to improve communication between the public and Alyeska. The 1990 federal Oil Pollution Act mandated the formation of citizens’ councils in Prince William Sound and Cook Inlet. While the nonprofit occasionally receives grant funding, it is almost exclusively funded by Alyeska Pipeline Service Co., at about $3.5 million in recent years, according to the council’s financial records. Schantz described the Prince William Sound Council’s relationship with Crowley as “very positive” and said she expects that to continue with Edison Chouest. The council will have a role in the transition, but has not yet been told what the specifics of that role will be, she said. “We’re going to be doing whatever we can to put together a prioritized list of what we would like to see tested to verify (Edison’s) crew capabilities — basically pre-qualify the crews before the change happens and just make sure that the level of care is maintained,” Schantz said. “We have very high standards here for prevention and response in Prince William Sound and the services this contract provides are key oil spill prevention and response measures. It’s so important that we maintain the high standards.” Crowley has about 250 employees in Valdez and operates 17 vessels for the SERVS contract. Leary described having crews based in Valdez as “critical” to Edison’s success under the SERVS contract. “Our crews will consist of qualified and experienced mariners with tractor tug and escort experience including local personnel, Alaska Natives and (Edison Chouest Offshore) mariners,” she wrote. “Our goal is to provide training and opportunity to develop local, Alaskan crews.” Several maritime unions have loudly criticized Alyeska for changing SERVS operators in spite of Crowley’s successful track record. Democratic candidate for the U.S. House of Representatives Steve Lindbeck has also highlighted that incumbent Republican Rep. Don Young has received nearly $300,000 in campaign donations from Edison Chouest and its related companies over the past decade. Through his office, Young has said it’s not appropriate for him to express an opinion on contracts between private companies. Schantz said the advisory council is simply concentrating on protecting Prince William Sound regardless of the SERVS operator. “Our focus is on escorting tankers in Prince William Sound and preventing and responding to an oil spill,” Schantz said. “I know there’s been a lot of talk from the unions and others but I’m not sure that’s very productive at this point. We need to kind of wait and see what’s going to be proposed and then move forward to make sure we can have the best system we can.” Elwood Brehmer can be reached at [email protected]

State rejects 2016 Prudhoe plan, extends current plan to Nov. 1

The state Division of Oil and Gas has officially rejected BP’s 2016 operational plan for Prudhoe Bay, but is extending last year’s plan until Nov. 1 in hopes the company will provide information on its efforts to market natural gas from the oilfield. Oil and Gas Director Corri Feige wrote a 15-page letter to BP Alaska Reservoir Manager Scott Digert June 30 rebutting several arguments BP and the fields primary working interest owners, ConocoPhillips and ExxonMobil, have made over the past few months as to why they cannot give the state what it wants. In the letter Feige contends the state needs to be able to plan for “major gas sales” — a natural gas pipeline and export project — and doing so requires BP and the working interest owner companies sharing specific work they’ve done to market the gas worldwide. “Major gas sales, in the relatively near future, are necessary to realize the benefit of the enormous gas resource within the (Prudhoe Bay Unit) to the people of Alaska, and planning for (major gas sales) must be done now,” the letter states. Prudhoe holds roughly three-quarters of the natural gas planned for export in the now-tenuous Alaska LNG Project. The 2015 Prudhoe Bay Plan of Development was set to expire June 30. The renewal dates of the annual operational plans for oil and gas units vary because they are based on when the original plan was approved and thus often do not follow a calendar year. BP has until Sept. 1 to submit a modified plan of development for review by the division, according to the letter. Subsequently, the 2015 plan has been extended until Nov. 1 “to allow continued operations at (the Prudhoe Bay Unit),” the letter states. BP Alaska spokeswoman Dawn Patience wrote in an email that the company is reviewing the letter but couldn't provide further comment at this time. In January, now-retired DNR Commissioner Mark Myers sent letters to all the unit operating companies across the state informing them the department, through the Division of Oil and Gas, would be requesting additional information in future unit development plans about natural gas production and sales. The information would be used to better understand how the state can maximize those resources, either through instate uses or export sales, Feige explained in a previous interview with the Journal. BP’s submitted its Prudhoe plan just before the submittal deadline in late March. The plan document contained a few short and general paragraphs that indicated BP has significant interest in selling its gas from the North Slope field, but lacked any further detail. Feige responded in a letter dated April 11, stating the plan needs to contain “a detailed discussion of the efforts to market gas from the unit during the preceding year, and a detailed plan for marketing efforts the (working interest owners) or unit operator will undertake under the proposed (plan of development).” More specifically, the division has demanded information about which, if any, potential gas buyers the companies have talked to as well as potential pricing terms that would make gas sales viable. Gov. Bill Walker has declined to comment on the division's push for the gas marketing information because it is a regulatory matter, according to a statement from his office. The company held firm that the original plan document is complete in a back-and-forth of letters with the division since, stating much of the information the state wants does not exist, and if it did sharing it with the state could violate antitrust laws because the state is a potential competitor with the companies whenever the gas from the field is sold. ConocoPhillips and ExxonMobil have stood behind BP in their own correspondence with the division, saying they also believe the plan is complete. The companies also contend the new demands are a significant departure from the precedent that has been set over the nearly 40 years that the state has been approving development plans for Prudhoe. The first one was approved in 1977. On the other hand, the state argues it needs the marketing information to being preparing for major gas sales in about 2025, since that’s when the producers sought and got approval from the Alaska Oil and Gas Conservation Commission last October to start taking gas from the Prudhoe and Point Thomson fields. Further, the state has cited the companies’ “duty to produce” the gas resources repeatedly since the disagreement arose. While each side’s argument has largely remained the same in multiple letters, Feige, in her June 30 letter, referenced lines in the original 1977 Prudhoe Bay Plan of Development that states BP planned “to commence gas pipeline deliveries of 2 (billion cubic feet per day) as soon as a pipeline and plant to condition the gas to specification can be completed. This is currently estimated to be about five years after the start of oil production,” for the first time. Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

New AGDC president gets grilled by resource committees

The Alaska LNG Project is at an unexpected crossroads. Consensus among state’s producer partners to continue the $45 billion-plus export plan for North Slope natural gas beyond this year has been lost. Concurrently, new Alaska Gasline Development Corp. President and CEO Keith Meyer is presenting an option to overhaul the financial structure of the project that would allow the state to lead the project, but still depend on the producers selling their shares of natural gas from the Prudhoe Bay and Point Thomson fields into the project. “This project needs a cooperative relationship with the producers and I want to have a cooperative relationship with the producers,” Meyer said during a daylong joint House-Senate Resources Committee project update hearing held June 29 at the Anchorage Legislative Information Office building. Meyer’s vision of a state-led Alaska LNG Project — one Gov. Bill Walker has long alluded to — would keep the project on its current schedule for LNG exports by 2025, if not a year or two sooner. To do that, the state would take the lead role in marketing the project not only to potential buyers, but to potential investors as well. The idea was met with predictable skepticism from legislators, particularly those in the Republican-led majorities. They have spent more than two years familiarizing themselves with the existing Alaska LNG Project structure — that with the state, BP, ConocoPhillips and ExxonMobil as equity partners to the end. Finance Committee members of each body also participated in the meeting discussion. Meyer repeatedly emphasized to legislators that seeking out investors for the project that are content with lower, but stable long-term rates of return are the lynchpin to lowering the cost of the project beyond what can be done to engineer the cost down. “Because we’re starting with a high-cost framework we’re going to have to beat this project down on rate-of-return,” Meyer said. A state-led project could also reap tax-exempt benefits from the Internal Revenue Service, Meyer speculated, but he could not provide assurances on that front. Alaska LNG Project Manager Steve Butt said the project team has narrowed the overall cost to the “lower end” of the $45 billion to $65 billion price range estimate that has been used almost since work began. He added, however, that the market still provides significant challenges to a $45 billion-or so project. “I think at the right time the known (natural gas) resource on the North Slope will be developed, I just don’t know if that time is today,” Butt testified. “At the same time as we’ve cut 10 to 15 percent off the cost the market has gone down 50-60 percent. When I look at the market that’s a really heavy lift.” While everyone is familiar with the oil price collapse over the last two years, the Asian LNG market has not been far behind. LNG spot market prices have fallen nearly 75 percent, to about $4 per million British thermal units, since the Alaska LNG Project plan was formalized in 2014. The “high-cost framework” touched on by Meyer is unavoidable. To make the project economic, it has to be a mega project in the truest sense. The Alaska LNG Project is designed to process up to 3.3 billion cubic feet of natural gas per day — more than 10 times what the state currently consumes in an average day. Prepping all that gas for transport down the 800-mile, 42-inch diameter pipeline will require a massive gas treatment plant on the North Slope. Finally, the LNG plant and marine terminals planned for Nikiski will cover more than 600 acres and consume roughly half of the project cost. Meyer insisted that adding responsibilities to the state’s role would not equate to adding risk. That would be spread among multiple investors and contractors. In a previous interview with the Journal, Meyer said the financial structure change would transform the project from an LNG export project limited to the equity investors — the state and producers — to an infrastructure project that ships natural gas and processes LNG for anyone it contracts with. “If you get this built, this becomes the way to open up the North (Slope) to explorers. It’s not just the way to monetize Prudhoe Bay and Point Thomson gas reserves,” he said at the June 29 meeting. “I think the state will be well served to have somewhat of an open access regime.” At the same time, Meyer said AGDC would welcome any or all of the producers as investors if the project fit their criteria. Legislators questioned him as to why it would be prudent for the state to move forward with a project that the world’s largest companies in the business are wary of. “If the discussion is internal versus external capital, I’m open to discussion. If the discussion is more rogue in nature, I remain concerned,” Sen. Peter Micciche, R-Soldotna, said. Meyer stressed the financial overhaul is a concept and not anything the state has committed to. He also said numerous times during several hours of grilling by legislators that if the state wants to continue pursuing a project it has to evaluate other options. “We have two choices: You can either delay the project or you can look for something different and I think we have enough support among the parties to look for something different,” Meyer said in response to questioning from Anchorage Republican Rep. Mike Hawker. BP and ExxonMobil representatives testified that their companies continue to support an aligned project with the state and producers but acknowledged the market challenges. ConocoPhillips Alaska Project Integration Manager Darren Meznarich said the company is committed to completing the pre-front end engineering and design, or pre-FEED, process this year as the project schedule calls for. However, he followed that by saying ConocoPhillips is not likely to commit to the front end engineering and design, or FEED, stage in 2017, which could require the project partners to commit nearly $2 billion over a couple years and is the final process before a final investment decision. Meznarich added that ConocoPhillips would still make its share of North Slope gas reserves available to a project it is not an investor in for commercially acceptable terms and is open to the concept proposed by Meyer and AGDC. Elwood Brehmer can be reached at [email protected]  

Constrained Inlet gas market remains a quandary

Which comes first, supply or demand? That question quickly becomes chicken-and-egg tough when it pertains to the Cook Inlet natural gas market, where constrained demand impedes development of high-cost supply. It is, at best, an untenable situation. Natural gas produced from the Cook Inlet basin, which includes shore side developments on the Kenai Peninsula and to the west of the Inlet, exclusively supplies the energy needs of nearly 60 percent of Alaskans from the outlying areas of the Matanuska-Susitna Borough south to Homer. Electricity generated at natural gas-fired power plants in Southcentral supplied more than a third of Interior’s power in 2014, according to Golden Valley Electric Association; and about 1,000 Fairbanks residents and businesses have rid themselves of their backyard fuel oil tanks since Fairbanks Natural Gas began providing them Cook Inlet-sourced gas via truck in 1998. With no nearby alternative supply, those numbers exemplify the importance maintaining Inlet gas production: it means keeping the lights on and buildings warm in the economic heart of the state. While those population centers have grown over the past 10 years, the demand for gas has not. Alaska’s appetite for Inlet gas was mostly stable at roughly 200 billion cubic feet, or bcf, per year for more than 20 years from the mid-1980s until 2007. The impact of increased residential and commercial demand from population growth was muted by larger industrial needs — namely that of the Agrium Inc. nitrogen fertilizer plant in Nikiski, which closed in 2007 for lack of gas supply — and ConocoPhillips’ LNG exports to Japan. At about the same time a confluence of factors hit the market hard. In late 2006, the Regulatory Commission of Alaska rejected a gas supply contract between Enstar Natural Gas Co. and Marathon Oil that was linked to Lower 48 Henry Hub market pricing. That ultimately resulted in a separation of pricing for the isolated Inlet gas from the indexed trading market. Since the de-linking, shale gas has depressed Henry Hub to the $2 per thousand cubic feet, or mcf range, while Inlet gas has generally fluctuated between $6 and $8 per mcf. The primary gas fields in the basin were also starting to show their age. Some had been producing oil and gas since the mid-1960s. Waning oil reserves made reinvestment uneconomic for the large operating companies at the time and consequently impacted gas production as well. With Agrium’s annual demand of about 55 bcf off the table and little exploration occurring, gas demand, and production, fell sharply for years until stabilizing somewhat in 2013 to roughly the current level of about 100 bcf per year. When the Southcentral utilities saw the declining production curve they began contingency planning — “self-protection mode” as Matanuska Electric Association General Manager Tony Izzo described it — and began discussing LNG imports to meet consumer needs, despite having one of the most historically prolific gas basins in the country in their backyards. The prospect of importing energy to one of the most hydrocarbon-rich regions of the world did not sit well with state lawmakers, who promptly drafted and passed the Cook Inlet Recovery Act in 2010, which incentivized development of the Cook Inlet Natural Gas Storage Alaska facility in Kenai and added to the oil and gas tax credits available to Inlet-operating companies. Two years later came Hilcorp Energy. In nearly one fell swoop Hilcorp purchased the Inlet holdings of majors Chevron and Marathon and immediately became the basin’s dominant producer. With Hilcorp came the 2012 consent decree between the state and the company — the agreement that has largely regulated Inlet gas pricing since then and will through its expiration in early 2018. Stable but not optimal The Cook Inlet gas situation began to stabilize with the consent decree, according to leaders of several Southcentral utilities. It capped base load natural gas prices at $6.60 per mcf in 2013, with annual 4 percent increases to a cap of $7.72 per mcf in 2017. The consent decree “added a degree of functionality to a previously dysfunctional market” and ended spot price bidding well in excess of $10 per mcf, Enstar Vice President and General Counsel Moira Smith said. Izzo said his only significant issue with the agreement, as a gas buyer, is the 4 percent price escalator. The most recent gas supply contracts between the utilities and Hilcorp and new gas producer Furie Operating Alaska LLC start when the consent decree expires and extend out to 2023. The initial prices in those contracts are up to 20 percent lower than the end of the decree pricing scale. While securing fuel supply is typically a utility’s top priority, Smith said in an interview that Hilcorp was willing to extend terms beyond 2023. Rather, it was Enstar that wanted to keep its long-term options open for potential new producers. Since Hilcorp took the lion’s share of the gas market, the lone new Inlet entrant with significant production at this point is Furie. Last September the state Division of Oil and Gas estimated there is about 1.2 trillion cubic feet of proven plus probable, or 2P, recoverable natural gas reserves in the Cook Inlet basin. With current local demand at about 85 bcf per year and ConocoPhillips annual LNG exports in the 15 bcf range the past two years — conducted in summer to balance seasonal utility demand swings — the division’s 2P reserve projection would provide a little more than a decade of supply. The U.S. Geological Survey has published total Inlet gas reserve estimates as high as 17 trillion cubic feet for conventional and unconventional plays — economics not considered. Furie Senior Vice President Bruce Webb said in an interview that he believes the current reserves could supply the status quo market for longer based on what Furie thinks it has, but the situation is still far from ideal. Regardless of the exact extractable reserves, Izzo said MEA’s contract with Hilcorp inked in April to supply all of its natural gas through March of 2023 provides the electric utility with only “temporary relief.” “As a buyer (of gas) and a provider of an essential service, the level of concern has not diminished for me at all,” he said. “For me, in three-to-five years I’m going to have to be looking at importing LNG again if I don’t see things turn around.” A “turnaround” would mean new players bringing new investment to new fields resulting in new gas production, according to Izzo. There has been a turnaround on the oil front since Hilcorp came to the scene. Cook Inlet oil production bottomed out at about 7,500 barrels per day in 2009. Almost always the more sought-after commodity, oil production has more than doubled to nearly 16,000 barrels per day from the Inlet in May, according to Alaska Oil and Gas Conservation Commission data. “In many ways, one could say that gas production hasn’t seen the same degree of turnaround because it’s a restricted domestic market where you’re limited to the demand that’s available,” Janak Mayer told the House Resources Committee during a Feb. 26 hearing on oil and gas tax credit legislation. Mayer is chairman of the Legislature’s oil and gas consulting firm Enalytica. Flat demand ConocoPhillips’ LNG exports, in addition to being subject to the forces of a depressed world market, are also limited by the company’s export license, which was renewed in February by the Department of Energy. It now runs into February 2018. The license allows ConocoPhillips to export up to 40 bcf of natural gas in liquid form over the next two years. However, those exports can only be made if local utility demand is met first. Thus, ConocoPhillips exports have come during the off-peak summer season since the plant reopened in 2014. Part of the market challenge stems from utilities, and residents, doing what we’ve been told to do for decades — saving energy. Enstar is not expecting demand growth from its natural gas customers through 2023 in filings with the RCA related to its latest gas supply contract with Hilcorp. Smith said incentive programs to purchase energy efficient appliances and state rebates for home weatherization projects, along with individual consumer efforts to use less natural gas, have offset the annual small growth in the utility’s customer base. “The conservation effect will result in flat annual demand from now into the foreseeable future,” Smith said. Izzo noted that the suite of new natural gas-fired generation plants in the region that have come online in recent years or are about to are all 25 percent to 30 percent more fuel efficient than the plants they are replacing, thus eliminating any significant demand growth from the electric utilities. Finally, Municipal Light and Power and Chugach Electric Association basically took up to 80 bcf of demand off the market over the next 15 years to 18 years when they partnered to purchase ConocoPhillips’ share of the Beluga River Unit in February. The utilities expect the field to produce between 70 bcf and 80 bcf in total before being depleted. Hilcorp owns the remaining third of the Beluga field and will operate the unit for the utilities, but it is a portion of valuable gas demand that will not be available to bid on for years to come. “We all think there’s gas out there but you have to think you can sell it before you can go out and invest,” Izzo commented. “If you went out and drilled a gas well now you wouldn’t be able to sell it until about 2021 or 2023,” Webb added. Tax credits For better or worse, Cook Inlet natural gas is about to return to a truly free, but still constrained, market. House Bill 247 signed by Gov. Bill Walker would eliminate state support for work in the basin starting in January 2018. That is just before the blanket price control of the consent decree will officially end on April 1, 2018. While much of the extra-extended legislative session this year focused on tax credits for the oil and gas industry, bill versions from House and Senate committees varied greatly on North Slope issue, but fairly quickly settled on eliminating credits from the Inlet within a few years. HB 247 cuts the current 25 percent Net Operating Loss, 20 percent Qualified Capital Expenditure and 40 percent Well Lease Expenditure reimbursable credits in half on Jan. 1, 2017. The halved credits are then fully killed off a year later. Webb testified in legislative hearings on HB 247 that Furie took advantage of all of the available Cook Inlet tax credits in developing the $700 million offshore Kitchen Lights gas discovery, which included installation of the first production platform in the Inlet in roughly 30 years. Furie began producing gas in time to fill its first utility contract with Homer Electric Association this spring. However, he noted the company recognizes the position falling oil prices quickly put the state in — that of annual budget deficits approaching $4 billion. “The state didn’t see this oil crisis — budget crisis — coming so we can appreciate the state’s position that they just can’t afford to pay everything anymore,” Webb said. He added that the final version of HB 247 that passed the Legislature gives companies needed time to adjust, while the administration’s proposal would have cut some of the Inlet credits nearly immediately this July 1. The tax credits helped Furie mitigate its biggest risk and the biggest risk any company takes —the risk of exploration — in a basin that is “easily 300 percent more expensive than the Lower 48” in terms of gas development, Webb said. Izzo said he is worried the state acted just a little too soon in wholly eliminating the credit program before additional gas reserves could be developed. BlueCrest Energy of Fort Worth, Texas, began producing small amounts of oil from the Cosmopolitan Unit just offshore of Anchor Point via a single onshore well in late April. The company committed upwards of $525 million to the project and hopes to produce up to 5,000 barrels per day this year. CEO Benjamin Johnson credited tax credits with helping the company develop the well-defined but green field reserve. BlueCrest investigated options to make gas production from Cosmo worthwhile — the gas reservoir sits directly above the oil — but the uncertainty about the credit program starting after Gov. Walker’s well-publicized line-item veto of $200 million of fiscal year 2016’s $700 million budget appropriation to pay for credits earned caused the company to delay tapping the Cosmo gas reserve, Johnson said in testimony to legislators this year. Another challenge for selling gas from Cosmo is that Hilcorp and Furie have eaten up much of the utility market for years to come. This year each secured contracts with Enstar through at least 2021. Hilcorp also recently inked a deal to supply all of Matanuska Electric’s demand from the end of the consent decree into 2023; and the two have other contracts in place as well. Now, BlueCrest is preparing to frack wells drilled from onshore to increase oil production. Legislative consultant Mayer said that infill drilling of developed fields should be profitable given Inlet gas prices and drilling costs; the situation Hilcorp is mostly in and Furie is working to get to with its first few gas wells in place. The economics of early development drilling, however, can be much different, he said. In a written response to questions from the Journal, Hilcorp stated: “House Bill 247 that recently passed the Legislature impacts our industry negatively. We, like all other oil and gas companies, have to consider these impacts when making our investment decisions. “In deciding where to spend our capital, a number of factors come into play and the stability of Alaska’s fiscal regime is an important one. Continued turmoil and instability within the Alaska oil and gas tax structure will also place Alaska at a disadvantage in attracting new players. We hope the result of any new legislation being considered will create a predictable and stable tax structure that encourages more oil and gas activity in Alaska.” A proposal by the administration to potentially offset the loss of the credits died in the Legislature and is not on the governor’s July 11 special session agenda; however oil and gas tax credits are an item once again. House Bill 246 would have established an oil and gas project development loan fund within the state-owned Alaska Industrial Development and Export Authority to provide low-interest loans for low-risk development projects. The fund would not have been immediately capitalized because the budget had already been passed, but HB 246 passed the House by a wide margin in the final days of the special session. The Senate had little time to address the legislation and adjourned without taking it up. Furie’s Webb said it obviously would not replace the tax credit system, which could offset more than half of the development costs of some projects, but has the promise to be useful, if it is not too restrictive. “If you go to Wall Street (for funding), the interest is really high because you’re trying to finance a project that may or may not prove out and you may or may not have a market for the product,” Webb said. “If the state has a good low-cost financing tool, that would definitely help out further development.” The Alaska Oil and Gas Association initially testified against the loan fund proposal, but later warmed slightly to the idea while emphasizing it would not be an adequate replacement for the credit program. Mayer testified to House Resources that spending more than $300 million per year on tax credits in Cook Inlet — as the state has done the past three years — is simply not feasible, particularly given the state receives minimal the production taxes the credits are tied to. “I think it’s hard to look at those (credit expense) numbers and see that as a sustainable system,” Mayer said. However, in the same hearing he added, “The basic impact of the credits is to make what is a very marginal investment maybe just possible,” exemplifying the challenge of the situation. Demand on the horizon The nearest demand growth appears to be at least four or five years away. That is, unless Agrium suddenly decides to restart its Nikiski facility, which seems unlikely given a statement by Richard Downey, a company vice president, who said nitrogen prices do not make that feasible at this point. “We continue to keep the plant warm, so to speak, in terms of upkeep, in hopes that someday we can return it to production. I would say market conditions are not conducive to that at the moment,” Downey told the Journal. He added that lower energy prices worldwide make restarting the Nikiski plant that relies on the Cook Inlet gas market a challenge. Webb also said he doesn’t think the Alaska LNG Project, or any other large North Slope export project, would impact the Southcentral gas market much, unless the Inlet gas supply fades and prices rise because the cost to move the gas down the 800-mile pipe would not match the local cost advantage. AIDEA officials leading the Interior Energy Project initiative to get natural gas to the Fairbanks area hope to start trucking more LNG north in 2018, but the 3 bcf per year starting point would be a minimal change in the overall market. The mega-mine Donlin Gold project is looking at a 315-mile natural gas pipeline from the west side of Cook Inlet to the mine site in the Kuskokwim River valley. As currently planned Donlin would need about 12 bcf per year to fuel the mine’s power plant and it would add the potential of getting natural gas to some of the nearby villages in the region. It would be a long-term customer, but would it provide enough to spur significant new exploration. The mine is also still in the environmental impact statement process, awaiting a federal decision sometime next year with operation still years away, along with being economically challenged by low gold prices. A mid-sized LNG export plant proposed at Port MacKenzie by Resources Energy Inc., a joint venture of Alaska and Japan interests, could crack the market egg. The plant’s 1 million tons per year of LNG processing capacity could add nearly 50 bcf of gas demand over 20-plus years and be the elusive “anchor tenant” to replace the void left by Agrium. With startup planned for 2021, the lead-time would allow for field development if need be. REI is looking for utilities interested in investing in gas reserves, which Japan has plenty of, General Manager Mary Ann Pease said, noting gas supply is not a worry. “We definitely think the gas supply is there,” she said. The challenge will be achieving the project’s $4 per mcf price target for wholesale gas, but that could be helped some through buying directly into a field. “The cost of gas is the single biggest thing that drives our project,” Pease said. Elwood Brehmer can be reached at [email protected]  

Furie takes first steps toward adding Inlet oil platform

Furie Operating Alaska is taking the first steps towards adding an oil platform to its Kitchen Lights gas development in Northern Cook Inlet. Furie Senior Vice President Bruce Webb said in an interview the company plans to re-enter the KLU-4 well roughly six miles north of the Julius R platform the company installed last year above its natural gas producing wells. The KLU-4 well was originally drilled to 10,000 feet in 2014 and will be punched down to 18,000 possibly this year but more likely next, according to Webb. “We know there’s gas there for sure; we’ve drilled through some gas and we see the gas on the seismic and on the seismic it appears to be a pretty large oil reservoir, but again, you don’t know for sure until you drill into it,” he said. “It could be really good sandstone with water.” The company once intended to drill farther, into the Jurassic formation, but expiration of the state tax credit for drilling with a jack-up rig in July caused Furie to back off on the extra drilling, Webb added. The work will be done with the Randolph Yost jack-up rig, a modified shelf-drilling rig the company moved to the Inlet early this year from the South Pacific. He said Furie hopes to get at least 2,000 barrels per day from KLU-4 starting sometime in 2019, about the time the company believes the oil production will become profitable. While Furie has identified gas in KLU-4, it hasn’t been fully delineated. “We’ll go after the oil and the gas will be there when we need it,” Webb said. It has begun the permitting process for another platform and is shooting for mid- to late 2018 to start development and eventual installation. “Depending on which road the federal agencies take (the permitting process) could be anywhere from one to three years. It depends if they decide (the platform) warrants an environmental impact statement,” Webb speculated. He said the second platform should cost less than the roughly $200 million it took to install the Julius R because a pipeline tie-in would only have to reach six miles back to the Julius R platform. Webb said a second pipeline to shore is already permitted if production from the combined developments eventually exceeds current pipeline capacity. The experience gained from the Julius R should also help keep the costs of a second platform down. “We learned a lot from the last installation,” Webb said. In the meantime, Furie is also drilling two development gas wells from the Julius R platform to supply the gas contract it signed with Enstar earlier this year. That contract starts in April 2018. Elwood Brehmer can be reached at [email protected]  

Walker names AG, introduces latest cabinet additions

Gov. Bill Walker’s cabinet is finally whole again. Walker introduced Anchorage attorney Jahna Lindemuth as Alaska’s new attorney general at a Tuesday afternoon press conference. Lindemuth replaces former Attorney General Craig Richards who resigned abruptly June 23 citing personal reasons. Walker said he was “struck” by her “passion for Alaska.” He referenced more than 950 hours of pro bono work she did in 2015 representing a victim of domestic violence and a wrongly convicted defendant in the very public “Fairbanks Four” case. “Everything she’s been involved in in her professional life she’s risen to the top,” Walker said of Lindemuth. Head of the Anchorage office of the international firm Dorsey and Whitney, Lindemuth has represented several Alaska Native regional corporations and ConocoPhillips Alaska in both state and federal court, according to the governor’s office. Acting Attorney General Jim Cantor will remain in that position until Lindemuth takes over the permanent position as Alaska’s top lawyer in early August. She will be the second woman to serve as attorney general of Alaska. Lindemuth conceded she will face “a steep learning curve” in transitioning from private practice to public service, but said she is confident the attorneys within the Department of Law will help make that switch easier. “Keeping in mind that there are real people behind the decisions that we make (as state attorneys) is important,” she said at the press briefing. Senate Judiciary Committee Chair Lesil McGuire, R-Anchorage, said in a formal statement that she is pleased with Lindemuth’s appointment. “(Lindemuth) brings years of Alaska experience to bear on the legal challenges facing our great state,” McGuire said. “With the Alaska LNG Project, Corrections reforms, arctic development and tribal sovereignty questions facing our state, I am confident Jahna Lindemuth will work for the best interests of all Alaskans.” Tuesday as also the first time Alaskans heard directly from new Department of Natural Resources Commissioner Andy Mack, who is taking over for acting DNR Commissioner Marty Rutherford, who is stepping down June 30. His appointment was also announced June 23. Walker said Mack has served as a behind-the-scenes consultant on oil and gas issues to the administration and has accompanied the governor in several meetings with Interior Secretary Sally Jewell. “I see an opportunity to play a little more offense than we have in the past” in relation to the state’s interaction with federal agencies regarding oil and gas development issues, Walker said. The governor has said repeatedly that he intends to continue pushing for exploration and development of oil resources in the coastal plain of the Arctic National Wildlife Refuge, a goal that is the opposite of the Obama administration’s view of the refuge. Mack said the move from his current position as a director for the Anchorage-based private equity firm Pt Capital to the head of DNR should not be an issue given both positions are tasked with bringing more investment into the state. “I can’t tell you how pleased I am to take this position the governor has offered me,” Mack said. Elwood Brehmer can be reached at [email protected]  

Anchorage attorney Jahna Lindemuth named new AG

Gov. Bill Walker’s cabinet is finally whole again. Walker introduced Anchorage attorney Jahna Lindemuth as Alaska’s new attorney general at a Tuesday afternoon press conference. Lindemuth replaces former Attorney General Craig Richards who resigned abruptly June 23 citing personal reasons. Walker said he was “struck” by her “passion for Alaska.” He referenced more than 950 hours of pro bono work she did in 2015 representing a victim of domestic violence and a wrongly convicted defendant in the very public “Fairbanks Four” case. “Everything she’s been involved in in her professional life she’s risen to the top,” Walker said of Lindemuth. Head of the Anchorage office of the international firm Dorsey and Whitney, Lindemuth has represented several Alaska Native regional corporations and ConocoPhillips Alaska in both state and federal court, according to the governor’s office. Acting Attorney General Jim Cantor will remain in that position until Lindemuth takes over the permanent position as Alaska’s top lawyer in early August. She will be the second woman to serve as attorney general of Alaska. Lindemuth conceded she will face “a steep learning curve” in transitioning from private practice to public service, but said she is confident the attorneys within the Department of Law will help make that switch easier. “Keeping in mind that there are real people behind the decisions that we make (as state attorneys) is important,” she said at the press briefing. Senate Judiciary Committee Chair Lesil McGuire, R-Anchorage, said in a formal statement that she is pleased with Lindemuth’s appointment. “(Lindemuth) brings years of Alaska experience to bear on the legal challenges facing our great state,” McGuire said. “With the Alaska LNG Project, Corrections reforms, arctic development and tribal sovereignty questions facing our state, I am confident Jahna Lindemuth will work for the best interests of all Alaskans.” Tuesday as also the first time Alaskans heard directly from new Department of Natural Resources Commissioner Andy Mack, who is taking over for acting DNR Commissioner Marty Rutherford, who is stepping down June 30. His appointment was also announced June 23. Walker said Mack has served as a behind-the-scenes consultant on oil and gas issues to the administration and has accompanied the governor in several meetings with Interior Secretary Sally Jewell. “I see an opportunity to play a little more offense than we have in the past” in relation to the state’s interaction with federal agencies regarding oil and gas development issues, Walker said. The governor has said repeatedly that he intends to continue pushing for exploration and development of oil resources in the coastal plain of the Arctic National Wildlife Refuge, a goal that is the opposite of the Obama administration’s view of the refuge. Mack said the move from his current position as a director for the Anchorage-based private equity firm Pt Capital to the head of DNR should not be an issue given both positions are tasked with bringing more investment into the state. “I can’t tell you how pleased I am to take this position the governor has offered me,” Mack said. Elwood Brehmer can be reached at [email protected]

Walker administration shuffled as AG, DNR commissioner step down

The Walker administration looks a lot different after separate announcements were made Thursday that Attorney General Craig Richards and acting Department of Natural Resources Commissioner Marty Rutherford will both be leaving Gov. Bill Walker’s cabinet. Richards’ resignation is immediate. Deputy Attorney General Jim Cantor will take over as acting attorney general until Walker appoints a new one, according to a release from the governor’s office. Rutherford’s is leaving at the end of June. Walker thanked Richards and Rutherford for their work for the state in formal statements. “When I appointed Craig (Richards) in December 2014 as attorney general, I knew Alaskans would benefit from his deep respect for the law and his vast knowledge of finance,” Walker said. “As the state’s top attorney, work has pulled him away from his three-year-old son, and I am grateful for the sacrifices he and his family have made in service to Alaska. Given Craig’s knowledge of gasline issues, I’m certain the state will continue to benefit from his oil and gas expertise as we push toward completion of a project.” Richards said in a statement that he is leaving for personal reasons. “I feel I need to re-focus on my family, which is impractical given the travel and workload requirements of the job. The Department of Law has top-notch lawyers, and I know the state is in good hands with these devoted public servants,” Richards said. Previously a law partner of the governor’s, he also worked as an attorney with Alaska Gasline Port Authority, a municipal group that was focused on developing a gasline from the North Slope to Valdez. In addition to his traditional duties as attorney general, Richards has been one of the administration’s point persons on the proposal to restructure how the Permanent Fund’s investment earnings are managed to significantly alleviate the state’s multi-billion-dollar annual budget deficit. Walker also put Richards on the Alaska Permanent Fund Corp. board of trustees earlier this year. Rutherford, who has worked for the state in some capacity for 27 years, is retiring from DNR June 30, but her work for the state is not over. Walker also appointed her to a public seat on the Permanent Fund Corp. board of trustees, replacing Gary Dalton. Rutherford’s father, John Kelsey, also served as a Permanent Fund trustee from 1987-95. “For nearly 30 years, Marty has helmed various important projects, including the gasline. Her knowledge of various topics and inimitable ability to connect with anyone she meets has inspired the utmost respect of people statewide — from the Legislature to the industry,” Walker said. Rutherford was a deputy DNR commissioner before taking the lead role after the retirement of Mark Myers from the commissioner position. As deputy for Walker, she led the state’s negotiating team for the Alaska LNG Project. She was also a deputy commissioner with DNR from 1992-2005 and held the same position in the state Department of Community and Regional Affairs before it was merged with the Commerce Department. “This is bittersweet for me,” Rutherford said. “I was born and raised here in Alaska, so it’s truly been an honor and great privilege for me to give back in some way to the state that has given me and my family so much.” Finally, Walker also appointed Andy Mack as DNR commissioner. Mack is currently a director at the Anchorage-based private equity firm Pt Capital. An attorney, Mack has served on the Resource Development Council of Alaska board of directors. He is also currently an advisor to several Alaska Native corporations involved in the North Slope oil and gas industry, according to the governor’s office. “As we look for more oil and gas exploration and development opportunities, Andy has the vision and passion Alaska needs to aggressively chart our own path. I am grateful to Marty, who has led the department seamlessly these past four months (as acting commissioner),” Walker said. “Alaskans owe Marty a debt of gratitude for her nearly three decades of government service.” Early in 2015 Walker appointed Pt Capital CEO and co-founder Hugh Short to the Alaska Gasline Development Corp. board of directors. Elwood Brehmer can be reached at [email protected]

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