Elwood Brehmer

Judge finds Anchorage LIO lease invalid

The Legislature’s $3.3 million per year lease for the Anchorage Legislative Information Office building was thrown out in a Thursday state Superior Court ruling. Judge Patrick McKay ordered the lease be ruled invalid because he determined it to not be an extension of a prior lease with the Legislature’s landlord, 716 West Fourth Avenue LLC, a group managed by Anchorage real estate developer Mark Pfeffer. McKay’s ruling means then-Legislative Council chair Rep. Mike Hawker, R-Anchorage, violated state procurement guidelines in 2013 when he did not seek a new lease through a competitive bid process, thus invalidating the lease. 716 West Fourth Avenue is the Downtown Anchorage address of the LIO building. The Legislature moved into the building after it was completed in late 2014. Anchorage attorney and owner of the adjacent Alaska Building Jim Gottstein filed suit against 716, the project development group and the Legislative Affairs Agency March 31, 2015, contending the lease was not an extension of a former agreement because it was for renting a new building. The Legislative Affairs Agency handles business matters for the Legislature. Gottstein also argued the lease further violated state statute because the $281,000 per month rent for the 64,000 square-foot building with underground parking exceeds a requirement for state rents agreed to through a lease extension to be at least 10 percent below market rate. The rental rate did not need examining, according to McKay’s order, because the lease was improperly secured. The Legislature has paid rent for the building through May 31. Attorneys for Legislative Affairs and 716 stressed to McKay in oral arguments Tuesday that the Legislative Council repeatedly sought proposals from other parties for suitable Anchorage office space through public requests for information starting in 2007. When no solution was found, Hawker was given authority to act as the contracting officer for the project and he agreed to rebuild on the existing LIO lot at the time. The defendents also claimed that because the steel support structure and foundation of the former, smaller LIO building remained intact during construction, the 10-year lease was an extension of the previous rental agreement and not one for a new building. McKay noted in his frankly worded order that the Legislature fronted $7.5 million of tenant improvement costs during project construction, a requirement he believes further pushes the lease beyond the realm of an extension. “Plain common sense — a principle which jurisprudence should not require to be checked at the courtroom door — mandates a finding that a contract to lease over 2.5 times more newly constructed space for just under five times the current rent with an introductory payment of $7.5 million for leasehold improvements is not a simple lease extension,” McKay wrote. “A court finding that this leasing scheme could be sole-sourced would eviscerate the competitive principles of the state procurement code.” 716 spokeswoman Amy Slinker wrote in an email to the Journal that the building owner group is reviewing the court decision and analyzing its next steps forward. What the ruling means for the Legislature’s future in the building that was custom-made for it remains to be seen. The Legislative Council, now chaired by Kodiak Republican Sen. Gary Stevens has gotten heavy pressure from the public and many legislators to cut ties with the LIO because of the high lease rate. The council has been reviewing the cost feasibility of purchasing the building or of a potential move to the nearby Atwood Building, which houses state executive branch agencies at its meetings in recent months. A March 14 analysis from San Francisco-based Navigant Consulting found the 20-year, inflation-adjusted cost of purchasing the LIO for $37 million to be nearly on par, on a cost per square-foot basis, with moving to the Atwood.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

State projects $2B investment loss

Not surprisingly, Alaska’s fiscal picture got worse with the March 21 release of the 2016 Spring Revenue Forecast. Total state revenue for the 2016 fiscal year, which ends June 30, is now projected to be about $3.6 billion, down more than 60 percent from the $9.5 billion of income estimated in the Fall 2015 Revenue Forecast released last December. The fall outlook for investment revenue had the state taking in $3.8 billion in fiscal year 2016, while the spring forecast expects the Fund to take a loss of just more than $2 billion for the year. In the first two quarters of fiscal year 2016, or from last July 1 to Dec. 31, 2015, the Fund lost $1 billion according to reports released by the Permanent Fund Corporation Feb. 12. The vast majority of the turnabout in the revenue forecast is attributable to poor financial market performance since the start of the New Year, which for the State of Alaska translates into lost income from Permanent Fund investments. The Dow Jones Industrial Average lost 5.5 percent in January and is currently down nearly 3 percent from one year ago. The Permanent Fund, which includes the principal of the Fund and the Earnings Reserve, ended fiscal year 2015 last June 30 with $55.9 billion in total assets and fell as low as the $48 billion range in January. However, Revenue Commissioner Randy Hoffbeck noted in a press briefing that markets have been on the rebound even since the spring forecast was compiled. In the most recent quarter ended Dec. 31, 2015, the Permanent Fund returned 2.1 percent, bringing the fiscal year-to-date return through two quarters to a loss of 2.2 percent according to reports released Feb. 12 by the Permanent Fund Corporation. The Fund held $52.7 billion as of March 18, according to the Alaska Permanent Fund Corp. Total state revenue was $8.5 billion in fiscal year 2015 and is expected to rebound near that amount to $8.2 billion in the 2017 fiscal year that starts July 1. Unrestricted General Fund revenue for 2016 was also revised down by $277 million, to about $1.3 billion in the latest forecast, as lower-than-expected oil prices more than offset an upward bump in the state’s oil production projection. The spring estimate for the average price in fiscal year 2016, is $39.50 per barrel for Alaska North Slope crude, compared to the fall estimate of $49.50 per barrel. The 2016 production estimate, on the other hand, increased about 3 percent from just more than 500,000 barrels per day in fall to 516,700 barrels per day in the latest calculation based on data provided by the producers, Hoffbeck said. In 2017 production is expected to fall back to about 506,000 barrels per day. Unrestricted revenue will fall as well, according to the forecast, to just more than $1.2 billion on a price projection of about $40 per barrel for next fiscal year, which is $564 million less than the fall forecast. Depending on how much is cut from the final state budget, if the lower 2017 revenue projection holds true it could increase the budget deficit that has been pegged at $3.5 billion to nearly $4 billion for next fiscal year. Diminishing oil income has also diminished the state’s dependence on it as a revenue source from supplying nearly 90 percent of all unrestricted state funds in prior years to 55 percent to 60 percent going forward, according to Hoffbeck. Long term, the Revenue Department expects oil to stabilize in the $60 per barrel range by 2021, which Hoffbeck said partially reflects the historical inflation-adjusted average price as well as the range where shale oil, which can be brought into production quickly, becomes profitable. “It makes sense that $60 would be kind of a ceiling we would bump into on oil price,” he said. The annual spring revenue forecast is typically released in early April, but Gov. Bill Walker said the preliminary forecast was released March 21 to better inform the Legislature and the public as major structural changes to how the state manages its money are contemplated during the last weeks of the legislative session. “The more information that’s available sooner, the better,” Walker said during the press briefing. The announcement comes as legislators are planning to tap into the Permanent Fund Earnings Reserve to bridge the current budget deficit. The last time the Fund lost money was during the Great Recession of 2009, when it lost $2 billion. Elwood Brehmer can be reached at [email protected]

Analysis finds buying Anchorage LIO close to moving cost

An independent review of the Legislative Council’s options to deal with the Anchorage Legislative Information Office building found the cost of purchasing the building to be nearly on par with moving the Legislature’s Anchorage offices elsewhere. San Francisco-based Navigant Consulting Director Nigel Hughes concluded in a report dated March 14 that purchasing the Anchorage LIO would cost 4 percent more, on a per square-foot present value basis, than moving to the nearby Downtown Atwood Building, which houses state executive branch agencies. The conclusion is first based on a $37 million purchase price, which Anchorage real estate developer Mark Pfeffer, managing member of the building owner group, 716 West Fourth Avenue LLC, has said he would be willing to sell for. It also assumes the purchase would be financed over 20 years at 3.1 percent interest, which was the going rate for tax exempt bonds on March 7, according to the Alaska Housing Finance Corp. 716 West Fourth Avenue is the Anchorage address of the LIO building. Subsequently, the analysis takes into account that the 42,900 square feet of usable space in the LIO is significantly greater than the 34,100 square feet of space available at the Atwood Building. While purchasing the LIO for $37 million equates to a 20-year net present value cost of $31.7 million and the 20-year cost to move would be $24.2 million, according to Hughes, the additional usable space in the LIO closes the per square-foot cost gap to $3.08 per square foot to stay and buy the LIO versus $2.95 to move to the Atwood Building. Included in the Atwood scenario is the $3.5 million in renovations the Legislative Affairs Agency estimates it would cost to make the available Atwood space suitable for legislative offices. The Legislative Affairs Agency handles business and legal matters for the council. Extending the existing 10-year, $3.3 million per year lease on the building to 20 years would cost $61.8 million in today’s dollars, or an even $6 per square foot, the analysis concludes. “Our goal from the beginning of our conversations with the ALaska Legislature and the Legislative Council has been to find an agreement that is good for Alaska,” 716 spokeswoman Amy Slinker said in a statement. “The Navigant analysis provides a solid step forward. We will continue to discuss in good faith options that can achieve savings.” The Legislative Council has found itself in a political bind over the current lease at a time when the state is trying to manage its way out of a $3.5 billion-plus budget deficit. On Dec. 19, the Legislative Council unanimously recommended the full Legislature vote not to fund the lease at a meeting in the Anchorage LIO unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days with help from state finance agencies. With the issue being a political hot potato, that help didn’t come. Navigant’s Hughes notes in his analysis that there are issues for the council to consider beyond simply the bottom line cost. If the council decides not to fund the current LIO lease, it “will need to consider the wider financial and legal implications between the state and the business community,” Hughes wrote. The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart. Pfeffer has hinted intent to sue if the Legislature walks away from its obligation. The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed. The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said. Appraisals of the six-story building plus its underground parking facility have been as high as $48 million, but numerous estimates put its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer. A Nov. 24 cost analysis done by AHFC and the Department of Revenue with information provided by the Legislative Affairs Agency put the 10-year cost of purchasing the LIO for $37 million with fixed-rate bonds at $48.8 million when financing and operating costs were included— translating to $8.97 per square foot. The comparable cost to move to the Atwood Building was found to be $10.1 million, including the $3.5 million for tenant improvement costs. AHFC Deputy Executive Director Mike Buller sent an email to Legislative Affairs Agency Executive Director Pam Varni Dec. 3 contending the analysis should not be considered when evaluating the council’s options because, among other reasons, it used a 10-year amortization for the purchase a longer-term assets and ignored the residual value of owning the building after it would be paid for. “Unfortunately, I cannot support the analysis of the options presented in your report to the council and a public discussion at this time will only embarrass everyone involved,” Buller wrote. He declined to comment further. Varni said in an interview that Legislative Council chair Sen. Gary Stevens was made aware of Buller’s concerns; however, neither Stevens nor Varni brought the issue up in discussions, according to a transcript. Questions to Stevens’ office regarding the Nov. 24 analysis were directed to Chief of Staff Katrina Matheny, who also serves as council staff. Matheny said Stevens waited until Feb. 11 to recommend an independent analysis of the council’s options because he was concerned more with the Legislature’s direct cash outlay on a 10-year basis, which is equivalent to the current lease, and less so with the inflation-adjusted present value cost or other issues. “We had no intention at that point (in early December) of hiring an independent third-party; we didn’t think one was needed,” Matheny said. When a Jan. 29 proposal from 716 West Fourth Avenue contended purchasing the LIO for $37 million would save the state money over moving to Atwood was quickly disputed by Varni for overstating moving costs by up to $16 million over 30 years, Matheny said the “dueling comparisons” pushed council members towards an independent review. Settlement passed Ultimately, waiting to hire outside help could have cost the council an opportunity to settle a lawsuit challenging the legality of the current Anchorage LIO lease. 716’s Jan. 29 proposal for the Legislative Council to purchase the building included a settlement in the lawsuit brought against the building owner and the Legislative Affairs Agency by Anchorage attorney Jim Gottstein, who also owns the Alaska Building adjacent to the LIO. Gottstein contends the lease violates state law because the council did not follow proper procurement code when it contracted with Pfeffer’s development team in 2013. He and 716 agreed to settle by Feb. 12 if the council and Legislative Affairs agreed to not attempt to recoup attorney fees from Gottstein in the settlement. The settlement, from 716’s perspective, was also contingent upon the council funding the current LIO lease or agreeing to purchase the building, according to the Jan. 29 document. Matheny said the settlement “fell by the wayside” because of the deadline and that Stevens wanted the state Superior Court to decide whether the lease is legal or not before making a decision on the building. Judge Patrick McKay heard partial summary judgment arguments March 22. He indicated an intent to issue a ruling by the week of March 28. Elwood Brehmer can be reached at [email protected]

No bonds means bare-bones capital budget

With little appetite from legislators for a general obligation bond package, bare bones capital budgets the next couple years are probably a harsh reality of the state’s fiscal situation. The administration’s proposal for a $500 million general obligation, or GO, bond package to fund up to $250 million of capital appropriations in each of the 2017 and 2018 fiscal years received, seemed possible, if not likely, to pass the Legislature based on reactions when the idea was first offered by Gov. Bill Walker in December. Attitudes have changed, however, as the session has worn on. Revenue Commissioner Randy Hoffbeck said during a March 21 press briefing that there was growing concern in the Legislature about taking on additional debt at a time when the state’s budget is upside down to the tune of a $3.5 billion-plus deficit. “The consensus seemed to be with legislators that they would like to wait until we get a stabilized fiscal plan in place because bonding will have to dovetail with whatever plan that we come up with,” Hoffbeck said. An administration plan to bond for future state pension obligation payments also fell on deaf ears and was subsequently scrapped. When first proposed, the bonding plans were pitched as a way to leverage the state’s low-interest borrowing capacity under the premise that the state can get a better percentage return on its savings over the long-term than the interest on the bonds would cost. The leaders of the capital budget in both chambers of the Legislature largely echoed Hoffbeck’s conclusions in interviews. Senate Finance co-chair Sen. Anna MacKinnon, R-Eagle River, said she heard through public testimony to the committee that many Alaskans feel the state operating budget is still too large, and therefore it wouldn’t be prudent to add spending for capital projects. Walker floated the GO bond proposal as a way to pay for critical and incomplete infrastructure projects across the state, but House Finance co-chair Rep. Steve Thompson, R-Fairbanks, said his primary concern lies in the prospect of “Christmas treeing” on a bond package. That is, a fear that numerous, nonessential projects would end up decorating the bond legislation. Both MacKinnon and Thompson said the sentiment towards capital spending could change next year if the Legislature works out a fiscal plan that stabilizes state revenue and substantially reduces annual deficits through some use of the Permanent Fund’s investment earnings, taxes and budget cuts. Thompson added that it will be a new Legislature next year, which could bring with it new priorities. MacKinnon also cited the State Bond Committee’s January Debt Affordability Analysis report, which concludes Alaska has the capacity to take on about $175 million in additional GO bonds without further impacting its credit rating. Multiple ratings agencies have slightly lowered the Alaska’s formerly sterling credit ratings this year because of the messy budget situation, and, so far, a lack of a plan to address it. “The issue is we absolutely could use debt to finance some projects that we think are viable and that would benefit the state long-term, and I believe that may still be a conversation going forward, but the issue is that currently we are structurally imbalanced and if we don’t change the way that we are structurally balances I can’t in good conscience go forward and recommend a bond package to anyone,” MacKinnon said. The hitch in holding off on a bond package is that waiting one year means waiting at least two. GO bond proposals must be approved by the public on a general election ballot — if not this November then not again until November 2018 — that also means approval from the electorate is far from a sure thing. While GO bonds often pass in better budget times, the prospect of voters signing off on state debt when cuts are being made to other areas of government spending is more uncertain. Hoffbeck said that when the next window for GO bonds opens up it would be something the state “would need to strongly consider.” MacKinnon did not rule out the possibility of funding high-priority projects — namely those that address safety issues — through direct appropriations next year. As for the 2017 budget, she said the capital budget, which will come out of the Senate first, will take center stage in the last couple weeks of the session, with the state’s priority being “to squeeze every dollar of matching money” out of federal capital programs. Much like last year, the governor’s proposed capital budget uses about $180 million of state general funds to match more than $950 million of federal money mostly for highway and airport improvement programs. All in, Walker’s capital budget totals more than $1.2 billion thanks to the federal support. As recently as fiscal 2013, when oil prices averaged close to $100 per barrel and translated into full state coffers, Alaska spent more than $2 billion of its own money in a capital budget. The drastic change in capital spending is exemplified simply in the size of the actual budget bills — 194 pages in 2013 versus 20 pages from the administration this year. Because it takes up to six years for most state appropriations to fully “hit the street” in the form of work for contractors, Alaska’s construction industry is still relying on the larger capital budgets from days gone by for much of its work. Significant contraction from the oil and gas sector led the Associated General Contractors of Alaska to project a decline in construction spending this year of about 18 percent, which would take the industry roughly back to the activity level seen 2013. Cut from the administration’s initial capital budget was $5 million for the Alaska Energy Authority’s popular Renewable Energy Fund grant program that supports projects across the state focused on getting rural communities off of diesel and fuel oil for home heating and electric generation. Since 2008, the Legislature has committed $271 million to the Renewable Energy Fund. It received $11.5 million in the budget passed last year, one of the few state programs to be funded in the state’s slim 2016 capital spend. AEA contends completely cutting Renewable Energy funding this year will impact its ability to administer prior-year grants. MacKinnon said the authority should expect to be “touched” by changes in state spending habits, but also noted she is working on a way for surplus funds from the Power Cost Equalization Program, also administered by AEA, to support renewable energy projects. The premise behind the idea being that rather than spending PCE money each year to subsidize electric costs, the money could be used to permanently reduce rural energy prices through generating renewable energy. Power Cost Equalization is an endowment-style state subsidy that buys down the cost of electricity for rural Alaska residents and small businesses. “It’s a theory we need to do the math on,” MacKinnon said. Elwood Brehmer can be reached at [email protected]

Enstar, Furie seal gas deal through April ‘21

Enstar Natural Gas Co. appears to have locked up 90 percent of its gas supply needs into 2021 after finalizing a deal with Furie Operating Alaska. The gas supply and purchase agreement filed March 14 with the Regulatory Commission of Alaska is for a firm supply of 6.2 billion cubic feet, or bcf, of natural gas per year from April 2018 through March 2021. During the first year of the contract the gas price would be $6.70 per thousand cubic feet, or mcf, nearly 20 percent less than the price the utility will pay — based on Consent Decree pricing — under a contract it has with Hilcorp Energy that expires at the end of March 2018. The contract has a price escalator of 2 percent per year, which is half of the annual price increase allowed under the Consent Decree. Base gas in the last year of the deal would be $6.97 per mcf. Daily calls for extra gas during peak winter demand periods would be about $1 more per mcf than the base price for the life of the contract. Enstar also has the option to extend the gas supply contract for two additional years through March 2023, but it must notify Furie of its intent to do so by April 1, 2018, according to a letter from the utility submitted to the RCA. The 2012 Consent Decree, agreed to by the State of Alaska and Hilcorp, set price caps on Cook Inlet natural gas through 2017 to prevent a monopoly situation when Hilcorp became the dominant player in the market through its purchases of Marathon Oil and Chevron assets. The ending Consent Decree price for base load gas in 2017 is $7.72 per mcf. Enstar estimates its average gas cost, when higher priced variable load gas is included, will be $8.33 per mcf under its Consent Decree-based contract with Hilcorp set to expire March 31, 2018. The utility also recently reached a gas supply deal with Hilcorp for 70 percent of its firm demand from early 2018 through early 2023. The initial gas price in that contract is $7.56 per mcf, a 9.2 percent price drop from the end of Consent Decree pricing. It also has a 2 percent price escalator. Both of the deals are pending RCA approval. Enstar projects its latest contract with Hilcorp will save Southcentral natural gas customers $14 million in the first year as the lower gas price is passed through to consumers. On the demand side, the utility is forecasting flat demand for gas at about 33 bcf per year through 2023 due to increased efficiency and conservation efforts by consumers offsetting small growth in its customer base, Enstar leaders have said. Furie’s deal with Enstar is the Houston-based independent’s second contract with Southcentral utilities since entering Cook Inlet. Furie agreed last September to supply Homer Electric Association with a base load of 4 bcf per year through 2018, with options to extend through 2020. That deal kicks in April 1 at a $6.50 per mcf base price. HEA will pay $7.00 per mcf for base load gas in 2018. Furie started exploratory drilling in the Kitchen Lights Unit offshore from Nikiski in 2011. Since, the company has spent over $700 million to bring Kitchen Lights online, according to company executives in testimony to the Legislature. Much of that money was invested in the first new production platform to be installed in the Inlet since the 1980s. Elwood Brehmer can be reached at [email protected]

Committee bill cuts Cook Inlet credits, not much more

Legislators began putting their imprints on Gov. Bill Walker’s oil and gas tax credit overhaul with the first committee version of the legislation released March 19. The House Resources Committee substitute of House Bill 247 is a mild version of the original bill; it gradually reduces the value of credits companies could claim for capital expenses, but does not address the minimum production tax rate or “tax floor.” Tax Division Director Ken Alper said in testimony March 21 that the bottom line savings to the state from the committee bill would be roughly $45 million to $65 million per year versus the status quo credit program. The administration’s bill would save an expected $400 million in fiscal year 2017 mostly by eliminating a 20 percent credit on capital expenditures and a 40 percent credit on drilling expenses, both in the Cook Inlet basin. Walker also proposed raising $100 million in new revenue through increasing the minimum production tax from 4 percent to 5 percent and preventing North Slope producers from using credits to take their tax liability below the minimum tax floor. The House Resources Committee is co-chaired by Reps. Benjamin Nageak, D-Barrow, and Dave Talerico, R-Healy. The committee version was promptly passed to House Finance late March 22 after 43 of 45 amendments to the bill were dismissed. They were brought primarily by Anchorage Democrat Reps. Geran Tarr and Andy Josephson. The lone amendment to pass from the Minority members was introduced by Tarr to ensure a legislative working group the bill would establish to evaluate the future of the Cook Inlet oil and gas tax regime includes members of the minority caucuses in the House and Senate. Rep. Paul Seaton, R-Homer, also introduced numerous amendments to the committee substitute mostly focused on further reducing the state’s direct cash outlay for refundable credits for existing producers. Of the seven Majority caucus members on the Resources Committee, Seaton has been the most critical of the state’s current industry tax credit program through the lengthy hearing process. “Once you’re giving people a lot of monetary support they want to keep giving to even if it’s not necessary,” he said in an interview. Tax credits should focus on helping companies develop new projects rather than producers working on existing fields that are already profitable with the basins high natural gas costs, he said, which the committee bill doesn’t adequately do. The only amendment of Seaton’s to make the bill requires companies engaged in exploration or development to file a $250,000 surety bond with the state to cover its unsecured creditors. It grew from Buccaneer Energy filing for bankruptcy in 2014 after developing the small Kenai Loop gas field, which left several Buccaneer small contractors on the Kenai Peninsula high and dry. He described the bond as a “small insurance policy” for businesses providing goods and services such as fuel or camp services to explorers. So far in fiscal 2016 the state has paid $473 million in refundable oil and gas tax credits for work that predominantly occurred in 2014, according to Alper. The total 2016 refundable tax obligation is expected to reach $700 million, but the state will be able to pay the remainder of that in the 2017 fiscal year, he said. To date, the State of Alaska has paid out roughly $3.5 billion in refundable oil and tax credits, Alper said, since the subsidy program took off in the 2007 fiscal year. Walker introduced HB 247 and its Senate mirror bill, SB 130, as a way to significantly reduce what he characterizes as an unsustainable expense that is a large part of the state’s $3.5 billion-plus budget deficit. Company representatives have said the administration’s policy changes would pile on an industry that is already losing money on every barrel it produces at current prices. The cost of producing North Slope oil and getting it to market is approximately $46 per barrel, according to the Revenue Department, while Alaska North Slope crude sold for $41 per barrel March 21, the first time it was above $40 this year. The committee’s HB 247 focuses on Cook Inlet and “Middle Earth” refundable credits. The Middle Earth region is anywhere in Alaska other than the North Slope and Cook Inlet geologic basins. It would reduce the current 40 percent Well Lease Expenditure credit to 30 percent in 2017 and 20 percent in 2018. The Net Operating Loss, or NOL, credit for those areas south of the Slope would also be cut from 25 percent to 10 percent on Jan. 1 2017. The committee bill also replaces a $25 million per company annual limit on refundable credits proposed by the administration with a $200 million annual repurchase cap. Alper said the $200 million cap would likely come into play only for companies executing major development projects requiring annual spending approaching $600 million. A requirement to make public the companies receiving refundable tax credits pushed by the governor was also left out of the substitute bill. Alaska Oil and Gas Association Executive Director Kara Moriarty said in an interview that the committee bill is recognition of the industry’s position in that it doesn’t make structural tax changes, but that changes to the Cook Inlet credits are still a concern. “Regardless of the (fiscal) situation the state is in, raising taxes on an industry in our situation only makes the situation worse,” she said. Tarr and Josephson, on the other hand, described the version of HB 247 that is moving on as a missed opportunity to save the state hundreds of millions of dollars per year in a Minority caucus press release. “I want to support the oil industry and in some cases can see the usefulness of co-investing in exploration and development projects,” Tarr said in a statement. “However, the (credit) current system is out of balance and needs to be reformed. House Bill 247 in its current form is unrecognizable from the original bill.” The two versions of HB 247 do align on eliminating a loophole in current statute that allows North Slope producers of new oil — production brought online in recent years — to compound a 20 percent new oil credit known as the Gross Value Reduction with a 35 percent NOL credit to produce a refund greater than the company’s actual loss. The Gross Value Reduction credit lowers the taxable wellhead value of new oil by 20 percent before other considerations are added to the oil’s taxable value. Alper said closing the Gross Value Reduction plus NOL loophole was first projected to save the state about $13 million next fiscal year, but that figure continues to go up as low oil prices force more producers to claim operating losses. Members of the committee and the Walker administration have noted throughout the tax policy debate that the loopholes allowing companies to take their tax liability below the 4 percent floor and grow their operating loss credit are a consequence of current oil prices below $50 per barrel that were not modeled when Senate Bill 21, the broader oil tax structure, was passed in 2013. According to the Tax Division, the committee bill would not impact tax structure for major North Slope producers — companies with over 50,000 barrels per day of production. It would impact new entrants to the Slope or small producers only at low prices through closing the NOL loophole. For Cook Inlet producers and companies developing production, however, the final impact of the latest version of HB 247 would be a reduction in state support that is now up to 55 percent for development costs to the 20-30 percent range by the time the credit reductions are fully implemented in 2018, Alper said. The Senate Oil and Gas Tax Credit Working Group held last year and headed by Sen. Cathy Giessel recommended hardening the production tax floor, which the committee substitute does not, and making any changes to the credit program forward looking, which it does. Elwood Brehmer can be reached at [email protected]

Lower revenue forecast reflects market volatility

Not surprisingly, Alaska’s fiscal picture got worse with the March 21 release of the 2016 Spring Revenue Forecast. Total state revenue for the 2016 fiscal year, which ends June 30, is now projected to be about $3.6 billion, down more than 60 percent from the $9.5 billion of income estimated in the Fall 2015 Revenue Forecast released last December. The vast majority of the disparity is attributable to poor financial market performance since the start of the New Year, which for the State of Alaska translates into lost income from Permanent Fund investments. The Dow Jones Industrial Average lost 5.5 percent in January and is currently down nearly 3 percent from a year ago. As a result, the fall outlook for investment revenue had the state taking in $3.8 billion in fiscal 2016, while the spring forecast expects the Fund to take a loss of just more than $2 billion for the year. The Permanent Fund ended fiscal year 2015 with $55.9 billion in total assets and fell as low as the $50 billion range in January. However, Revenue Commissioner Randy Hoffbeck noted in a press briefing that markets have been on the rebound even since the spring forecast was compiled. The Fund held $52.7 billion as of March 18, according to the Alaska Permanent Fund Corp. Total revenue was $8.5 billion in 2015 and is expected to rebound to $8.2 billion in the 2017 fiscal year. Unrestricted General Fund revenue for 2016 was also revised down by $277 million, to about $1.3 billion in the latest forecast, as lower-than-expected oil prices more than offset an upward bump in the state’s oil production projection. The spring estimate for the average price in fiscal 2016 is $39.50 per barrel for Alaska North Slope crude, compared to the fall estimate of $49.50 per barrel. The 2016 production estimate, on the other hand, increased about 3 percent from just over 500,000 barrels per day in fall to 516,700 barrels per day in the latest calculation based on data provided by the producers, Hoffbeck said. In 2017 production is expected to fall back to about 506,000 barrels per day. Unrestricted revenue will fall as well, according to the forecast, to just more than $1.2 billion on a price projection of about $40 per barrel for next fiscal year, which is $564 million less than the fall forecast. Depending on how much is cut from the final state budget, if the lower 2017 revenue projection holds true it could increase the budget deficit that has been pegged at $3.5 billion to nearly $4 billion for next fiscal year. Diminishing oil income has also diminished the state’s dependence on it as a revenue source from supplying nearly 90 percent of all unrestricted state funds in prior years to 55-60 percent going forward, according to Hoffbeck. Long-term, the Revenue Department expects oil to stabilize in the $60 per barrel range by 2021, which Hoffbeck said partially reflects the historical inflation-adjusted average price as well as the range where shale oil, which can be brought into production quickly, becomes profitable. “It makes sense that $60 would be kind of a ceiling we would bump into on oil price,” he said. The annual spring revenue forecast is typically released in early April, but Gov. Bill Walker said the preliminary forecast was released March 21 to better inform the Legislature and the public as major structural changes to how the state manages its money are contemplated during the last weeks of the legislative session. “The more information that’s available sooner, the better,” Walker said during the press briefing.   Elwood Brehmer can be reached at [email protected]

Price drops in Enstar, Furie gas deal

Enstar Natural Gas Co. appears to have locked up 90 percent of its supply needs into 2021 after finalizing a deal with Furie Operating Alaska. The natural gas supply and purchase agreement filed March 14 with the Regulatory Commission of Alaska is for a firm supply of 6.2 billion cubic feet, or bcf, of gas per year from April 2018 through March 2021. During the first year of the contract the gas price would be $6.70 per thousand cubic feet, or mcf, nearly 20 percent less than the price the utility will pay — based on Consent Decree pricing — under a contract it has with Hilcorp Energy that expires at the end of March 2018. The contract has a price escalator of 2 percent per year, which is half of the annual price increase allowed under the Consent Decree. Base gas in the last year of the deal would be $6.97 per mcf. Daily calls for extra gas during peak winter demand periods would be about $1 more per mcf than the base price for the life of the contract. Enstar also has the option to extend the gas supply contract for two additional years through March 2023, but it must notify Furie of its intent to do so by April 1, 2018, according to a letter from the utility submitted to the RCA. The 2012 Consent Decree, agreed to by the State of Alaska and Hilcorp, set price caps on Cook Inlet natural gas through 2017 to prevent a monopoly situation when Hilcorp became the dominant player in the market through its purchases of Marathon Oil and Chevron assets. The ending Consent Decree price for base load gas in 2017 is $7.72 per mcf. Enstar estimates its average gas cost, when higher priced variable load gas is included, will be $8.33 per mcf under its Consent Decree-based contract with Hilcorp set to expire March 31, 2018. The utility also recently reached a gas supply deal with Hilcorp for 70 percent of its firm demand from early 2018 through early 2023. The initial gas price in that contract is $7.56 per mcf, a 9.2 percent price drop from the end of Consent Decree pricing. It also has a 2 percent price escalator. Both of the deals are pending RCA approval. Enstar projects its latest contract with Hilcorp will save Southcentral natural gas customers $14 million in the first year as the lower gas price is passed through to consumers. On the demand side, the utility is forecasting flat demand for gas at about 33 bcf per year through 2023 due to increased efficiency and conservation efforts by consumers offsetting small growth in its customer base, Enstar leaders have said. Furie’s deal with Enstar is the Houston-based independent’s second contract with Southcentral utilities since entering Cook Inlet. Furie agreed last September to supply Homer Electric Association with a base load of 4 bcf per year through 2018, with options to extend through 2020. That deal kicks in April 1 at a $6.50 per mcf base price. HEA will pay $7.00 per mcf for base load gas in 2018. Furie started exploratory drilling in the Kitchen Lights Unit offshore from Nikiski in 2011. Since, the company has spent over $700 million to bring Kitchen Lights online, according to company executives in testimony to the Legislature. Much of that money was invested in the first new production platform to be installed in the Inlet since the 1980s.   Elwood Brehmer can be reached at [email protected]

Medicaid reform passes Senate

Medicaid has been a divisive topic in Alaska since Gov. Bill Walker announced his plan to expand the federal insurance program in the state early last year, but the Medicaid reform package that unanimously passed the Senate March 11 seems to be something lawmakers and health care leaders can agree upon. Sen. Pete Kelly’s Senate Bill 74 that was sent to the House after a 19-0 vote combined parts of the administration’s Medicaid reform and expansion bill with an earlier version of Kelly’s bill, both of which were introduced last session. The Department of Health and Social Services estimates the changes to the Medicaid system in SB 74, as it is currently constructed, would save the state more than $31 million right away in fiscal year 2017. Those savings are expected to increase to nearly $114 million per year by 2022 as the programmatic reforms are fully implemented. Kelly, a Fairbanks Republican and co-chair of the Senate Finance Committee, said the savings estimates are very conservative in discussion on the Senate floor before the vote on the bill. He also said prior attempts at Medicaid reform “missed the point” in trying to change patient behavior and therefore didn’t achieve meaningful savings. “(SB 74) is a reform bill that goes after the system, not after the recipient,” he said. Walker said in a statement to the Journal that he typically does not comment on legislation until it reaches his desk, but that he is committed to working with the Legislature on Medicaid reform. Medicaid expansion funded The state’s Medicaid expense has grown more than 70 percent in the last decade, from less than $400 million in 2006 to nearly $700 million this fiscal year at a time when the state is running $3.5 billion-plus annual budget deficits. The federal government is contributing more than $1.1 billion to Alaska’s Medicaid program this fiscal year. The ballooning cost of the program has been oft cited by legislators opposed to expanding it to a new group of beneficiaries, which Walker did last summer via executive order after the Republican-led majorities in the Legislature chose not to last year. A lawsuit against Walker by the Legislative Council challenging his authority to expand the program without the Legislature’s approval was dismissed in state Superior Court earlier this month. Republican leaders in the Legislature have said they intend to appeal the decision to the Supreme Court. The cost of the new class of Medicaid beneficiaries was fully covered by the federal government in fiscal year 2016, which allowed Walker to take the money without legislative approval, but will eventually require a 10 percent state match of about $20 million per year after 2021, based on DHSS enrollment estimates. The federal government’s 100 percent match ends at the end of 2016, meaning the state must begin contributing a match for the last half of fiscal year 2017, which runs through June 30 of that year. The state’s first payment for the new Medicaid recipients, estimated at $3.8 million based on enrollment projections, was funded in the operating budgets passed by House and Senate earlier this month, according to the offices of the Finance Committee chairs in each body. House Bill 227, a Medicaid reform package introduced by Rep. Paul Seaton, R-Homer, passed from the House Health and Social Services Committee to Finance March 9. Federal dollars make up savings By far the most of the forecasted savings to be wrung from SB 74 — $29 million in 2017 growing to $97 million in 2022 — would come from getting more Medicaid services for Alaska Natives fully covered by the federal government. Care received by Alaska Natives enrolled in Medicaid from IHS and Tribal health providers has long been fully funded by the federal government. Changes to federal rules within the last year expand what the feds consider to be received through an Indian Health Services or Tribal health facility. “The policy changes basically broaden what’s considered a service delivered through a Tribal facility to include the related transportation costs and also to include referrals out to other providers from the Tribal system when certain conditions are met,” DHSS Deputy Commissioner Jon Sherwood said in an interview. Federal funding will also now cover 100 percent of the Medicaid expense for Alaska Natives in long-term care facilities outside of a Tribal network. Previously, the match for all care received by Alaska Natives from non-IHS and Tribal facilities was 50 percent, similar to the match for Medicaid services to the broader public. Managed care SB 74 would also require DHSS to implement a primary care case management system to push Medicaid enrollees towards primary care first and away from potentially unnecessary and more expensive specialty provider and emergency room visits. Alaska Primary Care Association Executive Director Nancy Merriman said she doesn’t know what the case management system would look like yet, but hopes it “takes the form of a primary care health home for Medicaid enrollees where that practice has the ability to provide comprehensive and coordinated care for patients.” Included in the optimal system model would be services across the provider spectrum and care coordinators, particularly for individuals with chronic issues, to assure critical health information reaches from one provider to another and help in managing everything from prescriptions to appointments, according to Merriman. Overall, Merriman said she spent a substantial amount of time following the formation of SB 74 and commended the Senate Finance Committee for undertaking a “really thorough process of learning about all the different facets of Medicaid and then really listening to people and putting together a pretty good bill.” The bill also directs the Health Department to partner with a statewide hospital organization in developing a hospital-based approach to reduce over-utilization of emergency services. Sherwood said he expects to start talking with the Alaska State Hospital and Nursing Home Association about the directive if the bill is passed, as the idea was first floated by the organization. Also among the department’s duties would be establishing a medical assistance reform program that would, among other things, reduce travel expenses paid through Medicaid by requiring recipients to obtain care in their home communities whenever possible and expand the use of telemedicine for primary, behavioral and urgent care. Outside telemedicine allowed To make telemedicine providers as accessible as possible, the Department of Commerce, Community and Economic Development is directed to establish a business registry of telemedicine providers in the state. Telemedicine providers are required to be licensed in Alaska but do not have to be located in the state under the bill. Sen. Peter Micciche, R-Soldotna, a Finance Committee member, said on the Senate floor that telemedicine costs about a third of an in-person visit and one-tenth of most emergency room visits. “We are one of only two states that does not allow telemedicine to be practiced across state lines, this bill will change that,” Micciche said. Coinciding with the push to expand the use of telemedicine, the State Medical Board is also tasked with adopting guidelines for physicians who provide treatment or prescribe drugs without an in-person examination that are consistent with national guidelines for administering telemedicine. Behavioral health Also added to the state Health Department’s duties would be the management of a behavioral health system that integrated into the broader primary care system. In partnership with the Alaska Mental Health Trust Authority, the department would develop a plan for community-based behavioral health services that addresses related housing, employment and criminal justice issues. Mental Health Trust CEO Jeff Jesse said in an interview that the focus of the behavioral health reform is an attempt to elevate the treatment of behavioral, or mental, health issues to the primary care level. “We really want to integrate care so that the whole person is being looked at in as many settings as possible,” Jesse said. Prioritizing behavioral health treatment can address minor depression or substance use early on and prevent what can become extremely harmful and costly issues down the road if left untreated, he said. Sherwood echoed what others have said in regards to behavioral health reform, that everyone knows the cost savings are there, but they are hard to quantify because they stretch far beyond medical costs. “We know that when behavioral health issues are not addressed appropriately and quickly we see increased pressure on the criminal justice system, law enforcement, our courts, our correctional system. We see increased pressures on our child protection system; we see increased use of inappropriate services like emergency room services and other kinds of hospitalization,” Sherwood said. The Mental Health Trust’s role in reforming Medicaid goes beyond changing behavioral health practices for in the state to that of a funder, according to Jesse. The trust is in the process of considering a list of requests from DHSS to fund the drafting of federal waivers, provider assistance programs and consulting contracts for studies; “all those one-time expenses that, particularly in this fiscal climate, are pretty hard for the department to come by and hard for the Legislature to appropriate,” he said. In all, he said the self-funded trust could end up contributing several million dollars to the reform effort, which would likely require a restructuring of its current operations but also be worth the extra effort, Jesse said. He, like Merriman of the Primary Care Association, commended the committee for its thorough work on the far-reaching bill. Among the studies the bill calls for is a look at privatizing the Alaska Psychiatric Institute and the six state-run assisted living Pioneer Homes for elderly Alaskans. The original Pioneer Home in Sitka was a converted U.S. Marine barracks that first provided housing, meals and basic medical care to indigent elderly men in 1913, according to the Health Department. Pioneer Home residents applying for payment assistance would also have to show proof of a Medicaid application on the basis that Medicaid eligible individuals could have care partially paid for through the federal Medicaid match, a possible savings approaching $1 million annually, Micciche said. Health plans, opioid monitoring, fraud enforcement Additionally, the bill directs the Department of Administration to analyze the feasibility of establishing a health care authority to consolidate all state employee and retiree health care plans with local school district employee plans to maximize market purchasing power in an attempt to achieve lower insurance rates for the state. Beyond just Medicaid, SB 74 also requires providers and pharmacists to register with the state Prescription Drug Monitoring Program. The prescription drug database was established in 2008 as a voluntary program in an attempt to reduce the over-prescription of opioids and other addictive and controlled substances. Sen. Cathy Giessel said before the Senate vote that setting up the program was the first step of progress and “this inclusion in the Medicaid reform bill is the other half step.” Physicians and pharmacists would be required to search for a patient in the database before prescribing a controlled substance to see if the patient had also been prescribed the medication by another provider and could be “doctor shopping” as Giessel described it. The bill has an allowance for physicians and pharmacists to authorize a designee access to the database who would also register with for the program. Making participation in the Prescription Drug Monitoring Program mandatory will benefit all Alaskans, not just Medicaid beneficiaries, she said. Medicaid fraud is addressed in SB 74 through increased enforcement by the Department of Law and formation of the Alaska Medicaid False Claims Act. Largely in-step with federal law, the Medicaid False Claims Act would set civil penalties between up to three times the damages incurred by the state plus attorneys fees, but not less than $5,500 or more than $11,000 for each count. It would also set a statute of limitations of 10 years for any action to be brought against a provider or beneficiary accused of Medicaid fraud. Stricter fraud monitoring is expected to save the state up to $900,000 per year, according to the Law Department. The department requested $365,000 for two full-time positions to focus on Medicaid fraud for one year until the lawyers can pay for themselves. Criminal Division Director John Skidmore called the request a “put up or shut up” scenario in testimony to Senate Finance March 7. “If we collect the money, we’ve paid for ourselves and if we don’t, we’re not asking you to increase our budget, only to increase our authority to spend if we collect the money,” he said. Implementing the many changes in the bill — if it passes the House with a similar look — will also require seven new Health Department positions in 2017 and nine new staff in 2018. The department projects that number will decrease to five permanent positions once the transition period is complete in 2020. Elwood Brehmer can be reached at [email protected]

Alaskans note lack of input in pushback against Arctic plan

Alaska’s leaders in Juneau and Congress had harsh words for a joint March 10 statement from the White House and Canadian Prime Minister Justin Trudeau announcing plans for new emissions caps on the oil and gas industry and preservation of significant chunks territory in each country’s Arctic. The statement was released as Trudeau made the first official visit by a Canadian prime minister to the White House in nearly two decades. “Beyond deepening cooperation to reduce greenhouse gas emissions — which will have an outsized impact on the long-term health of the global Arctic — President Obama and Prime Minister Trudeau are announcing a new partnership to embrace the opportunities and to confront the challenges in the changing Arctic, with indigenous and northern partnerships, and responsible, science-based leadership,” the statement reads. It asks the leaders of all Arctic nations to embrace the objectives of conserving Arctic biodiversity, incorporating traditional indigenous knowledge in decision-making, supporting strong Arctic communities and building a sustainable economy in the region. The U.S. took chairmanship of the international Arctic Council last year from Canada, which held the post starting in 2013.  The council is a non-binding body of eight Arctic nations meant to spur positive relationships between the countries on Arctic issues. Secretary of State John Kerry led U.S. representation at an Arctic Council meeting in Fairbanks the following week. Sens. Lisa Murkowski and Dan Sullivan and Gov. Bill Walker all noted the omission of Alaska in drafting the 10-page agreement in formal statements of their own. The sentiment is similar to comments made following the president’s three-day visit to Alaska last summer, which was used as a vehicle to promote his climate change policies. “The Arctic presents great opportunity for our state and our nation to prosper in a global economy. However, the way to achieve that is by greater federal investment in our state’s Arctic development efforts, and not the restrictive policies that were presented today,” Walker said March 10. “It is important to consider the interests of all stakeholders in the region – whether it be focused on marine and wildlife preservation, international travel and shipping, or natural resource development. In doing so, we will ensure Alaska and the United States remain at the forefront of a flourishing Arctic economy.” Walker has said he pushes Obama to allow for oil and gas exploration on the coastal plain of the Arctic National Wildlife Refuge each time he meets with the president, despite actions from the White House to move further towards preservation, not development, of the area. Specifically, the U.S.-Canadian Arctic plan calls for protecting at least 17 percent of the countries’ Arctic land and 10 percent of far north marine waters by 2020. Obama and Trudeau also agreed to the “ambitious and achievable” goal of reducing methane emissions from oil and gas operations by up to 45 percent below 2012 levels by 2025, according to the statement. Further, both countries also endorsed the World Bank’s initiative to eliminate routine methane flaring from oil and gas facilities by 2030. Methane is the primary component of natural gas. “Recognizing the role that carbon markets can play in helping countries achieve their climate targets while also driving low-carbon innovation, both countries commit to work together to support robust implementation of the carbon markets-related provisions of the Paris (climate) agreement” reached in December, the joint statement reads. The countries would also be required to consult each other before approving future oil and gas development in the Arctic. Murkowski called the consultation requirement “simply stunning” in a release from her office. She also said by focusing almost solely on climate change in regards to the Arctic, the Obama administration fails to address other needs in the region, namely economic development. “Although the joint statement makes topical reference to consultation with indigenous people and the incorporation of traditional knowledge into decision-making, it also implies unjustifiable limits that will leave Alaskans standing at the door, rather than seated at the table, on Arctic policy,” Murkowski said. The announcement was not received kindly by the largest private employer in Alaska and the Native regional corporation for the North Slope. “Unfortunately, this is the treatment we’ve come to expect from this administration,” said Arctic Slope Regional Corp. president and CEO Rex A. Rock Sr. “Although these burdensome and largely unnecessary regulations will negatively impact the economy and the people of our region, Alaska’s North Slope, we continue to be completely left out of the conversation when the rules are being drafted. It appears, by all counts, the only side the administration bothered to reach out and listen to was the environmental groups, like the Center for Biological Diversity, World Wildlife Fund and National Resources Defense Council. “Make no mistake, this agreement isn’t the final word; we will fight for keeping the door of opportunity open across the Slope.” Environmental groups noted by Rock hailed the announcement as leadership towards protecting one of the world’s most delicate environments. To achieve the methane reduction goals the Environmental Protection Agency and Environment and Climate Change Canada will develop new regulations governing methane emissions from existing oil and gas sources as soon as possible. The EPA will quickly begin a process requiring producers operating existing methane emissions sources to provide data that will assist in developing “comprehensive standards to decrease methane emissions,” according to the joint statement. The proposed actions will harm the nation’s energy sector, and in-turn could impact the lives of hundreds of millions of Americans that rely on low-cost energy for their quality of life, Sullivan said, adding they could be “particularly devastating” for Alaska at a time when the state needs oil and gas revenue more than ever. “If the initiatives are enacted, less oil and gas will be produced in our state, more jobs will be lost, and state coffers will be increasingly diminished,” he said. “Now is the time when Alaska needs a federal government that will work with the state, instead of working against us to stymie economic opportunity.” Arctic fisheries were also addressed in that Obama and Trudeau are calling for an international agreement to preemptively close unregulated fishing in the central Arctic Ocean, an area that is increasingly accessible as summer sea ice continues its retreat. Elwood Brehmer can be reached at [email protected]  

Arctic OCS included in latest five-year plan

Alaska wasn’t excluded from the Interior Department’s latest five-year Outer Continental Shelf Oil and Gas Leasing Program plan released March 15, just days after President Obama issued a joint statement with Canadian Prime Minister Justin Trudeau calling for further protections of the nations’ Arctic areas. The proposed 2017-2022 program is a step in the Interior Department’s environmental impact statement process for determining what, if any, Outer Continental Shelf, or OCS, oil and gas lease sales it should hold. It does not ensure drilling off Alaska’s coast in the coming years, but it does evaluate potential sales in the Chukchi and Beaufort seas as well as the federal waters of Cook Inlet between 2017 and 2022. Also included are options to move a potential Beaufort Sea sale up from 2020 to 2019, and a no sale option. The Chukchi sale is scheduled for 2022 and Cook Inlet for 2021. The last Cook Inlet sale was in 2004 and drew no bidders. Elsewhere the proposal includes options for leases in the Gulf of Mexico, but removes sales in the mid- and South Atlantic coast areas. Interior Secretary Sally Jewell said in a department release that the program is a balanced proposal that protects sensitive areas and supports save development of the nation’s energy resources. Specifically to Alaska, Jewell said the proposal removes areas from consideration for leases — a 25-mile coastal buffer and the Hanna Shoal walrus foraging area in the Chukchi, and all of Bristol Bay — that Obama withdrew from future lease consideration in January 2015. “We know the Arctic is a unique place of critical importance to many, including Alaska Natives who rely on the ocean for subsistence,” Jewell said. “As we put together the final proposal, we want to hear from the public to help determine whether these areas are appropriate for future leasing and how we can protect environmental, cultural and subsistence resources.” The March 10 statement from the White House and Canadian Prime Minister Trudeau called for protecting at least 10 percent of each country’s Arctic federal waters by 2020. The Interior program report notes the fact that the Trans-Alaska Pipeline System, or TAPS, is currently running about one-quarter full and oil discoveries in the Chukchi and Beaufort seas have the potential to stem TAPS throughput decline. It also mentions a request by Gov. Bill Walker to move the Beaufort sale up from 2020 to 2018. In a statement from his office Walker commended Jewell’s decision to include potential Alaska OCS lease sales to this point in the program process. “Over the past year, I have had many meetings with Secretary Jewell to discuss our access to our resources. In those meetings, I emphasized to her the need for forward planning and ensuring that Alaska is part of the Interior’s five-year leasing plan,” Walker said. “Secretary Jewell and I have not always agreed on issues affecting Alaska, but I’m pleased that we can work with the federal government on this topic.” The Wilderness Society issued a statement expressing a hope the Obama administration will remove all Arctic areas from the Bureau of Ocean Energy Management’s final five-year OCS lease plan. Shell abandoned its multi-year, $7 billion effort to explore its Chukchi leases in September after the company received what it said was disappointing results from its lone exploration well. Shell also cited the federal regulatory process as a reason for discontinuing its Alaska OCS exploration. Alaska U.S. Sen. Dan Sullivan was not impressed with the Interior announcement. “While on the surface the Department of the Interior’s proposed OCS lease plan — which includes acreage in Cook Inlet and the Chukchi and Beaufort Seas — sounds positive, it’s akin to a car dealership announcing a lease sale without providing any keys,” he said in a statement from his office. “For production to be realized and for Alaska to benefit, there needs to be regulatory certainty and a willingness on the part of the Executive Branch to work with, instead of against, lease holders. The energy industry was watching Shell’s ordeal in the Arctic closely. Largely as a result of confusing and conflicting regulations, that company spent seven years and $7 billion to drill a single well. Few, if any companies, could afford a repeat.” ConocoPhillips and Statoil followed Shell in announcing they would also suspend work on the Arctic OCS leases they hold. Shell spent more than $2 billion for its Arctic OCS leases; ConocoPhillips spent about $500 million. Soon after, Jewell announced Interior was canceling planned lease sales for the Chukchi and Beaufort scheduled for 2016 and 2017 based on lack of industry interest. Interior has also denied requests by Shell for extra time on its leases set to expire in 2017 in the Beaufort and in 2020 in the Chukchi, but the company is appealing that decision. Alaska U.S. Rep. Don Young was equally underwhelmed. “Considering the insurmountable regulatory burdens put in place by (Interior) during Shell’s OCS exploration, I have little confidence potential bidders will come forward on the two Arctic lease sales,” Young said in a statement through his office. “Unless the (Interior) and the agencies under its umbrella work to create a regulatory environment that truly gives exploration a chance, I have no expectation for successful development in the Arctic under the Obama administration. “I find little rejoice in the inadequate number of lease sales being offered today and the regulatory environment under which they are being released.” Elwood Brehmer can be reached at [email protected]

Ahtna cites tax credits as it prepares to spud gas well

Ahtna Inc. is preparing a drill site near Glennallen to further its hunt for natural gas in the Copper River basin. The Copper River-area Alaska Native regional corporation is building a gravel road and four-acre pad now, with first drilling of its exploration well Tolsona No. 1 scheduled for next month, according to a March 12 company release. Tolsona No. 1 will be on state land about 10 miles west of Glennallen along the Glenn Highway. Ahtna President Michelle Anderson said in a statement that the company is anxious to get drilling after beginning the exploration application process nearly six years ago. “We are optimistic of a resource discover that will help address the rural energy crisis in the Ahtna region,” Anderson said. “A substantial discovery would benefit not only the Ahtna region but the state at large. It would provide a boost to the economy by putting Alaskans to work and help alleviate the high energy costs that many residents experience.” The proposed well depth of 4,500 feet will reach the targeted Nelchina sandstone formation, according to Ahtna. Drill work will be done with a Saxon rig owned by the global drilling company Schlumberger Ltd. Ahtna is partnering on the work with the Midland, Texas-based independent Rutter and Wilbanks, which hit gas when it drilled the nearby Ahtna 1-19 well in the mid-2000s. That well was abandoned, however, because of high-pressure water zones that were also encountered. Ahtna conducted more that 40 miles of seismic surveys last winter, the results of which led to the decision to drill this year, according to the company. Roy Tansy Jr., Ahtna’s executive vice president, testified to the House Resources Committee earlier this month that the company utilized the state’s Frontier Basin refundable tax credits for its seismic program and will do the same for drilling. The state covered about $2.4 million of the $3 million in seismic costs and the company expects to recover 73 percent of its drilling costs estimated at $10 million through the tax credit program. While Gov. Bill Walker’s proposed overhaul of the state’s oil and gas tax credit program does not touch the Frontier credits, Tansy urged the Legislature to extend them, as they are set to expire July 1, the start of the 2017 fiscal year. The Frontier Basin credits were established in 2012. “Ahtna would not be doing this exploration if the tax credits were not there,” he said. The Frontier Basin seismic credit can be used to cover 75 percent of costs up to $10 million for the first four surveys in the six Frontier oil and gas basins identified by the state. The drilling credit covers up to 80 percent of drilling costs up to $25 million, also on the first four wells in each of the areas. Once drilling of Tolsona No. 1 is done in May the site will be demobilized and cleaned and the road will be available for public access to the surrounding state land. Elwood Brehmer can be reached at [email protected]

CIRI sells tourism businesses to Alaska Denali Travel

Cook Inlet Region Inc. announced March 11 that it has sold its tour and resort subsidiary CIRI Alaska Tourism to Viad Corp., which also owns Alaska Denali Travel. CIRI President Sophie Minich said in a statement that the award-winning cruise tours and lodges that make up CIRI Alaska Tourism, or CATC, have always been a source of pride for the Alaska Native regional corporation and that CIRI believes the quality of business will continue under Viad’s ownership. Viad President of Travel and Recreation called the opportunity to grow its Alaska business “truly exciting” in a release from the company. “We strive to connect travelers in a meaningful way to genuine experiences. CATC’s strong team, amazing experiences and exceptional guest service will only further our ability to create unforgettable adventures in one of the most unique places in the world,” Barry said. Phoenix-based Viad, which has marketing and travel business groups, has owned Alaska Denali Travel since 2011. As the name implies, the business is focused on Denali National Park, with Denali Backcountry Lodge and Denali Cabins offering lodging and Denali Backcountry Adventures providing tours into the park. CIRI Alaska Tourism has primarily built its business around Resurrection Bay, with the exclusive Seward Windsong and Kenai Fjords Wilderness lodges and Kenai Fjords Tours operating out of Seward. In 1999 the company built the 212-room Talkeetna Alaskan Lodge just south of its namesake town. CIRI Alaska Tourism has won a host of industry accolades for its businesses in recent years. Alaska Denali Travel Vice President Thomas McAleer said in a release that the tourism subsidiaries will combine well as both have a longstanding history of successful operations in Alaska’s tourism industry. “With the addition of CATC, not only are we combining two stellar teams of employees, but we will also be able to offer guests a complete bucket list journey from Seward and Kenai Fjords National Park up to Talkeetna and into Denali National Park,” McAleer said. Alaska’s tourism industry is going strong on the back of a growing Lower 48 economy and low fuel prices encouraging Americans and international tourists to travel. The state Commerce Department reported record visitor numbers last year with nearly 1.8 million people finding their way to Alaska last year — a 7 percent increase from 2014. Each of those travelers contributed to the state economy by spending an average of about $940 once in Alaska, according to Commerce figures.  

Alaska included in latest five-year OCS lease proposal

Alaska wasn’t excluded from the Interior Department’s latest five-year Outer Continental Shelf Oil and Gas Leasing Program plan released March 15, just days after President Obama issued a joint statement with Canadian Prime Minister Justin Trudeau calling for further protections of the nations’ Arctic areas. The proposed 2017-2022 program is a step in the Interior Department’s environmental impact statement process for determining what, if any, Outer Continental Shelf, or OCS, oil and gas lease sales it should hold. It does not ensure drilling off Alaska’s coast in the coming years, but it does evaluate potential sales in the Chukchi and Beaufort seas as well as the federal waters of Cook Inlet between 2017 and 2022. Also included are options to move a potential Beaufort Sea sale up from 2020 to 2019, and a no sale option. The Chukchi sale is scheduled for 2022 and Cook Inlet for 2021. The last Cook Inlet sale was in 2004 and drew no bidders. Elsewhere the proposal includes options for leases in the Gulf of Mexico, but removes sales in the mid- and South Atlantic coast areas. Interior Secretary Sally Jewell said in a department release that the program is a balanced proposal that protects sensitive areas and supports save development of the nation’s energy resources. Specifically to Alaska, Jewell said the proposal removes areas from consideration for leases — a 25-mile coastal buffer and the Hanna Shoal walrus foraging area in the Chukchi, and all of Bristol Bay — that Obama withdrew from future lease consideration in January 2015. “We know the Arctic is a unique place of critical importance to many, including Alaska Natives who rely on the ocean for subsistence,” Jewell said. “As we put together the final proposal, we want to hear from the public to help determine whether these areas are appropriate for future leasing and how we can protect environmental, cultural and subsistence resources.” The March 10 statement from the White House and Canadian Prime Minister Trudeau called for protecting at least 10 percent of each country’s Arctic federal waters by 2020. The Interior program report notes the fact that the Trans-Alaska Pipeline System, or TAPS, is currently running about one-quarter full and oil discoveries in the Chukchi and Beaufort seas have the potential to stem TAPS throughput decline. It also mentions a request by Gov. Bill Walker to move the Beaufort sale up from 2020 to 2018. In a statement from his office Walker commended Jewell’s decision to include potential Alaska OCS lease sales to this point in the program process. “Over the past year, I have had many meetings with Secretary Jewell to discuss our access to our resources. In those meetings, I emphasized to her the need for forward planning and ensuring that Alaska is part of the Interior’s five-year leasing plan,” Walker said. “Secretary Jewell and I have not always agreed on issues affecting Alaska, but I’m pleased that we can work with the federal government on this topic.” The Wilderness Society issued a statement expressing a hope the Obama administration will remove all Arctic areas from the Bureau of Ocean Energy Management’s final five-year OCS lease plan. Shell abandoned its multi-year, $7 billion effort to explore its Chukchi leases in September after the company received what it said was disappointing results from its lone exploration well. Shell also cited the federal regulatory process as a reason for discontinuing its Alaska OCS exploration. ConocoPhillips and Statoil followed Shell in announcing they would also suspend work on the Arctic OCS leases they hold. Shell spent more than $2 billion for its Arctic OCS leases; ConocoPhillips spent about $500 million. Soon after, Jewell announced Interior was canceling planned lease sales for the Chukchi and Beaufort scheduled for 2016 and 2017 based on lack of industry interest. Interior has also denied requests by Shell for extra time on its leases set to expire in 2017 in the Beaufort and in 2020 in the Chukchi, but the company is appealing that decision.   Elwood Brehmer can be reached at [email protected]

Alaska pushes back on Arctic plan with Canada

Alaska’s leaders in Juneau and Congress had harsh words for a joint March 10 statement from the White House and Canadian Prime Minister Justin Trudeau announcing plans for new emissions caps on the oil and gas industry and preservation of significant chunks territory in each country’s Arctic. The statement was released as Trudeau made the first official visit by a Canadian prime minister to the White House in nearly two decades. “Beyond deepening cooperation to reduce greenhouse gas emissions — which will have an outsized impact on the long-term health of the global Arctic — President Obama and Prime Minister Trudeau are announcing a new partnership to embrace the opportunities and to confront the challenges in the changing Arctic, with indigenous and northern partnerships, and responsible, science-based leadership,” the statement reads. It asks the leaders of all Arctic nations to embrace the objectives of conserving Arctic biodiversity, incorporating traditional indigenous knowledge in decision-making, supporting strong Arctic communities and building a sustainable economy in the region. The U.S. took chairmanship of the international Arctic Council last year from Canada, which held the post starting in 2013.  The council is a non-binding body of eight Arctic nations meant to spur positive relationships between the countries on Arctic issues. Secretary of State John Kerry will lead U.S. representation at an Arctic Council meeting in Fairbanks next week. Sens. Lisa Murkowski and Dan Sullivan and Gov. Bill Walker all noted the omission of Alaska in drafting the 10-page agreement in formal statements of their own. The sentiment is similar to comments made following the president’s three-day visit to Alaska last summer, which was used as a vehicle to promote his climate change policies. “The Arctic presents great opportunity for our state and our nation to prosper in a global economy. However, the way to achieve that is by greater federal investment in our state’s Arctic development efforts, and not the restrictive policies that were presented today,” Walker said March 10. “It is important to consider the interests of all stakeholders in the region – whether it be focused on marine and wildlife preservation, international travel and shipping, or natural resource development. In doing so, we will ensure Alaska and the United States remain at the forefront of a flourishing Arctic economy.” Walker has said he pushes Obama to allow for oil and gas exploration on the coastal plain of the Arctic National Wildlife Refuge each time he meets with the president, despite actions from the White House to move further towards preservation, not development, of the area. Specifically, the U.S.-Canadian Arctic plan calls for protecting at least 17 percent of the countries’ Arctic land and 10 percent of far north marine waters by 2020. Obama and Trudeau also agreed to the “ambitious and achievable” goal of reducing methane emissions from oil and gas operations by up to 45 percent below 2012 levels by 2025, according to the statement. Further, both countries also endorsed the World Bank’s initiative to eliminate routine methane flaring from oil and gas facilities by 2030. Methane is the primary component of natural gas. “Recognizing the role that carbon markets can play in helping countries achieve their climate targets while also driving low-carbon innovation, both countries commit to work together to support robust implementation of the carbon markets-related provisions of the Paris (climate) agreement” reached in December, the joint statement reads. The countries would also be required to consult each other before approving future oil and gas development in the Arctic. Murkowski called the consultation requirement “simply stunning” in a release from her office. She also said by focusing almost solely on climate change in regards to the Arctic, the Obama administration fails to address other needs in the region, namely economic development. “Although the joint statement makes topical reference to consultation with indigenous people and the incorporation of traditional knowledge into decision-making, it also implies unjustifiable limits that will leave Alaskans standing at the door, rather than seated at the table, on Arctic policy,” Murkowski said. Environmental groups hailed the announcement as leadership towards protecting one of the world’s most delicate environments. To achieve the methane reduction goals the Environmental Protection Agency and Environment and Climate Change Canada will develop new regulations governing methane emissions from existing oil and gas sources as soon as possible. The EPA will quickly begin a process requiring producers operating existing methane emissions sources to provide data that will assist in developing “comprehensive standards to decrease methane emissions,” according to the joint statement. The proposed actions will harm the nation’s energy sector, and in-turn could impact the lives of hundreds of millions of Americans that rely on low-cost energy for their quality of life, Sullivan said, adding they could be “particularly devastating” for Alaska at a time when the state needs oil and gas revenue more than ever. “If the initiatives are enacted, less oil and gas will be produced in our state, more jobs will be lost, and state coffers will be increasingly diminished,” he said. “Now is the time when Alaska needs a federal government that will work with the state, instead of working against us to stymie economic opportunity.” Arctic fisheries were also addressed in that Obama and Trudeau are calling for an international agreement to preemptively close unregulated fishing in the central Arctic Ocean, an area that is increasingly accessible as summer sea ice continues its retreat.   Elwood Brehmer can be reached at [email protected]

Walker orders operational review of state-owned corporations

Gov. Bill Walker’s administration is exploring ways Alaska’s state-owned corporations can maximize their benefit to the state economy through efficiencies and possible combining of efforts. The governor issued an administrative order Thursday morning to jumpstart the operational review process for the Alaska Housing Finance Corp., the Alaska Energy Authority and the Alaska Industrial Development and Export Authority. That process will also involve several regular state departments. Walker said in a press conference that the administration is doing with the three state agencies what it has been trying to do in executive branch departments — to save the state money during a time of multi-billion dollar budget deficits without impacting critical services. He emphasized the review would have no impact on the agencies’ existing projects or obligations. “This is not about cutting back services to Alaskans; this is about doing things more efficiently and how do we use the assets — combined it’s roughly $4 billion of worth in these companies. That’s a big economic engine in the state,” Walker said. The end result of the review is unknown at this point, but Department of Administration Commissioner Sheldon Fisher said there are three main steps to the process. First, each agency’s role in improving conditions for economic development in the state will be examined with help from the Commerce Department. Second will come program reviews to ensure what the three are doing is necessary or being done to the maximum extent possible; and third will be a look at business operations and how those can be improved, streamlined or even combined, according to Fisher. He said it would be similar to the shared services initiative being done to ensure administrative duties in state departments are being handled as efficiently as possible. From there, the process will result in identifiable outcomes, according to Walker. The quasi-government agencies are self-funded enterprise organizations that were originally sown with legislative appropriations in the 1960s and ‘70s. AEA and AIDEA are largely consolidated already. The organizations share an Anchorage office and board of directors, but the authorities’ missions are separate. Both also fall under the purview of the Department of Commerce, but are rarely subject to executive branch requirements. AIDEA’s focus is on traditional economic development through direct project investment and business loans. AIDEA Executive Director John Springsteen said the authority averages about a 5.5 percent return on its business deals, or about $380 million total since its creation. AEA focuses mostly on rural energy, administering the state’s Renewable Energy Fund grant program for small-scale energy projects and the Power Cost Equalization Program, which subsidizes rural electric costs down to rates more comparable with urban parts of Alaska. AEA has also led the state’s evaluation of the large Susitna-Watana Hydro project. “Affordable energy is the foundation of economic development,” AEA Executive Director Sara Fisher-Goad said. “Our return to the state is really in the projects we’ve managed and working with communities and utilities to reduce energy costs for Alaskans.” AIDEA and AHFC each return annual investment dividends to the state General Fund. The foundation of AHFC’s business is the more traditional mortgage lending market, but its niche is to provide financing for affordable housing projects that don’t quite “pencil out” for private investors, its Executive Director Bryan Butcher said. AHFC also administers several housing-focused energy efficiency rebate and loan programs for the state. It is under the Department of Revenue for management purposes much the same way AIDEA and AEA fall under Commerce. House Speaker Rep. Mike Chenault said in a press briefing following the announcement that the House would be willing to look at the prospective benefits of combining the organizations, but doing so would almost certainly require changes in legislation, which Walker said would likely come next year. While it is unknown how long the review process will take, Chenault noted that the administration asked for $500,000 from the Legislature to support the effort. That would be matched about $500,000 in receipts from the agencies, he said, to bring the total cost to about $1 million. Along with the evaluation Administration will do on the agencies’ operations, it will give the Commerce and Revenue departments an inventory of state facilities “appropriate for enterprise development, consolidation, or other forms of efficiencies,” the administrative order states. Similarly, the Department of Natural Resources will compile an inventory of state lands it deems suitable for economic development.   Elwood Brehmer can be reached at [email protected]

IEP talks advance with Cook Inlet gas partner

The Interior Energy Project took a big step forward March 3 when the Alaska Industrial Development and Export Authority announced it is negotiating with a sole project partner to supply Cook Inlet natural gas to the Fairbanks area. IEP Manager Bob Shefchik said to the AIDEA board that the proposal by Salix Inc. to build a small natural gas liquefaction facility on Point MacKenzie in the Matanuska-Susitna Borough is the best option for the project as it faces viability challenges brought on by low oil prices. Salix is the last standing of 13 companies that offered 16 ideas to get an alternative space heating energy source to the Interior in response to a June 2015 request for proposals, or RFP, issued by the state authority. According to an analysis by the global consulting firm Arcadis Inc. of Salix’s proposal, the plan for a $68 million, 3 billion cubic feet per annum natural gas liquefaction plant should equate to gas delivered to Interior customers for $15.74 per thousand cubic feet, or mcf. That price would nearly meet the project’s stated goal of $15 per mcf, which is roughly the energy equivalent price of $2 per gallon fuel oil. Salix and Spectrum LNG, a small Oklahoma-based LNG company with a North Slope-sourced proposal, were the finalists in the RFP process started this past summer. Salix is a subsidiary of Avista Corp., a Spokane, Wash.-based utility company that operates electric and natural gas utilities in Idaho, Oregon and Washington. Avista also purchased Juneau’s Alaska Electric Light and Power Co. in 2014. Avista spokeswoman Jessie Wuerst said the company is very pleased to have been chosen as a partner to this point but declined to comment further because project negotiations are ongoing. The basic financing structure for the plant would start with a $30 million equity investment by AIDEA and a $28 million, long-term, low-interest loan from the state Sustainable Energy Transmission and Supply Fund. Salix would post a $10 million equity stake; requiring an 11.7 percent rate of return. Shefchik said the $3.24 per mcf tolling fee identified by Salix for the LNG plant  — the first major cost layered on the wholesale gas price to add up to the final “burner tip” cost of gas for consumers — could fall in negotiations. “As we work with Salix on both the term sheet and the financing, our effort is to push that $3.24 down to the $2 range and we believe that’s possible,” he told the AIDEA board. AIDEA’s first attempt at the project in 2014 was limited to North Slope gas by legislation passed in 2013 that funded the project with $332.5 million with primarily low-interest loan and bond authority, as well as a $57 million grant appropriation. Financing for the Salix plant would come from that pot of funding, as the legislation was amended last year to support a Cook Inlet-sourced Interior Energy Project. The ability for Cook Inlet producers to supply another market long-term was unclear in 2013, but the Inlet’s available gas reserves have grown since, as new companies have entered the market and Hilcorp Energy’s work on existing gas fields has also greatly improved the situation. Further buoying Salix’s proposal is a $6 per mcf Cook Inlet wholesale gas price, and the prospect of even lower-cost natural gas to feed the LNG plant, according to the project evaluation. Southcentral utilities have signed gas supply contracts in recent months for base demand in the $7.50 per mcf range, less than a current state-mandated price cap that expires at the end of 2017. Shefchik said in an interview the project team is negotiating with multiple producers for gas supply. He also noted the unavoidable reality of high capital costs on the Slope as a main reason for moving forward with Salix over Spectrum. That was evidenced in the first IEP go-round, which was scrapped by the authority just prior to making an investment decision because construction costs for a larger plant kept final projected gas prices in the $18 per mcf and higher range — too high to continue. Now, oil in the $30 per barrel range has pushed fuel oil down to the $2 per gallon range, challenging the IEP from any gas source, as potential customers are less likely to make upfront investments to convert to natural gas. However, Shefchik said the energy price reprieve has also given AIDEA the time to develop a project durable across a range of energy prices rather than rushing to complete a less optimal solution. Larger LNG trailers should also play directly into improving the final cost of gas in Fairbanks, Shefchik said. Pentex Alaska Natural Gas Co., the parent company to Fairbanks Natural Gas owned by AIDEA, has been testing a 13,000-gallon capacity LNG trailer for suitability along the route from Southcentral the Fairbanks. Positive results from those test runs means the larger LNG trailer could lower transportation costs by about 30 percent versus the 10,500-gallon capacity trailers currently used to supply Fairbanks Natural Gas from the small LNG plant on Point MacKenzie. Additionally, building the Salix plant on the same pad as the plant run by Pentex subsidiary Titan LNG could offer operational savings by running both plants with a single operator. Shefchik said the location the Salix plant isn’t yet settled but he hopes it can be built alongside the existing plant to minimize capital costs and maximize operational efficiencies. Besides the economic benefits of a potentially lower- and stable-cost energy supply, a successful Interior Energy Project would significantly improve the region’s winter air quality — some of the worst in the country due to low-level atmospheric inversion that occurs in the area and traps wood smoke and emissions from fuel oil furnaces. Detailed negotiations are with Salix are ongoing, according to Shefchik, and an official recommendation from the AIDEA board to continue is expected at its March 31 meeting. Fairbanks rates drop 10.4 percent Fairbanks Natural Gas President Dan Britton told the AIDEA board that changes to the utility’s pricing structure implemented Jan. 1 have largely been successful, resulting in ratepayers bills being lowered by an average of 10.4 percent during the first two months of the year. AIDEA took ownership of the utility last year through the authority’s $52 million purchase of FNG’s parent company Pentex. Transfer of the private, unregulated utility to a public entity allowed for lower rates of return and tax savings among other items that were first expected to result in 13 percent rate reductions for FNG customers. At the same time, Britton wrote in a brief operational report to the AIDEA board that the warm Interior winter and low fuel oil prices have combined in a gas sales volume that is 17 percent, or about $700,000 below budget for January and February. “We will be watching expenses very closely,” Britton said, adding capital projects may be deferred if the trend continues. He said in an interview that margins were already thin after the rate reduction but that the utility is still on solid financial footing. With the forecast showing no sign of a cold snap, Fairbanks seems to have escaped this winter without hitting minus-30 degrees Fahrenheit. Most winters the city sees more than 20 days colder than minus-30, Britton said, which simply means customers burn less natural gas. The number of heating degree days — a temperature-based metric for determining how much energy is required to heat a structure during cold weather — in Fairbanks has also been off 17 percent from FNG’s budget in the first to months of the year, according to the report to the board. Piling on the warm weather is cheaper fuel oil that has led some Fairbanks Natural Gas customers to revert back to the fuel the city has so badly wanted to get off of. At about $2 per gallon delivered, fuel oil is about 25 percent cheaper on an energy equivalent basis than FNG’s current price for natural gas, which is about $20 per mcf, according to Britton. He said 12 of the 14 school district buildings that the utility had budgeted to be on natural gas switched to fuel oil in January and February, along with the state’s Ruth Burnet Sport Fish Hatchery. Many of the utility’s large customers are interruptible, which allows FNG to supply them with gas when it is available. That also means interruptible customers must have a backup fuel source — and when the backup fuel is cheaper it is their prerogative to switch. Elwood Brehmer can be reached at [email protected]

Enstar to save $14M in first year of new gas deal with Hilcorp

The eventual return to a free Cook Inlet natural gas market is looking good for consumers as the latest round of gas supply contracts are signed by utilities. Enstar Natural Gas Co. has reached a deal with Hilcorp Energy to fuel the lone Southcentral gas utility through March 2023 at prices more favorable than those outlined under the Consent Decree that regulates Inlet gas contracts through 2017. Filed with the Regulatory Commission of Alaska Feb. 29, the gas sale and purchase agreement between Enstar and Hilcorp would kick in April 1, 2018, at an average price of $7.56 per thousand cubic feet, or mcf, for firm gas deliveries. That would amount to a 9.2 percent price decrease compared to contracts under Consent Decree terms that will expire at the end of March 2018 — an overall $14 million savings in the first year. Enstar Vice President and General Counsel Moira Smith said that savings will be passed on directly to utility’s customers. “It’s a nice discount off of Consent Decree prices,” Smith said in an interview. “We thought it was a big win for our customers.” The firm gas price at then end of the deal in 2023 is $8.19. The tentative agreement, which is subject to RCA approval, also calls for an annual 2 percent price increase, versus the 4 percent yearly escalation allowable under the Consent Decree. The Consent Decree is the deal reached by the Attorney General’s office and Hilcorp in late 2012 that set price caps for Inlet gas contracts from 2013 through 2017, thus allowing Hilcorp to purchase gas and oil interests from Marathon and Chevron and become the majority gas supplier in the basin. At more than 22 billion cubic feet, or bcf, per year, Hilcorp would supply about 70 percent of Enstar’s projected demand under the contract — a demand forecast that is flat at 33 bcf for the foreseeable future. Smith said Enstar’s customer base grows a little more than 1 percent a year, but increasingly energy efficient homes using less natural gas offsets new customer demand. Regional electric utilities that use natural gas as primary fuel source have made similar comments regarding their own demand forecasts. Last year Chugach Electric Association and Homer Electric Association signed gas supply contracts extending beyond 2017 at prices less than Consent Decree prices as well. Enstar was able to combine firm, base delivery and peak volume demand prices in the deal, which will cover for contacts of each type the utility had with Hilcorp that are expiring in 2018, according to Smith. Higher prices for peak demand purchases add about 15 cents to the average yearly gas price paid by Enstar under the agreement. Utilities typically hunt hard for the longest-term contracts they can to provide customers with security of fuel supply, but there were other factors that led to the five-year term. “Our goal was to get some stability and five years gives us some stability while simultaneously allowing other producers time to get on their feed and get some real production up and going and also allow room for a (pipe)line from the North Slope that we could purchase from,” Smith said. “It was not Hilcorp saying they did not want to negotiate for more than five years.” If seen to fruition on its current schedule, the Alaska LNG natural gas export project would begin shipping North Slope gas to Southcentral in late 2024 or 2025, but the state and its partners have announced they won’t have key agreements in place for approval by the Legislature this year, likely delaying the effort. As to the large share of the contract — filling upwards of 70 percent of Enstar’s total gas demand through one producer — Smith said frankly, “It’s because nobody else could do it.” While there is little doubt gas reserves in the basin could supply Southcentral for at least several decades, limited local demand continues to hinder the market for Inlet gas. Producers could develop the resource, but they would have no one to sell it to. Thus, the market has narrowed to one with a single, dominant producer in Hilcorp, despite having some of the highest wholesale natural gas prices the world currently. Hilcorp’s near exclusive control of Cook Inlet natural gas supply spurred the Consent Decree — a way for the state to limit the monopoly power over a critical commodity. Smith said the Consent Decree did its job in that it ended exorbitant high bidding for peak demand gas sales and added a “degree of functionality” to the market. For its part, Hilcorp has been a reliable partner and provided good service to its utility customers, she said. “Without engaging in hyperbole, (Hilcorp has) acted as very good stewards of the state resource to ensure stability for utilities,” Smith said. She added that Enstar would still like to see more players, on either side, in the market. Since Agrium Inc. shut down its Nikiski fertilizer plant in 2007, Enstar has become the major buyer, accounting for a third to half of all gas demand from the Inlet. Just three years ago Enstar resisted the idea of new Cook Inlet customers because the market was strained on the supply side, Smith said. Hilcorp’s work to improve supply from existing fields has flipped the market challenge. Now, the utility would prefer to be “noise” in a much larger gas market, Smith said, under the premise that a larger market would spur more production leading to better security of supply and price competition. Sporadic sales from ConocoPhillips’ Nikiski LNG export facility have increased gas demand slightly over the last couple years, but depressed worldwide LNG prices have put the immediate viability of future exports in question. Furie Operating Alaska LLC is finishing early development of its Kitchen Lights Unit and has one small contract in place with Homer Electric, under which gas sales are set to start in April. The base load gas price in that deal is $7.42 per mcf, according to RCA filings. Elwood Brehmer can be reached at [email protected]

Plan for Southeast alternative fuel revived with propane

Alaska has a love affair with natural gas, but Frank Avezac says rural areas of the state should at least consider a date with its little sister, propane. Avezac is CEO of Alaska Intrastate Gas Co., a startup utility that March 4 announced plans to provide 17 coastal communities — from Kodiak to Metlakatla — with propane as an alternative to fuel oil with construction starting as soon as this year. The aggressive proposal by Alaska Intrastate Gas Co. would start in Cordova with infrastructure buildout in 2016 and then move to Juneau, Valdez and Ketchikan. Residents of the communities planned for gas development could see fuel cost savings of up to 30 percent from a switch from fuel oil to propane for space heat, according to Alaska Intrastate Gas Co. The full list of communities Alaska Intrastate Gas hopes to serve includes Kodiak, Valdez, Cordova, Yakutat, Klukwan, Haines, Skagway, Juneau, Angoon, Sitka, Kake, Petersburg, Wrangell, Klawock, Craig, Ketchikan and Metlakatla. Larry Head, vice president of power and energy for Alaska Intrastate Gas’ global engineering partner AECOM, said both the physical and market characteristics of propane make it a better option for remote Alaska communities. “The capital cost for producing, shipping and storing LNG is many times higher than that of propane,” Head said. Propane is a byproduct of sorts in natural gas reserves. It is typically separated from the methane that is pure natural gas. Cook Inlet’s natural gas is “clean” or “dry” gas, meaning it is almost pure methane, while North Slope natural gas is “dirty,” with a host of vapor fuels and carbon dioxide that must be pulled off before the gas can be shipped and sold. The project would buy Canadian propane and barge it from Prince Rupert to the coastal towns at a delivered price of about $1.10 per gallon to $1.30 per gallon, up to 50 percent cheaper than delivered LNG, according to Head. At that point, the vaporized propane would be mixed with air to produce a blended gas known as syngas, which has virtually the same burn characteristics as natural gas, he said, meaning the two can be used interchangeably in distribution pipes and appliances. The advantages of propane over LNG for small-scale use “go on and on,” Head said. Natural gas has to be chilled below minus-260 degrees Fahrenheit to make it LNG for ease of transport. When done on a small scale, the liquefaction process can add $2-$3 per gallon to the cost of LNG. Propane, on the other hand, liquefies at minus-44 degrees and can be kept liquid at warmer ambient temperatures for transport with relatively little compression. It has also historically been cheaper than diesel, or fuel oil, on an energy equivalent basis, Head said, and likely always will be because there just aren’t enough backyard grills to use it all. Delivered fuel oil is selling in small quantities for about $2.60 per gallon in Cordova, according to vendors. “Right now there’s a major glut of propane and there’s going to be a major glut for many years ahead because there’s not outlets for its use,” he said. Cordova was chosen as the starting point for the project because its fish processing facilities can act as market anchor tenants to supply the base demand needed to make the development of propane and propane accessories economically viable from the get-go, according to Head. “Our analysis shows we don’t need heavy adoption, we simply need the anchor clients to sign up and then residential clients will be provided, based on their interest in having a change-over (from fuel oil),” he said. Commitments to convert from a majority of residents and small businesses will likely be needed in the smallest communities without large anchor market tenants, Head added. Changing home heating systems from fuel oil to propane or natural gas can cost as little as $1,000 to $1,500 for newer boilers, in which just the burner must be replaced, or up to nearly $10,000 for a complete replacement boiler. The project has tentative agreements with fish processors in Cordova to buy gas that should be finalized soon, Head said. The first step is getting the infrastructure in place. “Right now, all we want to do is get pipe in the ground, because without pipe getting in the ground you’re never going to bring any type of gas to anybody,” Avezac said in an interview. Outgoing Cordova Mayor Jim Kasch said Alaska Intrastate Gas first came to Cordova with a plan to supply LNG nearly 10 years ago when energy prices in Alaska were at record highs. At that time, the claim was natural gas for half the cost of fuel oil, he said. The Cordova City Council approved a land sale to the utility for a landing facility, but the deal was rejected in a public vote. Kasch was on the city council when the people of Cordova rejected the deal. This time, Kasch said he was first made aware of the revived plan March 7 and sees it as a “cart before the horse scenario,” because Alaska Intrastate Gas and AECOM have yet to apply for permits to build the necessary storage, vaporization and distribution infrastructure while wanting to start building this year. “If they can do something to mitigate (high energy costs) and reduce the cost of daily life here in rural Alaska, boy, I’m all for it but they need to sell themselves to the communities where they plan on doing this and I’ve yet to see that,” Kasch said. Avezac said the holdup on the land sale years ago was opposition to filling in tidelands, which Alaska Intrastate Gas doesn’t intend to do this time around, not an opposition to the overall plan. “We’ve never met anybody that doesn’t want gas, ever,” he said. As for working with the city, Head said, Alaska Intrastate Gas has certificates of public necessity and convenience that give the utility access to right-of-ways for piping, and while permit applications have not been filed, discussions have been had and he sees no issues in getting the paperwork squared away. He said further information about project financing and detailed construction timelines would be made public soon. Elwood Brehmer can be reached at [email protected]

Enstar, Hilcorp ink gas deal to 2023

The eventual return to a free Cook Inlet natural gas market is looking good for consumers as the latest round of gas supply contracts are signed by utilities. Enstar Natural Gas Co. has reached a deal with Hilcorp Energy to fuel the lone Southcentral gas utility through March 2023 at prices more favorable than those outlined under the Consent Decree that regulates Inlet gas contracts through 2017. Filed with the Regulatory Commission of Alaska Feb. 29, the gas sale and purchase agreement between Enstar and Hilcorp would kick in April 1, 2018, at an average price of $7.56 per thousand cubic feet, or mcf, for firm gas deliveries. That would amount to a 9.2 percent price decrease compared to contracts under Consent Decree terms that will expire at the end of March 2018 — an overall $14 million savings in the first year. Enstar Vice President and General Counsel Moira Smith said that savings will be passed on directly to utility’s customers. “It’s a nice discount off of Consent Decree prices,” Smith said in an interview. “We thought it was a big win for our customers.” The firm gas price at then end of the deal in 2023 is $8.19 per mcf. The tentative agreement, which is subject to RCA approval, also calls for an annual 2 percent price increase, versus the 4 percent yearly escalation allowable under the Consent Decree. The Consent Decree is the deal reached by the Attorney General’s office and Hilcorp in late 2012 that set price caps for Inlet gas contracts from 2013 through 2017, thus allowing Hilcorp to purchase gas and oil interests from Marathon and Chevron and become the majority gas supplier in the basin. At more than 22 billion cubic feet, or bcf, per year, Hilcorp would supply about 70 percent of Enstar’s projected demand under the contract — a demand forecast that is flat at 33 bcf for the foreseeable future. Smith said Enstar’s customer base grows a little more than 1 percent a year, but increasingly energy efficient homes using less natural gas offsets new customer demand. Regional electric utilities that use natural gas as a primary fuel source have made similar comments regarding their own demand forecasts. Last year Chugach and Homer electric associations signed gas supply contracts extending beyond 2017 at prices below Consent Decree prices as well. Enstar was able to combine firm, base delivery and peak volume demand prices in the deal, which will cover for contacts of each type the utility had with Hilcorp that are expiring in 2018, according to Smith. Higher prices for peak demand purchases make the yearly average gas prices about 15 cents per mcf higher than the base gas prices paid by Enstar under the agreement. Utilities typically hunt hard for the longest-term contracts they can to provide customers with security of fuel supply, but there were other factors that led to the five-year term. “Our goal was to get some stability and five years gives us some stability while simultaneously allowing other producers time to get on their feed and get some real production up and going and also allow room for a (pipe)line from the North Slope that we could purchase from,” Smith said. “It was not Hilcorp saying they did not want to negotiate for more than five years.” If seen to fruition on its current schedule, the Alaska LNG natural gas export project would begin shipping North Slope gas to Southcentral in late 2024 or 2025.

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