Elwood Brehmer

Anchorage attorney Jahna Lindemuth named new AG

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

Walker administration shuffled as AG, DNR commissioner step down

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

Meyer shares gov’s vision of state-led LNG effort

One thing is clear: The state’s new point man on all things gasline has a new perspective on the Alaska LNG Project. Self-proclaimed “gas guy,” and, as of June 15, Alaska Gasline Development Corp. President and CEO, Keith Meyer views one of the largest and complex projects the country has ever seen more simply, as the “logistics infrastructure of moving gas from the supply point to a market point,” he said in an June 21 interview with the Journal. “When I look at this project, I look at it as an infrastructure project, not as an extension of a producing unit and I think that’s going to be a significant shift,” Meyer said. With a low-end cost estimate of $45 billion and an 800-mile long footprint from the North Slope to the Kenai Peninsula, the immensity of the Alaska LNG Project certainly isn’t lost on Meyer. A 35-year veteran of the energy industry, he oversaw the development of the Sabine Pass LNG terminal on the Texas-Louisiana line as president of Cheniere LNG. Sabine Pass was once the largest LNG import terminal in the country and has become an export facility after the shale gas revolution. Former AGDC President Dan Fauske, who led the corporation since its inception, abruptly resigned last November at the request of Gov. Bill Walker, who thanked Fauske for his service at the time, but said he wanted someone with more LNG industry experience to lead AGDC as the project developed further. Fauske’s background is in finance; he was also the longtime CEO of the Alaska Housing Finance Corp. After the taking hold in the late 2000s, the shale gas revolution quickly became the shale oil revolution that helped flood world oil markets with supply and is now indirectly challenging the AK LNG Project status quo. The gasline project Alaskans have come to know since early 2014 with BP, ConocoPhillips, ExxonMobil and the state as partners — now without TransCanada’s initial participation after the Legislature agreed to buy out the company’s interest last fall — moving ahead as one likely won’t be the project that is finished next decade, at least according to Meyer. Depressed oil prices have hit the producers’ and the state’s balance sheets hard. Walker’s strong desire to keep progressing to construction, combined with the producers’ waning willingness and ability to move along at the same pace has the parties in talks about a new Alaska LNG structure. That’s where Meyer comes in. By separating the need to be an owner in the project from the ability to obtain pipeline and liquefaction capacity, he said the state could lead the Alaska LNG Project as an infrastructure project. That would not mean, however, that the state would be forced to foot the bill. Meyer said he envisions potentially numerous investors: those looking for stable, long-term investment returns in the “low double-digit” range, percentagewise, or less. With the state in the lead the project could also reap tax advantages that, when combined with a larger pool of investors, could cut costs on the finance side. Those investors could be pension or insurance funds, or the large Asian utilities that are the likely LNG customers. The producers would not be excluded from that list either. “The producers are going to be welcome owners. We’d love to have them,” Meyer said. In the event one or more of the current producer partners chose not to buy into the project further, they would then become welcome upstream customers in what he described as a “contract carrier” pipeline and LNG plant. “When I look at the producers I first see customers,” he said. “We want to recognize that however this project goes we’re going to look at them as customers. We’re going to provide a very valuable service and we’re going to provide that service at a very reasonable price because they’re going to need to sell their product into the global arena as well.” The prospect of the producers not wanting to sell their gas into the state’s line is an unlikely one, he said. “My belief is that if we build a pipeline that lets them access the global market they will definitely want to sell their gas,” Meyer said. Last fall Walker requested and got informal letters of commitment to sell gas into a project from BP and ConocoPhillips in the event the companies decide not to directly invest. ExxonMobil did not provide such an assurance. The nine-page agreement signed last December states that the sales offer will be made to the State of Alaska if “mutually agreed commercially reasonable terms can be reached between the relevant party (the withdrawing company) and DNR (the state Department of Natural Resources).” In an analysis for the Legislature, Janek Mayer and Nikos Tsafos, of the firm enalytica, estimated that if the state were to purchase ConocoPhillips’ 22 percent share of the 35 trillion cubic feet of North Slope gas reserves, the cost, at $4 per million British Thermal Units, would be $19.2 billion. The structure would also open up the project to other North Slope producers with natural gas to sell. It would be an outlet that would hopefully spur new gas development, Meyer said. Project objectives Changing the investment structure does not mean changing the look of the infrastructure itself, though. The North Slope gas treatment plant, 42-inch pipeline and 20 million tons per year liquefaction plant that have been heavily studied and partially engineered is what the state would move ahead with — an export-sized project as opposed to an in-state only pipeline. With producers as upstream customers of the project contracting for space in the pipe and capacity in the liquefaction plant, the end buyers of LNG are then customers of the producers, or the state, with its share of gas, and not direct customers of the Alaska LNG Project. The new structure fills the first of the two major objectives that need to be achieved to make the project successful: It relieves the $45 billion-plus investment burden from the current project participants, including the state, according to Meyer. “There’s a lot of cash sort of sitting on the sidelines waiting for a good infrastructure project. An Alaskan LNG project is a good infrastructure project,” he said. “You’ve got a U.S. project — not only U.S. — it’s in Alaska, which has a demonstrable track record of LNG and energy exports, so this will be a very good infrastructure project.” He also doesn’t see convincing some key legislators, who have butted heads with the governor over prospective changes to the project can be successful as an issue. There are concerns about the state taking a larger role. “What I want to see us do is shave billions off the cost and years off the in service (timeline) and I think if we do that we’ll have full support of legislators,” Meyer said. “I think there’s a misconception out there that ownership is equivalent to investment and from my background I’ve never assumed that.” The second overarching objective is making the project globally competitive. Alaska’s near 50-year history of LNG exports from ConocoPhillips’ liquefaction plant and export terminal, just down the road in Nikiski from where the new plant might go, is a big plus for utilities that emphasize reliability of supply as much as anything, Meyer said. Additionally, Alaska is a direct sail to all the potential Asian markets; while Lower 48 competitor selling LNG have to go through a third country, Panama, to reach Pacific customers. Those factors, along with the fact that the gas reserves at Prudhoe Bay and Point Thomson are very well defined and developed, combine to still make the Alaska LNG Project a good one, according to Meyer. The established North Slope infrastructure also helps de-link the cost of North Slope natural gas from oil, easing price fluctuations. “If you take reduced volatility, stable venue, state, location and competitive price I think we’ve got a real winner. It’s all those things that go into a large utility purchase decision. It’s not just price, but price is important; we have to recognize that,” he said. He added that even though Lower 48 Henry Hub priced natural gas is now in the $2 per thousand cubic feet, or mcf, range, making it competitive with Alaska in Asia despite much longer shipping times, the Henry Hub market has historically been a volatile one, as well. Market analysts vary on projections for long-term Henry Hub pricing. Some feel that fracking fundamentally changed the North American natural gas market; while others contend it will still be subject to future price spikes. Since “fracked” gas became an established commodity in 2010, Henry Hub indexed natural gas exceed $5 per mcf once for a brief period early in 2014. The price issue for Alaska LNG will be at least partially addressed through timing. The current spot prices for LNG delivered to Asian ports of about $4 per million British thermal units (roughly equivalent to a per mcf price of natural gas) is nearly half of what Asian market spot prices were a year ago and nearly 75 percent less than what they were when the Alaska LNG Project was being conceived just a few years ago. That is simply the effect of LNG suppliers responding to the largest increase in demand the world has ever seen with the largest supply increase ever, Meyer said. The world is oversupplied with LNG. However, he sees the market imbalance correcting in the 2022-25 timeframe, which is the “demand window” the state needs to hit, he said. “One of the good things about natural gas is it is the preferred hydrocarbon molecule. The world is trying to get cleaner,” Meyer said. “We’re going to have this consistent demand curve (growth) for natural gas.” The current project timeline calls for startup sometime in late 2024 or 2025. But that also means time is of the essence. Meyer said the state “needs to be out in front of customers right now,” and starting to get contracts signed within the next two years. That will mean developing an AGDC marketing team. “Our marketing won’t just be LNG, it can also be this project,” he said, noting a utility could buy gas from a producer and use the Alaska LNG Project as a means to move and process what it bought. The corporation has until now filled the role of a technical body, first focused on engineering the idled Alaska Stand Alone Pipeline, or ASAP, project. To that end, the work done to date on the project’s upcoming Federal Energy Regulatory Commission license filing — FERC’s environmental impact statement process — “far exceeds” what is typically done on Lower 48 export projects at this point in development, Meyer said.  

Interior budget bill takes another shot at King Cove road

Alaska is a big part of the $32 billion bill headed to the Senate floor to fund the Interior Department, Environmental Protection Agency and the Forest Service. That shouldn’t be surprising considering Sen. Lisa Murkowski chairs the Interior and Environment Appropriations Subcommittee that drafted the legislation. The wide-ranging funding bill passed the Appropriations Committee June 16 on a 16-14 vote without Democrat support. “What we’re trying to do is direct federal resources where they’re needed,” Murkowski said during a June 19 teleconference with Alaska media. Overall, the $32 billion in funding for fiscal year 2017 would be about $340 million less than 2016, according to the committee report. On the Interior Department, Murkowski included language to initiate a new land swap between the State of Alaska and the federal government that would allow the state to finish construction of an emergency road between the Alaska Peninsula communities of King Cove and Cold Bay. She has led the Alaska congressional delegation’s push to get the link completed, particularly since Interior Secretary Sally Jewell blocked a land transfer for that purpose late in 2013. The land swap is needed because 11-mile unfinished section of the longer gravel road would run through the Izembek National Wildlife Refuge, where development of any kind is prohibited. Jewell ultimately rejected the previous land trade of about 43,000 acres of state and Alaska Native corporation land for 206 acres of Izembek territory — included in a 2009 omnibus public lands bill signed by President Barack Obama — after a U.S. Fish and Wildlife Service environmental impact statement determined the swap would negatively impact migratory bird habitat in the refuge and chose the “no action” alternative. Last September, U.S. District Court of Alaska Judge H. Russel Holland ruled in favor of the Interior Department decision in a lawsuit filed by King Cove Alaska Natives over the land swap rejection. According to the language in the bill, the land swap must be completed within 180 days of the legislation taking effect. With it being a funding bill and the federal 2017 fiscal year starting Oct. 1, 2016, that deadline would be in late March 2017. It also state’s that the land swap would “not constitute a major federal action for purposes of the National Environmental Policy Act,” meaning an environmental impact statement would not be necessary. Any difference in the appraised value of the federal and state land up for trade could be resolved with a direct payment by the State of Alaska to the federal government or through inclusion of more federal land. An appraiser would be selected jointly by the state and the Interior secretary. The 315,000-acre Izembek Refuge surrounds the village of Cold Bay and is home to entire populations of some waterfowl species, such as the Pacific black brant, at certain times of the year. The road would give King Cove residents in urgent need of medical care a reliable link in bad weather to the large World War II-era airport at Cold Bay. Murkowski said the previous deal that was rejected by Jewell is “off the table.” The latest appropriations bill directs the Interior Department to work out a deal of equal land value with the state. By stating that the land exchange and construction of the road “is in the public interest,” the bill appears to take any department discretion off the table as well. “It’s fully my intent to hold the Interior Department and the secretary — hold their feet to the fire and facilitate this transfer,” Murkowski said. The bill would also resurrect the Alaska Land Use Council. First established through the 1980 Alaska National Interest Lands Conservation Act, or ANILCA, the council was allowed to sunset in 1990. According to Murkowski, bringing back the council should help alleviate the often contentious working relationship between the state and federal agencies and give Alaskans “a stronger voice in the decisions made about the lands” in their state. Implementation of the EPA’s Waters of the U.S. rule would also be delayed by a year if the bill passes. The Obama administration and supporters of the rule, which is currently suspended in federal court after states sued to stop its implementation, contend it would clarify what waters the EPA has jurisdiction to regulate. Opponents argue it is another example of “federal overreach” that would inflate the agency’s authority and stymie development projects nationwide.Murkowski said the one-year hold is better than nothing. “We’re kind of counting on the courts here to recognize that this is a broad expansion of EPA’s authority to regulate under the Clean Water Act and to help us ensure that EPA is not allowed to proceed with this,” she said. “So, do I wish that it could have been a permanent moratorium, or ban? Certainly. Is a one-year delay what we were able to gain support for? Yeah, that’s where we are.” Indian Health Service funding for some Alaska-specific programs was also increased in the bill. It directs $11 million — $7 million more than 2016 — to the Village Built Clinics Program, which funds health care infrastructure in Alaska villages. Another $10 million is set aside for the Small Ambulatory Clinics Program to fund clinics in the extremely remote Western Alaska villages of Gambell and Savoonga. Nationwide funding for IHS drug and alcohol and behavioral health treatment efforts is also upped by $37 million in the bill to more than $240 million. Pertinent to Southeast Alaska, the bill prohibits the Forest Service from finalizing the Tongass National Forest Land Use Plan before conducting an inventory of harvestable timber in the 17 million-acre forest. The Forest Service’s preferred management plan for the Tongass, which is going through the public process, calls for a harvest transition from old growth to young, or second growth, timber in the coming years. The Forest Service is not opposed to the inventory measure, according to Murkowski. “It’s not about saying we don’t want to do the transition; it is about ensuring that the transition is based on a full and complete understanding of what we have and the Forest Service recognizes that,” Murkowski said. The bill provides $77 million for federal forest inventories nationwide, including portions of Interior Alaska. Conservation groups have lauded the Tongass transition as a major step to protect salmon habitat in the forest. Timber industry representatives in the state have said they are not opposed to a transition, but emphasize that it needs to happen slowly, over decades, to allow young growth stands to mature. Until then they continue to push for some old growth harvest. Elwood Brehmer can be reached at [email protected]  

Tesoro to sell some fuel storage in consent deal with state

Tesoro Alaska Co. has agreed with the state to sell about one-quarter of its fuel storage capacity at the Port of Anchorage. The state Department of Law reached a consent decree deal with the fuel service company dated June 10 that calls for Tesoro to sell its Terminal 1 fuel storage facility, with about 220,000 barrels of capacity. Last year Tesoro agreed to buy the majority of Flint Hills Resources’ fuel storage in the state. That included about 580,000 barrels of storage at the Port of Anchorage, as well as a rail loading facility. Tesoro previously owned storage capacity at the port. A six-month Department of Law investigation determined the Tesoro-Flint Hills deal would unduly limit competition among fuel providers at the port, according to a June 21 department release. The Port of Anchorage is the primary off-load point for the vast majority of goods, including fuel, headed for destinations across the state. “Allowing a new competitor into the Port of Anchorage will increase competition in this very constrained market,” Chief Assistant Attorney General Ed Sniffen said in the release. According to the consent decree, Tesoro has a year to find a buyer for Terminal 1. If it can’t find one, it must lease the storage capacity. An Alaska Superior Court judge must still approve the consent decree. In a June 20 release, Tesoro said its deal with Flint Hills initially reached late in 2015 had officially closed, with the consent decree a part of that deal structure. “This acquisition enhances our capabilities to efficiently and reliably serve our customers in the state of Alaska,” Tesoro CEO Greg Goff said in a formal statement. Tesoro also purchased Flint Hills’ fuel marketing contracts and a 22,500-barrel jet fuel facility at the Fairbanks International Airport. The refinery was not part of the deal. Flint Hills closed its North Pole refinery in May 2014, a move that impacted a range of businesses and industries across the state. Since, it has slowly divested its other assets in Alaska, such as its fuel storage tanks. Elwood Brehmer can be reached at [email protected]

Walker left with decisions after House committee rejects using Fund earnings

Where does it go from here? The House Finance Committee failed to move Senate Bill 128, the Permanent Fund restructuring bill, to the floor on a 5-6 committee vote early Friday afternoon. Gov. Bill Walker has all but said he would call the Legislature back again if the central piece of his fiscal plan to pull the state out of $3 billion-plus annual deficits is not adopted. Some members of the committee hinted that the governor has indicated he would back off that stance if the bill at least made it to a floor vote. Finance co-chair Rep. Steve Thompson, R-Fairbanks, summed up the situation in final comments before the vote: “I would like to see (SB 128) go to the floor and if it doesn’t we’ll be here next month.” Fellow co-chair Rep. Mark Neuman, R-Big Lake, made it clear that he would be a “No” vote on the floor because “that’s what my constituents expect of me,” he said, but supported moving the bill out of committee to give the full House a chance to resolve the matter. Rep. Dan Saddler, R-Eagle River, voted against moving the bill because he doesn’t feel “the Legislature has earned the public’s permission to go the revenue side” without further budget cuts. If Walker doesn’t call legislators back, or if they fail once again to adopt Permanent Fund reforms, he could partially veto the PFD appropriation in the operating budget that would pay checks of just more than $2,000 to each Alaskan this fall. When asked if he felt there is any way the currently calculated PFD for this year could be "held harmeless" during a June 15 press briefing Walker simply said, "No." Under the version of SB 128 that passed the Senate 14-5, dividend checks would be $1,000 for the next three years. The Senate Majority released a statement saying its members were “disappointed” in the House Finance Committee action. "We are facing uncertain times. SB 128 provided some level of certainty to help stabilize our economy and continue the divided program Alaskans have grown to rely on," said Sen. Anna MacKinnon (R-Eagle River), co-chair of the Senate Finance Committee. "The tough decisions have only just begun. We will continue to change the status quo and business as usual. The Senate stands ready to act." Republican Reps. Lynn Gattis of Wasilla and Tammie Wilson of Fairbanks both said the administration’s message about the importance of using the Permanent Fund’s earnings to partially pay for state government now has not adequately reached the people of the state. Gattis characterized it as the bill not being “ready for prime time.” “It’s been tough to try to convince the folks back home of what (budget) situation we’re in because we’ve had a great time, a great ride for these many, many years,” Gattis said. Wilson has been a clear opponent of any change to the Permanent Fund Dividend calculation that would likely lower future PFD payouts. “This is Alaskans’ money and I’m not going to take it from them,” Wilson said. She also asked Revenue Commissioner Randy Hoffbeck, who has been the administration’s point person — and the Legislature’s whipping post — on the Permanent Fund plan and the tax proposals, if a public referendum on restructuring the Permanent Fund was ever considered. “I think to simply say that every time you’ve got a hard decision you take it back out to the people — I don’t think that’s why the people — that’s not the way the system is set up; that’s not exactly (what) I think people expect from their legislators,” Hoffbeck responded. “I think they expect you to use your judgment because you will beyond the shadow of a doubt have multiple times more information to make the decision than the public will no matter how much time we put in trying to educate them on the issue.” He reiterated that the Permanent Fund was first set up to support the General Fund with the dividend program coming later, and continued: “I think when we talk about people owning the money in the dividend we also have to recognize that the people own the schools and the roads and other various forms of infrastructure and there needs to be money to keep those up and active and functioning and those don’t happen free of charge.” The administration has insisted since before the session that failing to overhaul how the state pays for its budget will drain state savings accounts and kill the dividend program and life as Alaskans know it within five years. That’s because of the belief that oil markets have changed worldwide, and a long-term return to the prices of $100 per barrel or more that would be needed to balance the current budget is a pipe dream. Thompson noted that the version of SB 128 as amended by the House Finance Committee that ultimately failed to move Friday guaranteed $1,500 PFDs for two years, with projected future payouts in the $1,000 range under the new formula. The version that passed the Senate by a wide margin guaranteed three, $1,000 PFDs with future checks likely just below $1,000. “$1,500, that’s larger than four of the dividends over the last six years,” Thompson said. He supported the bill on the belief that the Legislature will continue to reduce state spending in future years. Minority Democrats on the committee pushed back against the bill because they feel the budget is still too “bloated” with oil and gas tax credits to support a change how the Permanent Fund is utilized, as Rep. David Guttenberg of Fairbanks described the sentiment. Fairbanks Democrat Rep. Scott Kawasaki called the bill a “massive flat sales tax only on the shoulders of Alaskans.” Anchorage Democrat Les Gara, who has been a vocal critic of changing how dividends are paid, voted to move SB 128 to the floor, but did not indicate how he would vote if it had passed the Finance Committee. The House Finance Committee vote on SB 128 was as follows: Rep. Bryce Edgmon, D-Dillingham: Yes Rep. Les Gara, D-Anchorage: Yes Rep. Lynn Gattis, R-Wasilla: No Rep. David Guttenberg, D-Fairbanks: No Rep. Scott Kawasaki, D-Fairbanks: No Rep. Cathy Munoz, R-Juneau: Yes Rep. Mark Neuman, R-Big Lake: Yes Rep. Lance Pruitt, R-Anchorage: No Rep. Dan Saddler, R-Eagle River: No Rep. Steve Thompson, R-Fairbanks: Yes Rep. Tammie Wilson, R-North Pole: No Oil and gas loan fund approved; vote on taxes delayed Shortly after the House Finance Committee killed the Permanent Fund bill — at least for this special session — the full House quietly passed House Bill 246, which would establish a $100 million revolving loan fund for oil and gas infrastructure development projects within the Alaska Industrial Development and Export Authority. The bill received little attention during the regular session, but was a big part of the administration’s oil and gas tax credit reform plan. It would provide low-interest loans for companies in the place of some of the refundable tax credits that dominated debate late in the regular session. With the Senate all but formally adjourned and just holding technical floor sessions as the House worked through SB 128, it remains unclear what the Senate will do with the AIDEA loan program legislation. Votes on the motor fuel, mining and fishing industry tax increase bills were pushed back another day. It appears unlikely the tax hikes will pass the House if they are eventually voted on. Elwood Brehmer can be reached at [email protected]

Citing jurisdiction, Juneau seeks dismissal of head tax suit

The City and Borough of Juneau is asking a federal judge to throw out a lawsuit by cruise line representatives alleging the city misused tens of millions of dollars in revenue from passenger fees because the court doesn’t have the authority to rule on the matter. Attorney Robert Blasco, outside counsel for Juneau, wrote in a June 7 motion to dismiss the suit that the U.S. District Court of Alaska lacks jurisdiction to hear the suit that claims the city violated the U.S. Constitution by spending funds from vessel passenger fees on general government services. Cruise Lines International Association Alaska, or CLIA, which represents 12 cruise companies that operate in the state including some of the world’s largest cruise ship companies, filed the suit in April requesting a permanent injunction to the fees that total $8 per cruise passenger. Blasco cited the 1948 federal Tax Injunction Act, which prevents federal district courts from stopping collection of any state tax when the case can be heard in state court. “The Tax Injunction Act strips the federal courts of jurisdiction to enjoin or restrain the levy, collection, or assessment of state taxes, including local taxes authorized by state law, where plaintiffs can obtain adequate remedy in state court,” he wrote. The 14-page dismissal motion focuses almost entirely on the court’s jurisdiction as it pertains to the Tax Injunction Act, and does not rebut or significantly address the claims of misuse of head tax revenue CLIA cited in bringing the suit. The industry association contends the city spent more than $41 million collected from Juneau’s $5 per person Marine Passenger Fee and $3 per passenger Port Development Fee over roughly the past 15 years on projects and expenses not related to the cruise industry. That is potentially a problem because the Commerce Clause of the U.S. Constitution prohibits state and local taxes or fees imposed strictly on individuals engaged in interstate travel unless the money collected is used for projects or operations that benefit the travelers or are necessary to accommodate them. The vast majority of Alaska-bound cruises embark from Seattle. The State of Alaska also collects head taxes from cruise passengers and distributes that money to cruise ship ports-of-call communities. A state audit of how local governments have historically spent head tax revenue found with minor exceptions that the money was handled in accordance with the Commerce Clause. The audit did not investigate how local head tax revenues are spent. Juneau and Ketchikan — Alaska’s most visited cruise port communities — are the only locales with their own head taxes. However, Ketchikan is not a defendant in the suit. CLIA’s complaint alleges $22 million collected from the passenger fees, also known as “head taxes,” funded general government operating expenses; while another $11 million funded capital projects in the borough that “provide no direct benefits to the cruise lines’ vessels and passengers.” Likely the most visible illegitimately funded project, according to CLIA, is a manmade island being built in Gastineau Channel that includes a whale statue and is nearly a mile from the cruise ship docks. That is using $10 million in head taxes, CLIA claims. The dismissal motion contends that because the fees are imposed on all large cruise line passengers — nearly 1 million of which visit Juneau each summer — they qualify as taxes under the Tax Injunction Act. Blasco also wrote that because CLIA asserts the money in question was used for general government purposes, the Tax Injunction Act applies again. “The Ninth Circuit and other courts have repeatedly found assessments that were spend on such general uses as those alleged by (CLIA) to be taxes under the Tax Injunction Act,” he wrote. On the other hand, CLIA argues that because the head taxes are only levied on passengers of commercial vessels over 200 tons and those with overnight accommodations, they discriminate against large cruise ships, therefore requiring the revenue to be dedicated for cruise-related expenses. Elwood Brehmer can be reached at [email protected]

Walker wants balky House to act on using Fund earnings

All eyes are on the House Finance Committee. The only legislative committee meeting late in the special session, it met for nearly seven hours on June 14 to hear testimony from the administration, the Alaska Permanent Fund Corp., and the public on Senate Bill 128, the compromise proposal to establish a structured annual draw from the Permanent Fund earnings reserve account. The mechanics of the bill have been discussed at length since it was changed from an annuity-style draw to a percent of market value, or POMV, approach months ago in the regular legislative session. At this point, the focus is, unsurprisingly, on the dividend. SB 128 would change the Permanent Fund Dividend calculation from strictly a percent of Fund earnings to 1 percent of the Fund POMV plus 20 percent of state resource royalty revenue. The sticky wicket is that means this year’s projected record-high PFD of nearly $2,200 per Alaskan would be reduced to $1,000, as the bill also ensures $1,000 PFDs for three years, after which the new formula kicks in. The new formula is also projected to kick out dividends in the $1,000 range based on stock, oil price and production forecasts. The Senate passed the bill June 6 on a 14-5 vote, but House members hearing from constituents angry about the prospect of smaller checks are unwilling to make an unpopular vote. “Everybody knows the votes are not there (among House members) for this bill as it is written,” Rep. Les Gara, D-Anchorage, said June 14. Anchorage Republican Rep. Lance Pruitt said the concerns are bipartisan and that much of the worry is that SB 128 is the beginning of a “slow creep” to take the PFD away. In a June 15 press briefing Gov. Bill Walker commended the Senate for its June 6 vote that “ensured the dividend program would continue,” he said. “What’s remarkable about (the Senate) vote is it was a bipartisan vote. You had some Republicans; you had some Democrats. It was not a party line vote at all and I cannot thank them enough for that,” the governor said. Walker also reiterated what he, members of his administration and business groups that support revamping how the Permanent Fund is used have said countless times since the governor’s New Sustainable Alaska fiscal plan was unveiled in December. “Without changing, without Senate Bill 128, the Permanent (Fund) Dividend program in a few years will go to zero,” Walker said. “No one has disputed that. It’s not debatable.” That’s because without overhauling how state services are paid for, or without a dramatic and unforeseen rebound in oil prices, the current $3.5 billion or so annual budget deficit will drain the Constitutional Budget Reserve within two years. After that, the state would have to start burning through the Permanent Fund earnings “ad hoc” style, which the administration insists would eliminate the PFD by 2020. The 5.25 percent POMV draw called for in SB 128 would provide a smaller, but sustainable draw from the earnings of the Fund. It is supported by the nonpolitical Alaska Permanent Fund Corp. The governor added that “no action is unacceptable,” not-so-subtly implying that he will call the Legislature back into another special session if some form of Permanent Fund restructuring legislation is not passed by June 22, then end of this current 30-day special session. Walker talked with many members of the House by phone over the weekend, he said, and possible changes to the bill to garner more support were discussed. However, he told reporters that keeping the status quo on the dividend simply wouldn’t work. “We’re going to get across the finish line,” Walker said. That’s not how North Pole Republican Rep. Tammie Wilson sees it. She said emphatically during a brief and very poorly attended June 14 House floor session that cutting the dividend would be the “biggest mistake” the Legislature could make at a time when Alaska’s economy needs all the fiscal infusion it can get. “Reducing the dividend down to $1,000 could be one of the biggest things we could do to negatively affect our economy so therefore I don’t care how many times the governor wants to call us back if this bill (SB 128) doesn’t pass because I will stay here, and I know a lot of my colleagues will, to do what’s best for Alaskans no matter where this bill goes,” Wilson said. University of Alaska Anchorage Institute of Social and Economic Research Director Gunnar Knapp said in an interview that not infusing the economy with roughly $750 million — the collective PFD reduction — would undoubtedly impact the economy, but it’s not that simple. Knapp’s report entitled, “Short-Run Economic Impacts of Alaska Fiscal Options,” has been used continuously this year as a reference for measuring the potential impact of state budget cuts, new taxes and the like. In House Finance the banter was that the PFD cut would cost the economy upwards of 8,000 jobs. Knapp said his low-end calculation actually put the impact at about 4,200 jobs with a high potential impact of about 6,600 jobs. “Nobody wants to do anything that hurts — why would they? — except that we don’t have any choice. Over the next three to four years we’re going to have to do a few things that hurt and the sooner we do them the sooner we’ll fix the problem and the more savings we’ll be left with,” he said. “You can (preserve spending) by continuing to draw down on your savings but you need to think about the consequences of drawing down your savings.” The credit ratings agencies continue to hint at those consequences. Fitch Ratings quietly became the last of the “big three” ratings agencies to downgrade Alaska’s credit rating from AAA to AA+ when it announced the action June 14 as House Finance prepared for the first installment of its marathon meetings. On June 9, S&P Global Ratings — the first agency to downgrade its rating for Alaska back in January — put the State of Alaska on “CreditWatch with negative implications,” an indication that further, more significant downgrades are coming if a long-term budget solution is not realized. Walker said the downgrades send a message “across the country that something is wrong with Alaska.” His concern is that future downgrades would have a “chilling effect” on private investment in the state, the governor said. Revenue Commissioner Randy Hoffbeck said during the governor’s press conference that going from AAA to AA+ roughly equates to a 0.25 percent interest rate increase on bonds the state tries to sell, which alone is not catastrophic. “We recognize that AAA to AA+ is a fairly minor change — that one-quarter of 1 percent, even though it does add up — but we’ve got S&P saying they’re looking at a one, two or three more notch downgrade. Now we’re talking about really big dollars so there’s a lot of concern,” Hoffbeck said. The downgrades also impact local governments that bond for school and city projects on the back of the moral obligation of the State of Alaska, allowing them to capture better interest rates based on the state’s credit rating. Elwood Brehmer can be reached at [email protected]  

CIRI partners with Doyon on Nenana drilling

Doyon Ltd. is teaming up with Cook Inlet Region Inc. to fund its exploratory drilling in the Nenana basin this year, the Alaska Native regional corporations announced June 14. Two weeks earlier, Doyon spud the Toghotthele No. 1 well on a large gravel pad about seven miles west of the town of Nenana. The 10,000-foot Toghotthele well, which is the beginning of the shared investment, should reach the anticipated resource-bearing rocks by late July, Doyon leadership has said. “We are excited about this new partnership with a fellow Alaska Native corporation,” CIRI President and CEO Sophie Minich said in a joint release. “The Nenana basin offers a promising opportunity to meet the energy needs of Interior Alaska and provide additional benefits to our shareholders.” Doyon also hopes to drill a second well on the pad later this year to better delineate the results of Toghotthele No. 1. “We are beyond pleased to be partnering with CIRI in our exploration efforts. CIRI’s commitment speaks to the potential of a commercial-sized oil or gas find in the Nenana basin and their confidence in our efforts so far,” Doyon CEO Aaron Schutt said. Doyon holds 400,000 acres of state leases in the Nenana basin and has subsurface mineral rights to another 42,000 acres. It has been exploring in the area on and off since 2005 and has drilled two wells — the latest in 2013 — that indicated hydrocarbon-bearing formations worthy of further investigation. As is typically the case, Doyon’s primary target is oil, but the desire for a natural gas supply in Interior Alaska would seemingly provide a suitable market in the event of a significant gas find. When Doyon first announced its intent to drill the Toghotthele well last summer it put the odds of a commercially viable natural gas discovery at 50-50, and the likelihood of a significant oil play at about 20 percent. CIRI spokesman Jason Moore said those are the probabilities CIRI invested in the first well on, but the Southcentral region Native corporation is ready to extend the partnership should the well results warrant further drilling. “We really do view this as we’re investing in more than a well. We’re investing in an exploration program,” Moore said. In an interview, he said he could not disclose the terms of the partnership, but CIRI is taking a working interest share in the well and Doyon will remain as the operator, given its experience in the basin. The well is being drilled with a rig owned by Doyon Drilling, a subsidiary of the regional corporation. The partnership had been in the works for several months, according to Moore, and he said he could not recall a similar deal. “As far as a major investment partnership with another regional corporation, this may be a first for CIRI,” he said. Doyon spokeswoman Charlene Ostbloom said the corporation partnered with Arctic Slope Regional Corp. early in its exploration around Nenana, but she was not aware of any other business ventures with regional corporations. The state is also chipping in on the Nenana work. While the contentious oil and gas tax credit reform package passed by the Legislature earlier this month focuses on reducing state subsidies for Cook Inlet and North Slope activity, it extends a “Middle Earth” credit that funds 80 percent of drilling costs up to $25 million for the first two wells in each of the state’s six identified frontier basins. That credit was set to expire next month, but will remain in place until July 2017 if Gov. Bill Walker signs the legislation. Schutt has said the state’s Middle Earth oil and gas exploration tax credits were important in progressing Doyon’s previous drilling. Ahtna Inc., another Alaska Native regional corporation, is similarly drilling for gas near Glennallen. The administration pushed hard for cuts to the overall tax credit program, but also supported extending the Middle Earth credits to allow Doyon and Ahtna to complete their work that has been planned for some time. Doyon has also conducted 3-D seismic programs looking for likely oil and gas formations in the Yukon Flats region northeast of Fairbanks in recent years. Similarly, CIRI is becoming more active in the industry. Moore said the Nenana investment along with a seismic program shot on CIRI land on the Kenai Peninsula signifies “a bit of an evolution” by the company into the oil and gas realm. Elwood Brehmer can be reached at [email protected]  

AGDC hires Houston LNG exec as new CEO

The Alaska Gasline Development Corp. will have a new leader as of June 15. That is scheduled to be Keith Meyer’s first day on the job as AGDC’s president and CEO. Meyer will join AGDC from LNG America, a Houston-based energy logistics firm he founded in 2008 that focuses on increasing the use of LNG as a fuel for the maritime and transportation industries, according to an AGDC release. The hire was announced at the corporation’s monthly board of directors meeting Thursday morning. It comes nearly seven months after Dan Fauske resigned from the position at the request of Gov. Bill Walker last November. At the time, Walker commended Fauske, who had led AGDC from its inception, for his work there, but said the state needed someone with more direct experience in the pipeline and LNG industries. Prior to leading AGDC, Fauske had a long career in finance with the Alaska Housing Finance Corp. Meyer is starting on a three-year contract with a base salary of $550,000. He will be eligible for an annual performance bonus of up to $200,000, which will be decided by the AGDC board. Fauske’s salary was $360,000. As its name implies, AGDC is the organization leading the state’s efforts — currently focused on the Alaska LNG Project — to export North Slope natural gas through a pipeline project and get a portion of that gas to communities along the project corridor. “Keith’s contribution will be immediate and impactful. He’s a proven leader who understands what’s at stake in Alaska, and possess the skills and experience we need at this critical time in the development of our natural gas pipeline and LNG project,” AGDC board chair Dave Cruz said. “Keith believes in Alaska and in the mission of AGDC. I’m proud to welcome him aboard.” Interim president Fritz Krusen will return to his role as a vice president with AGDC. “Fritz did a heck of a job when he was called upon,” Cruz said succinctly at the meeting. AGDC vice chair Hugh Short, who led the board’s executive search, said Meyer has already met with key legislators. “We are entrusting (Meyer) with a significant task, but I think he has the ability to carry this project through,” Short said. Meyer has 15 years of experience in the LNG business and more than 35 years of broad experience in the energy industry, according to AGDC. Prior to founding LNG America, he led Houston-based Cheniere LNG as it developed the Sabine Pass LNG terminal in Louisiana, the country’s largest LNG receiving terminal. Meyer is joining AGDC at a critical time for the $45 billion-plus AK LNG Project. Much slower than expected progress on commercial negotiations between the project’s producers, BP, ConocoPhillips and ExxonMobil, as well the double whammy price collapse of the world oil and LNG markets have added to the already long list of challenges the any mega project faces. “Alaska is engaged in one of the largest energy projects in North America. I’m excited by the challenge and incredibly honored by the trust and confidence the board is placing in me. I understand how vital the gas pipeline and LNG project are to our Alaskan economy, and I’m committed to getting them built,” Meyer said in a formal statement. He was preparing for a family wedding and thus unable to attend the Thursday AGDC board meeting, corporation spokesman Miles Baker said. Elwood Brehmer can be reached at [email protected]

Senate votes to tap Fund earnings to fill deficit

Fourteen Alaska state senators were willing to put their names in the “Yea” column and vote to use the Permanent Fund’s profits to pay for government services and restructure how the annual dividend payment is calculated. The question now is how many in the House are willing do the same? Hours before the June 6 Senate floor vote, Sen. Peter Micciche, R-Soldotna, said just prior to moving the bill out of the Finance Committee and to a floor vote, that the decision is a politically painful but fiscally responsible one. “I certainly didn’t sign up, when I was elected four years ago, to say, ‘I want to be the guy — I want to be the guy to be the first one to have to use the earnings of the Permanent Fund,’ but the reality of it is that’s where we are and I think it’s the responsible thing to do,” Micciche said. “It’s a tough vote, but I know that’s why my district sent me here, to make those tough decisions and be well-informed in those decisions and make sure we’re not being wasteful in any one of those (state) departments. So I’m not excited about this bill going to the floor, but duty calls.” The floor vote to restructure the Fund made for odd bedfellows. Republican Sens. Mike Dunleavy, R-Wasilla, and Bill Stoltze, R-Eagle River, from two of the most conservative districts in the state, joined Anchorage Democrat Sens. Berta Gardner, Johnny Ellis and Bill Wielechowski in voting against Senate Bill 128. Wielechowski said in floor testimony that changing how the dividend is calculated, and setting the PFD amount at $1,000 per Alaskan for the next three years, “is a regressive tax. I don’t think there’s any doubt about it.” He touted that Alaska has the lowest income inequality of any state, thanks in large part to the PFD. “I made a promise to my constituents that I would not cut their Permanent Funds, their dividends,” Wielechowski said. Dunleavy said in the bill’s last Finance Committee hearing that he could not support using the Permanent Fund for government services until significantly more budget cuts were made. The earliest the House could take up the bill is the week of June 13, as legislators have been forced out of hotels in Juneau for the latter part of the week and weekend for the long-planned Celebration, put on by Sealaska Corp. An overhaul of the Permanent Fund status quo is the centerpiece to Gov. Bill Walker’s New Sustainable Alaska Plan along with cutting spending and increasing taxes to get the state out of its fiscal crisis by 2019. The actual size of the budget deficit changes daily with oil prices and who is talking, but it is still somewhere between $3.5 billion and $4 billion, even after the latest round of budget cuts. “I thank members of the Senate for taking this important vote to but Alaska on the pat for a sustainable future. We recognize the concern some have raised about the need for balance, which we have addressed through the remaining pieces of the New Sustainable Alaska Plan,” Walker said a statement from his office late June 6. “Restructuring the Permanent Fund is the cornerstone of this plan, and a significant portion of it, but make no mistake — the work to put Alaska on a sustainable path is far from over. I applaud the Senate for taking this bold step.” A week earlier the governor called a press conference and openly scolded legislators for not moving ahead sooner on his tax and Permanent Fund proposals to balance the budget. While SB 128 is technically “the governor’s bill” that the administration introduced at the start of the regular session, the mechanics of it have been changed to more reflect what was first proposed in April 2015 by outgoing Anchorage Republican Sen. Lesil McGuire. It uses a percent-of-market-value, or POMV, approach to calculate how much money the state can pull from the earnings account of the Fund each year. SB 128 sets a 5.25 percent POMV draw, meaning 5.25 percent of the Fund’s five-year average overall value will be used to pay for government and the dividend checks. Drawing from the earnings of the Permanent Fund as prescribed in SB 128 would roughly cut the projected annual deficits in half by allowing the state to apply $1.8 billion in Fund earnings directly towards deficit reduction. Another $700 million in earnings would pay this fall’s $1,000 dividend, as it would for the two following years. Dividends in the out years would come from 20 percent of the POMV draw, which amounts to 1.05 percent of the Fund value, and 20 percent of the state’s royalty revenue. Combined, they are projected to total about $1,000 for the foreseeable future. But given the PFD would then be based on market performance, oil production and oil price, long-term PFD amounts under SB 128 are still anyone’s guess. In a case of unfortunate timing, this and last year’s PFDs, based on the current calculation formula — strictly on the market performance of the Fund — were and are more than $2,000, some of the largest checks ever paid. Had the change been necessary in 2012 or 2013 when the financial collapse of 2008-09 shrunk the PFD to about $900, the $1,000 checks proposed in the bill would not be a PFD cut. On the floor, McGuire called the POMV approach a “tried and true method of money management,” noting that it is how the vast majority of endowment funds are managed worldwide. “This bill is the most important thing that I will do in my 16 years (in the Legislature) and I will dare to say the most important thing that anyone in this room will do in their political career,” she said. “It is the main step towards stabilizing Alaska’s future.” Sen. Anna MacKinnon, R-Eagle River, noted that without revamping state fiscal policy, ratings agencies have said they will be forced to further downgrade the state’s credit rating, which will impact the ability of local governments and the state to bond for needed projects, including a gasline. McGuire emphasized that the principal of the Fund, comprised primarily of invested state resource royalty income, is constitutionally protected, but the dividend is not. She, as Micciche did in the Finance hearing, and the Walker has for months, referred to the Permanent Fund as a “rainy day account to preserve revenue that came from nonrenewable commodities.” No one discussed dividend checks when the Fund was created, McGuire said. However, “We’re obligated to reflect on the laws that we pass and to say that in 2016 the world looks very different than it did in 1982,” when the dividend program was established, she said.

Oil tax credit bill passes by one vote

It’s in the governor’s hands now. After coming out of a House-Senate conference committee earlier in the day, House Bill 247 was quickly passed by the Legislature June 6 with little fanfare given the consternation the oil and gas tax credit legislation has caused since Gov. Bill Walker introduced it in January. The version of HB 247 sent to the governor’s desk is essentially the same version of the bill that passed the Senate a few weeks prior, at least as far as finances go. As a result, it passed the Senate easily. In the House, it was a different matter. Because the hours of debate, rhetoric and grandstanding that typically accompany controversial legislation were spent when the bill was on the House floor several weeks ago, it was simply time to vote. With Anchorage Republican Rep. Mike Hawker, a staunch supporter of the tax credits, back in Juneau after missing most of the session to receive cancer treatment in Anchorage, the milder HB 247 passed the House on a 21-19 vote. Because it only goes about half as far in cuts and revenue generation as his bill, it remains to be seen what Walker will do with it. The governor has a policy of generally not commenting on pending legislation. As the previous House and Senate versions did, this HB 247 limits future refundable tax credits for work in the Cook Inlet basin to the companies with a presence there already. However, those credits will also be short-lived, as the bill ramps down the percentage of capital expenses the state will reimburse in 2017 and wholly eliminates the Cook Inlet basin tax credit system in 2018. Increased activity in the Inlet in recent years — driven to some extent by the availability of the credits — has roughly doubled oil production and significantly grown the Southcentral natural gas supply. That activity has also cost the state between $260 million and $400 million in annual refundable credit payments since fiscal year 2014 for areas outside of the North Slope, according to the Legislature’s consultant firm Enalytica. With very little “Middle Earth” oil and gas activity in the areas between the Slope and the Inlet, companies working in Cook Inlet earned the vast majority of those credit totals. The Department of Revenue had projected the annual payment of Inlet-area credits to naturally decline over the next few years for several reasons, meaning the actual “bottom line” impact of HB 247 won’t fully reverse the high-spend years. Rather, it will accelerate Revenue’s prediction. Overall, the bill is expected to save the state about $160 million per year by the time it takes full effect in fiscal year 2020. That’s roughly half the dollar figure that the version of HB 247 that passed the House in mid-May would have saved through credit cuts and generated through tax tweaks, according to Tax Division reports on the bills. As for the Slope, all recent iterations of the bill close a loophole that allowed companies producing “new oil” eligible for the 20 percent Gross Value Reduction credit to use the GVR to enhance, or grow, a reported operating loss to the point that it would be greater than the actual operating loss. While a GVR-enhanced operating would occur mostly at times of very low prices and amount credit totals in the single-digit millions of dollars, there was largely consensus among legislators the state should not pay companies more than their actual incurred losses through the Net Operating Loss credit. It is how the Net Operating Loss, or NOL, credit is handled, or not, that is the biggest difference between the HB 247 that first passed the House with minority support and the one that squeaked by on a majority-led vote June 6. The HB 247 that is on its way to Walker retains the 35 percent refundable NOL credit for small North Slope producers. The majors are able to deduct losses at time of high expense or oil low prices from production tax liabilities in future years.  Rep. Paul Seaton, R-Homer, testified in a brief floor debate June 6 that not cutting the NOL — as the bill that previously passed the House did for all but the very smallest producers — will basically leave the state without production tax to collect if oil prices stay relatively low as forecasted. “The problem is that we’re anticipating oil prices varying between $40 and $60 (per barrel) for some time in the future, which is the worst possible situation where we will have in the less than $46 (per barrel range) — we will be generating hundreds of millions of dollars of loss carry forward credits, which are then applied in the subsequent years when the price goes up towards $60 and takes the tax below the floor to zero,” Seaton said. “And so that means that as we address other issues of fiscal stability we are totally hamstrung, because there will be no production tax in the anticipated oil price ranges.” The basic North Slope NOL credit was one of the few areas of the state’s oil and gas tax credit system the administration’s original bill did not touch. Despite basically being the Senate’s bill, the compromise to the compromise of HB 247 did adopt the House language to annually disclose the names of the companies receiving direct tax credit payments and the individual amounts they received. The Senate bill allowed the state to disclose the amount paid for each type of credit without disclosing specific credit holders. Current law only allows the Department of Revenue to disclose the aggregate amount of credits earned in each basin, without revealing the type of credits or to whom they were paid. While some legislators sided with industry and opposed any “confidentiality” change, several general supporters of the tax credits in the Legislature acknowledged the lack of disclosure to be a hindrance to fully understanding where the state is making sound or ill-advised investments.

After Alaska successes, FAA weather cam program expands

What started as a small program to help Alaska pilots that fly some of the most dangerous routes in the state is ready for the big time, and your smartphone. “We help reduce CFIT (controlled flight into terrain) accidents,” said Walter Combs, who is the Federal Aviation Administration’s Weather Camera Program manager. “We give pilots enough information that they look before they launch. They used to fly out to see if they could go and turn around and come back if they couldn’t. Now, they take a look and see if they can go and if they can’t they sit on the ground and wait until they can.” Despite being based in Anchorage, his title mentions nothing about Alaska. That’s because there is nothing regional about his program, other than it started quietly in Alaska nearly 10 years ago. Combs and his 10-person team design, install, maintain and repair nearly 900 cameras at 228 sites across Alaska. Those cameras are often in locations specifically chosen for their isolation, difficulty of access and virtually perpetual inclement weather. “We serve anybody flying,” Combs said simply. And the idea is simple enough, too. Give small aircraft pilots an eye to look beyond the mountain peaks visible from the runway and push back against the temptation to take unnecessary risks because one is already in the air. Combs said the high rate of avoidable flight accidents and deaths in the state meant something had to be done. “We got started because there were so many CFIT accidents,” he said. Combs noted one of Alaska’s most popular, and notorious, mountain passes, Merrill Pass, as a prime example of the need for the weather cameras. Named after Russel Merrill, the pilot who first traversed the route from Anchorage and over the Alaska Range to the Kuskokwim Valley in 1927, Merrill Pass is home to two of Combs’ camera sites. Anchorage’s Merrill Field is named after him as well. “If you fly through Merrill Pass in the summer you can just see this (plane) wreckage scattered all over,” Combs said. The program has worked. The FAA required hard data to justify funding the program when the first cameras were installed in 2007. At that time, Alaska had an average of 0.28 weather-related flight accidents per 100,000 flight hours. A third-party consultant developed an algorithm that set targets to reduce the frequency of weather-related crashes by about 10 percent per year in the early years of the program. By 2011, the actual number of weather-induced accidents had been cut by more than half, to 0.13 per 100,000 flight hours. In 2014, the rate was down to 0.04 per 100,000 hours, or an 86 percent reduction in crashes caused at least partially by weather, according to the FAA. But the cameras do more than improve safety; they also improve operational efficiency. As Combs said, pilots no longer have to be in the air to see an impenetrable cloudbank for themselves. They can check the trouble spots of their route from the terminal, or the hangar or their office — wherever the nearest computer screen happens to be. Combs said he has received testimonials from pilots who would regularly fly into Lynn Canal north of Juneau up to six or seven times per day only to be turned back before cameras were installed at two sites along the route. Again back in 2007, when the first 80 sites were installed, the FAA estimated Alaska pilots unnecessarily flew for more than 15,300 hours on flights that would ultimately be cut short by inclement weather. Unnecessary flight time logged was down to about 5,000 hours by 2014, based on FAA data. Combs contends the actual number is still less than that. “What (pilots) are not doing is taking chances in those passes, what we call pinch-points, or hazard areas where weather is known to sock in,” he said. User-friendly upgrades to the program’s website have encouraged more use, meaning the safety and efficiency metrics should keep getting better, although it will likely be hard continue the impressive year-over-year improvements. The website avcams.faa.gov averaged 27 million hits per year in the program’s first eight years. The reformatted website, with added information, quicker and easier navigation and always more cameras, pushed the number of views to nearly 200 million in 2015 alone. Combs said several small flight service operators have added the weather cameras to their “ops specs.” In other words, the pilots are now required to check the cameras along their route as part of their pre-flight routine. Alaska Air Carriers Association Director Jane Dale confirmed that and said Combs gets nothing but “high marks” from her members. “The carriers don’t do anything until they look at the cameras,” Dale said. It’s more than just one photo of the horizon, however. Most sites, except those with partially obstructed views, have four cameras to show incoming our outgoing weather in any direction. Weather conditions not viewable in a still photo, such as temperature, wind, barometric pressure and cloud ceiling are also provided. Additionally, camera shots taken in 10-minute intervals are stored for six hours, allowing pilots the opportunity to review how the weather is changing — is it getting better or worse? Combs said National Weather Service officials in Juneau are also taking advantage of his program to make their forecasts. After a recent tour of the NWS Alaska office he said, “The forecasters will have all the cameras on that are in their section that they’re doing the forecast on.” He has also taken requests from commercial fisherman in Southeast Alaska for cameras near their favorite fishing grounds, Combs said. To date, the FAA has invested about $25 million in the program over nearly a decade, according to Combs, a relatively small amount of money when one considers the locations of some of the equipment. One of the newest sites, per a Parks Service request, is situated on Kahiltna Glacier at the foot of Denali. When word gets around that Combs’ team is looking to establish a camera site somewhere in the state, locals often do their best to make his job as easy as possible, exemplifying the understood value of the program, he said. “Wherever we can get commercial power, we do. And that’s interesting because most people that we approach are willing to give us free power and free (Internet) communication if they have it,” Combs said. “So we’ve got a lot of sites out here where I’m not paying for any power, I’m not paying for any communication.” In those places without power, the program team has developed solar and wind power modules to energize the cameras that must operate with only one maintenance trip per year. FAA Alaska Region Administrator Kerry Long said much of the Weather Camera Program’s success is due to the direct connections Combs has made with the industry. He’s managed to cut through the bureaucracy the FAA is known for. “There aren’t six levels of getting things done. It’s Walter that makes these decisions,” Long said. “There’s no largesse to it. If you can convince Walter that there’s a need and you’re a user, assuming we can afford it, he’ll do it.” Now, the program is on the verge of expanding to the Lower 48, Combs said, at the request of the National Transportation Safety Board, which has requests for future sites in many mountainous regions of the West. That expansion will largely depend on funding. But in the more immediate future, more website improvements and Android and IOS mobile apps are currently in the works and should be ready for the public early this fall, Combs said. The new website and the mobile apps will allow pilots, or the countless other camera users, for that matter, to save and recall their favorite routes. Efforts are also being made to add more local flight information, such as NOTAMs (notices to airmen), according to Combs. He has 40 pilots actively testing the apps this summer. “They’re using the app every day. In fact, we’re using Survey Monkey for their feedback,” Combs said. “We’re on track. We’re giving pilots what they’re after. It’s really cool. It’s really neat to do.” Elwood Brehmer can be reached at [email protected]

‘Middle Earth’ tax credit debate reaches Interior gas project

The tentacles of the debate over oil and gas tax credits have reached the state’s effort to expand access to natural gas in and around Fairbanks. On May 14, the Senate Finance Committee sent a letter to Gov. Bill Walker asking him to delay the sanctioning of the Interior Energy Project at least until Doyon Ltd. has drilling results from its exploration of the Nenana basin. The request comes as the Alaska Industrial Development and Export Authority is preparing to make a final investment decision later this summer on a plan to truck Cook Inlet-sourced LNG to the Fairbanks area. Walker wrote in a May 17 response that a projected IEP delay of about 60 days to wait for Doyon’s results isn’t unreasonable, but that he would have to determine if AIDEA can legally delay the project. In March, AIDEA selected Salix Inc., a subsidiary of the Washington-based energy utility group Avista Corp., as its preferred private project partner. Salix was the authority’s choice from more than a dozen responses to a request for proposals last summer. Doyon did not participate in the competitive bid process. Specifically, the Finance Committee letter notes the administration’s support for extending tax credits for exploration work done in the “Middle Earth” basins of Alaska, those areas other than the Slope and Cook Inlet, by a year to July 2017. Those credits are refundable for 80 percent of exploratory well costs up to $25 million per company per year. Fairbanks Republican Sen. Pete Kelly, a Finance co-chair, was the only committee member to not sign the letter that originated from the office of fellow Finance co-chair Sen. Anna MacKinnon, R-Eagle River. Currently, Doyon, the Interior Alaska Native regional corporation is searching for oil and gas in the Nenana basin about 60 miles southwest of Fairbanks. Ahtna Inc., another Alaska Native regional corporation, is similarly drilling for gas near Glennallen. The Middle Earth credits were set to expire in July of this year, but were ultimately extended to July 2017 in the final version of House Bill 247 that passed the Legislature June 6. By subsidizing both Doyon’s work and the Interior Energy Project, the state seems “to be competing against ourselves by supporting both projects,” the letter states. Fairbanks is likely the only significant market for Doyon, should the company make a commercially viable gas discovery, absent a large export pipeline to tap into. Sources familiar with the Nenana work say the state could end up spending $50 million or more to reimburse Doyon for its earned credits. The company drilled its first two exploration wells in the area searching for oil in 2009 and 2013. Doyon Lands and Resources Vice President Jim Mery said in an interview that a third test well was spudded late May 31 and should reach the suspected resources by late July. There is also potential to drill a second well on the same pad later this year to delineate any reservoir find, he said. Drilling results from the well likely won’t be available until mid-November at the earliest, according to Mery. “The chances of success we think are greater on gas compared to oil but oil is still a target substance that we’re pursuing,” he said. The company has put those chances of success at about 50 percent for gas and 20 percent for oil in testimony to the Legislature. MacKinnon emphasized in an interview that the committee supports getting lower cost energy to Fairbanks, but said Finance members occasionally mentioned Doyon’s efforts when discussing the Middle Earth credits and how it could all relate to the Interior Energy Project. “Why would we spend money incentivizing something if there’s no market?” she said. “What we’re looking for is return on investment.” Assigned by the Legislature in 2013 with the ambitious task of getting natural gas to Interior residents for a price of roughly $15 per thousand cubic feet, or mcf, the authority’s IEP team has expressed substantial confidence in its latest project plan. A prior effort to truck North Slope LNG to the region — as directed by the legislation providing financial backing to the project — fizzled in late 2014 due to burdensome construction costs for a Slope-based liquefaction plant. While progress is being made to meet the project’s price goal and get more natural gas to the region by early 2018, lower oil prices have all but eliminated the price delta between fuel oil and natural gas at $15 per mcf on an energy equivalent basis. This has challenged the project further because it is believed less residents will be willing to spend potentially thousands of dollars to convert their home heating systems to natural gas without immediate cost recovery, despite the air quality benefits gas would provide, and the six committee members cited that as well. “Not only would an IEP (final investment decision) at this time result in an investment unlikely to provide the intended price relief for several years at a minimum, it would also reduce the incentive for Doyon to execute their project,” the letter states. It’s believed Doyon could supply gas for “multiple dollars (per mcf) cheaper” than the IEP, MacKinnon said. That would be because the gas would simply flow via a 60-mile pipeline to utilities and not have to be converted to LNG, trucked north and then regasified before being ready for use. AIDEA has about $120 million invested in the project so far, according to its latest quarterly report to the Legislature. Of that, $52.7 million is in loans issued to utilities to fund distribution pipeline build out in Fairbanks and North Pole. Most of that work went on last year. The authority also purchased Fairbanks Natural Gas, the city’s small private gas utility, in 2015 for about $54 million. Plans are to transfer ownership of FNG and integrate it into the borough’s Interior Gas Utility. When that happens AIDEA will recoup its investment, according to authority leadership. Walker’s spokeswoman Katie Marquette said the administration is still evaluating the situation. “Ultimately, I know that your goal is the same as mine: to ensure that consumers in Fairbanks are provided the lowest possible price for clean burning natural gas,” the governor wrote to MacKinnon. “I look forward to continuing to work with you, and all members of the Senate to achieve that end.” AIDEA spokesman Karsten Rodvik wrote in an email that the authority is aware of the correspondence but is not in a position to comment. Detailed negotiations between Salix and the authority are progressing, but there is nothing binding between the two, Salix spokeswoman Jessie Wuerst said. “We are one piece of the supply chain (the LNG plant),” she said. “Where the gas supply comes from is up to AIDEA.” Oil prices hovered around $100 per barrel in 2013 when the legislation to fund the project with more than $330 million in state grants and low-interest financing passed with broad support from Legislators statewide. At those prices, fuel oil was near $4 per gallon in the Interior, or about twice the cost of $15 per mcf natural gas on an energy equivalent basis. Mery said Doyon could conceivably start supplying gas in late 2019 if commercially viable reserves are discovered this year and a sanctioning decision is made next summer. However, Doyon would face many of the same issues AIDEA has in keeping the Interior Energy Project afloat, Mery said, the main challenge being the lack of economies of scale. If Doyon finds gas and moves ahead, “one of the biggest variables is going to be the pipeline tariff and that’s going to be driven by volume, so the more (customers) the better,” he said. Elwood Brehmer can be reached at [email protected]

Walker to Legislature: Your job isn’t done yet

Gov. Bill Walker made it clear June 1 that he does not think legislators finished their work when the passed the state operating and capital budgets a day prior. That’s because the budgets are funded fully with draws on the Constitutional Budget Reserve savings account, or CBR, and not partially with the measured annual draw from the Permanent Fund Earnings Account he has pushed for since late last year. By passing the operating budget, however, legislators did avoid forcing the Department of Administration to send out required “pink slips” to state employees that would have been laid off during a government shutdown had a budget deal not been reached by June 30, the end of the current fiscal year. State employees must be notified 30 days prior to being laid off. “Layoff notices will not go out today based on what happened yesterday,” Walker said at the start of a press briefing. “That’s a good thing but it’s certainly a long way from being over.” Then, he, Revenue Commissioner Randy Hoffbeck and Budget Director Pat Pitney took legislators to task for the next half-hour. “Do we have to go broke before we fix Alaska? I guess that’s my question to the Legislature. Do we actually have to do that? Do we have to become Puerto Rico?” Walker said emphatically. Shortly after passing the budgets May 31 House Speaker Rep. Mike Chenault, R-Nikiski, said he hasn’t seen that the governor is “willing to work for” the tax increases and Permanent Fund restructuring plan that the administration has proposed. “I too am looking forward to the governor engaging,” said House Majority Leader Rep. Charisse Millett, R-Anchorage. “I think it’s time for his administration to come forward and have their modeling ready and have some of the issues that we’ve asked them for — have them ready so our members and their respective committees can get that information.” Walker said he and members of his administration have had more than 400 meetings with legislators and there have been at least 120 legislative committee hearings on the individual bills that collectively make up his New Sustainable Alaska Plan to balance the state budget by 2019. Subsequently, he said he was “offended” by the comments from legislators about the administration effort and Hoffbeck referred to them as “disingenuous,” though neither directly cited who made the comments they were referring to. “I’m offended by that because I’ve watched this team travel the state thousands of miles to sit down with community after community, group after group, legislative group after legislative group to present the plan,” Walker said. “So if somebody doesn’t understand the plan at this point or a legislator feels that we haven’t done enough I say they haven’t paid enough attention to what we’ve been doing.” He also reiterated that the administration has held two town hall-style meetings for legislators to brief them on the various aspects of the complex and comprehensive budget proposal. “When we presented this plan to (legislators) last December we said if there’s a better plan let it come forth. No other plan came forth. For many their plan was really just to take shots at pieces of our plan. That’s not a very good plan. We will continue until the very last day of the (special) session to engage with them in every way that’s appropriate. There’s nothing we won’t do at this point. It’s that critical,” Walker added. Republican-led majority leadership in both the House and Senate has said the personal income and industry tax increase proposals put forth by the administration are all but unpassable this year. Hoffbeck said that each individual tax increase will not have a major impact on the respective industries. With the income tax, the expected revenue from the overall tax package has been pegged at about $400 million per year. “The economics of these various industries (oil, fishing and mining) is driven by the commodity price. These taxes are not going to have a significant impact on these industries,” he said. Pitney contended that the operating budget compromise that was touted by leaders of both parties, with roughly $4.4 billion of unrestricted General Fund money, really just masks the larger problem. While legislators said the budget decreases the annual budget deficit from $3.8 billion to about $3.2 billion, the $600 million difference was made up with one-time draws of unspent funds from the current year’s budget and will come home to roost when the budgeting process starts over. “We haven’t significantly moved the budget dial and without a fiscal plan the CBR won’t be able to fund the budget in (fiscal year 2018),” Pitney said. The compromise that seemed to be reached on establishing a statutory annual draw from the earnings of the Permanent Fund — the centerpiece to the administration’s fiscal plan — would cut the deficit by about $1.8 billion. That money could be added to the general fund at any time in fiscal 2017, Pitney said, meaning the Legislature could still pass what has historically been viewed as an Alaskan political death nail to reduce the deficit by about half. House Finance co-chair Rep. Steve Thompson, R-Fairbanks, said the Permanent Fund bill — amended mid-session from the governor’s version to be identical in the House and Senate, seemingly indicating a workable compromise — would be taken up later in the week with small changes. “I hear a lot of discussion about ‘these are difficult decisions.’ Well, they may be politically difficult and challenging but they’re fiscally responsible and that’s why we were elected, to come and make these decisions,” Walker said. “I’ve heard lots of discussions about, ‘let’s get through the next election; we’ll do it after the next election.’ It’s time we stop talking about the upcoming election or reelection and start making decisions about what’s best for Alaska right now. I think Alaskans will embrace that kind of leadership — that kind of whatever it takes to get the job done.” Walker wouldn’t commit to saying he planned to call special sessions until the Permanent Fund bill passed but added, “When I say we need to get the job done this year, I mean this year.” On oil tax credits, an issue the industry has emphasized needs to be left alone as it struggles through a low-price period right along with the state, Walker said matter-of-factly, “Those that say they want status quo — status quo is not on the menu anymore for anyone.” Elwood Brehmer can be reached at [email protected]  

REI announces move to FEED for Cook Inlet gas project

Plans for a small-scale natural gas liquefaction and export facility at Port MacKenzie continue to move ahead despite current market challenges. Resources Energy Inc. Vice President Brian Murkowski said May 30 that the company plans to move the project into the front-end engineering and design, or FEED, stage within the next few months. Right now, work to minimize the cost of the 1 million ton per year LNG plant to less than $1 billion is ongoing, REI General Manager Mary Ann Pease said in an interview. Gas for the plant would be sourced from Cook Inlet. “Optimizing that cost and bringing it down as much as possible is the focus right now,” Pease said. “A billion dollars does not make a very economic project and the more we can refine that the better.” Original capital estimates for the plant were in the $1.2 billion to $1.8 billion range. Pease has said another $1 billion would be needed to purchase a gas supply for the plant. By comparison, the mega Alaska LNG Project to export North Slope natural gas is planned as a 20 million-ton per year project at a rough cost of more than $45 billion. The FEED should take roughly two years, at which point a final investment decision would be made, Murkowski said. Construction would then take about another two years to put start-up sometime in 2020 or 2021, he said. Local Japanese government officials from the Kyoto Prefecture and Maizuru City toured Port MacKenzie May 30 and said in a Matanuska-Susitna Borough release that they were impressed with the available space at the port as well as its ability to handle large vessels despite Cook Inlet’s extreme tidal fluctuations. They also met with Mat-Su Borough officials who have long pushed for development of the industrial port site across Knik Arm from Anchorage. Kyoto and Maizuru City are prospective purchasers of the LNG the plant would produce for municipal and industrial use. Pease said the Japanese delegation members continue to emphasize Alaska’s ability to reliably support the country’s energy security. Alaska’s location, less than a week’s sail from East Asia, is another benefit, she said. ConocoPhillips’ LNG plant in Nikiski started supplying the country with LNG in 1969 and REI hopes to continue that good relationship. This time though, the Japanese delegation is interested in investing in the entire supply chain and not just purchasing LNG, she said. Pease acknowledged the obvious challenges for any LNG export project these days, given the depressed spot market. In April LNG sold for as low as $4 per million British thermal units delivered to East Asia, by far the lowest prices in recent years, according to the Federal Energy Regulatory Commission. Just three years ago when REI began investigating Alaska as the location for a potential project the spot price for Asia LNG was nearly four times what it is today. Pease said the market is simply oversupplied, but also noted an LNG plant is a long-term project. “The primary focus right now is those continued good relationships (between Alaska and Japan) and reducing the cost — we’ve got to do that,” she said. While Southcentral Alaska has faced natural gas shortages from Cook Inlet over the past decade, Pease echoed what regional utility leaders have said now that the market has at least temporarily stabilized by saying a new large customer would be about the best thing to spur new development for the currently constrained natural gas market. She said all the technical data she has seen indicates ample reserves of gas still underneath the Inlet that just need a market. “I have no concern about the long-term availability of Cook Inlet gas as long as — and this is my caveat — as long as we have an industrial anchor tenant that will be here to continue the exploration and development and then production that needs to take place,” she said. If REI finishes the job it could be that market anchor, as 1 million tons of LNG equates to about 48 billion cubic feet of gas. That is more than half of the natural gas currently produced for use by Southcentral utilities each year.  

Analyst: Alaska in a bind on taxes, LNG

A leading international energy analyst did not paint a rosy picture for Alaska in a May 26 presentation to the state Oil and Gas Competitiveness Review Board. IHS Energy Senior Vice President Atul Arya said the state is one of only a few oil provinces worldwide discussing the possibility of raising taxes or cutting incentives during the prolonged downturn in oil markets. IHS Energy Inc. is a global energy industry consulting firm. The global movement was to begin increasing taxes, or government take, on the oil industry when oil prices first spiked above $100 per barrel in 2007, and Alaska followed suit. Since, the state has bucked general international policy trends by twice cutting taxes; first with new tax credits in the 2010 Cook Inlet Recovery Act and then by lessening production taxes at high prices when Senate Bill 21 passed in 2013. While initiated for very different reasons, both of those measures were enacted when oil prices were high — in the $100 per barrel range. Now, as legislators debate how far the state should scale back its industry tax credit program, a proposal first introduced by Gov. Bill Walker to reduce the state’s multi-billion-dollar budget deficit, others are holding pat or looking for ways to spur activity, Arya said. “What I find most interesting — in the most recent time, most everybody is creating incentives to help attract investments into their countries,” he said. “Even places like India and China, which are not really hotbeds of oil and gas activity, have done more to attract investors, and of course there are many other countries who are doing that in the last year or so.” Walker has said his administration’s plan to cut the state’s annual spend on oil and gas tax credits, which has grown to upwards of $700 million per year, is a necessary part of the larger fiscal restructuring the state must go through to stabilize its economy. At the same time, being able to determine its return on investment in the industry is paramount for Alaska, particularly when state dollars are scarce, according to Arya. Alaska’s latest oil debate over tax credits has been challenged for that information. The amount of credits the state pays to companies, oftentimes for the lion’s share of exploration and development costs, is by law confidential and available only to the Department of Revenue. The Oil and Gas Competitiveness Review Board was established in 2013 with the passage of SB 21 primarily to evaluate how state policies impact Alaska’s ability to attract investment in its flagship industry. The board consists of officials from several key state agencies and public members associated with the oil and gas industry. It is scheduled to issue a report by Jan. 15, 2017, on the state’s tax structure for all areas south of the North Slope. That report could go a long way in shaping future oil and gas taxes and credits for Cook Inlet depending on the outcome of the current tax credit debate, board members noted. Tough news for Alaska LNG With a dramatic return of high oil prices nowhere in sight, the light at the end of Alaska’s dark revenue tunnel is getting dimmer, at least according to Arya. “LNG, I have to say… is a bit of a fool’s gold right now. To think that LNG from Alaska can see the market; it’s just very challenging,” he said. Exporting the state’s plentiful North Slope natural gas through a pipeline and liquefaction project has long been a goal for countless Alaskans, and a top priority of Walker’s. Simply put, Arya believes there is just too much readily available natural gas from cheaper sources for Alaska’s gas to be competitive on the world market. He said the numbers are “startling” when one examines how much global gas supply there is. Global demand for LNG — at about 240 million tons in 2014 — will continue to grow to about 350 million tons by 2020 according to IHS, but so will liquefaction capacity. IHS expects LNG supply to exceed 400 million tons per year by 2020, with most of the new capacity coming from inexpensive sources in the Lower 48, Arya said. Natural gas producers in the rest of the country continue to turn profits even with prices around $2 per thousand cubic feet, or mcf, of gas, he said, because stiff competition has driven overhead reductions. The current proposed $45 billion-plus Alaska LNG Project to export Alaska’s gas to Asia, in which the state is a partner with BP, ConocoPhillips and ExxonMobil, faces an unavoidable problem — an expensive 800-mile pipeline. The project’s midstream transportation costs alone — the pipeline — have been estimated at about $8 per mcf of natural gas. When the Alaska LNG Project was conceived in late 2013, LNG delivered to Asian markets was selling for about $15 per million British thermal units, which roughly equivalent to natural gas on an mcf basis. Today, the Asian LNG spot price is about $4 per million Btu, according to the Federal Energy Regulatory Commission, or about half of the Alaska LNG Project’s estimated midstream costs. Alaska project proponents have emphasized the much shorter shipping time between Alaska and East Asia when compared with Lower 48 LNG exports coming mostly from the Gulf states, but whether logistics savings can overcome a major price gap remains to be seen. Arya said there is a window for Alaska LNG starting in 2023 and beyond; the best-case scenario for first production from AK LNG is around 2025. That is about the time many historic long-term LNG contracts with Japanese buyers are set to expire. However, new market forces will still make for challenging hurdles, he said. First, LNG contracts must be secured in the near-term before the many billions of dollars it will take to build the project can safely be invested. And securing lengthy contracts for the 25-year project could get increasingly difficult as the worldwide LNG glut affords buyers the option to pick and choose lower prices on shorter terms, making the LNG market look more and more like oil. Secondly, there is nothing stopping investors from favoring more Lower 48 LNG projects because they will likely continue to pencil out. “It’s going to be this interesting game of internal competition within the United States between the Lower 48 and Alaska to see who can come in for the next tranche of gas,” Arya said. Elwood Brehmer can be reached at [email protected]

Aviation Museum opens history of helicopters

Airplanes are so synonymous with Alaska the alliteration is unnecessary. But two iconic Alaskan families are quick to point out the state would not be what it is today without that “other” aircraft: the helicopter. Rex Bishop, 93, said in an interview at his South Anchorage home that he and ERA Helicopter founder Carl Brady, who passed away in 2005, used to argue about who brought the first helicopter to the state. “I guess Brady did,” Bishop said with a smirk. That first rotary flight took place in June 1948 out of Juneau. Brady had won a contract with the U.S. Topographic Survey to fly surveyors over the largely unmapped, then-territory, specifically Chichagof Island in Southeast. With the aid of Brady’s Bell 47 helicopter, the Chichagof survey took 33 days instead of the seven years that had been planned for “by foot,” said Marya Pillifant, a vice president with the Brady family’s Anchorage-based firm Benchmark Construction. Pillifant has also taken on the role of curator of the Brady family archives to support the Alaska Aviation Museum’s exhibit that opens June 4 chronicling Alaska’s nearly 70-year history of helicopters. Helicopters were key to those early surveys because they could do the one thing fixed wing aircraft couldn’t — and for the most part still can’t — hover. However, Brady found that his early Bell 47s, which he had flown for his agricultural pest control business in Washington, still didn’t completely fit the bill for working in the remote mountain wilderness. They had wheels. “When they were doing the survey work (Brady) found that a lot of the time you had to land the craft on ground that wasn’t flat — mountains, hills,” Alaska Aviation Museum Executive Director Jarod Hoogland said. “Helicopters, just like planes, had wheels that rotated and rolled so he actually pioneered the use of skids on helicopters. You think now of a classic helicopter and you think of it having skis or skids; you don’t think of it having wheels but that wasn’t the case then.” The first skids were fashioned out of plywood and Brady had them wired to his original pair of Bell’s, according to Hoogland. Shortly after Brady’s innovation manufacturers began putting skids on their new aircraft, he said. The Bradys credit Carl with being the first to put skids on helicopters. Bishop said he couldn’t unequivocally confirm the claim, but said it could certainly be true. The first Bell helicopters to come from the factory with skids were produced in 1951, a fact which supports the story. One of the original Bell 47s Brady brought to Alaska now hangs in the terminal at Ted Stevens Anchorage International Airport. Pillifant said ideally it would be on display at the Aviation Museum, but the logistics were too much to overcome. However, the museum’s location, just across the street from the airport at Lake Hood, makes it easy for visitors to see both in one trip if they wish. In 1956, Brady established Economy Helicopters’ first permanent office in Anchorage. A couple years later he merged the company with California-based Rotor Aids Inc. and the companies’ initials were melded to form ERA Helicopters, which today operates as the international aviation services company ERA Group Inc. headquartered in Houston. Bishop got into the helicopter business through his cousin Jim Ricklefs, who ran Rick Helicopters out of San Francisco. Through the late 1950s the pair trucked their Bell 47s to and from Alaska for summer work on the emerging Cook Inlet oil fields each year. “The helicopter industry really did a lot to help establish Alaska as a productive state simply because there were no roads up here, or runways,” Bishop said. That early shuttle business around Southcentral pitted Brady, who died in 2005 at the age of 86, and Bishop in direct and intense but cordial competition. “I stayed in business to keep Brady honest,” Bishop quipped. The competition was direct to the point that Bishop’s Alaska Helicopters — a wing of Alaska Airlines in its early years — was literally next door to ERA’s hangar in Anchorage. Ultimately, Bishop sold Alaska Helicopters to ERA in 1995. “I always appreciated Carl Brady and his company because he had a good strong company,” he said simply. This is just the small sample of the helicopter’s rich history in Alaska. The Alaska Aviation Museum will have the rest. Elwood Brehmer can be reached at [email protected]

Special session starts, facing same issues

Legislators approved a resolution May 24 to pick up where they left off, at least in regards to the bills Gov. Bill Walker put on their agenda when he called the special session. House Concurrent Resolution 401 reinstates the operating, capital and mental health program budgets as well as the Permanent Fund earnings reform, adoption, reinsurance and oil and gas tax credit and the closely tied oil project development loan fund bills as they stood before legislators gaveled out of the extended regular session late May 18. The administration introduced legislation addressing two of the governor’s 11 special session agenda items May 23, the first day of the special session, an omnibus tax bill and a bill to provide long-term health insurance for surviving family members of emergency responders killed in the line of duty. Either the governor or the Legislature can call a special session. Typically, the administration introduces bills during special sessions called by the governor. However, in this instance legislators suspended traditional rules with both bodies agreeing to the concurrent resolution through majority votes. The House vote was unanimous to adopt the resolution. Sen. Bert Stedman, R-Sitka, was the only dissenting vote on HCR 401 in the Senate. The House minority tried to amend the resolution to omit House Bill 247, but the majority emphatically rejected that amendment. Negotiations on the more-than-contentious oil and gas tax credit bill during the regular session stalled progress on the operating budget, but a compromise reached between the majority and several majority members was able to pass the House. When the Senate passed a version of HB 247 that wouldn’t cut the state’s future credit obligation enough or disclose which companies received the credits to satisfy enough legislators in the House, the impasse resumed in the last hours of the extended session. House Minority Leader Rep. Chris Tuck, D-Anchorage, acknowledged a lot of work had already been on HB 247 but suggested legislators should allow the administration, which first introduced the bill in January, draft another tax credit bill. He argued that because information regarding which companies receive what in regards to the credits is confidential to everyone except the Department of Revenue, the administration should lead the way. “I think that we need to at least hear what the governor would like to have and have the proper vetting process to hear that throughout the committee process,” Tuck said. “So we’re asking in this amendment that House Bill 247 be exempted from everything being put back to where it once was before ending the regular session.” Rep. Scott Kawasaki, D-Fairbanks, correctly noted in floor discussion that the bill changed radically through the committee process and even on the House Floor, where the final changes to the version that ultimately passed the House were made. He said a new bill from the administration would get proper vetting through the committee process. However, Majority members — including those that have sided more with the minority on the issue — were quick to point out that the changes Kawasaki referenced were not made without intense scrutiny as it moved through three committees in the House and another in the Senate. House Resources Committee co-chair Rep. Dave Talerico, R-Healy, cited the more than 20 meetings HB 247 had in his committee — it’s first referral. “We had very substantial testimony from the public, industry and our own consultants,” Talerico said on the House floor. “We went through well lease expenditures, capital expenditures, gross value reductions, gross value at the point of production, pipeline tariffs, exploration credits, royalties and everything else that was connected in any way shape or form with tax credits or this bill. We fully vetted everything that happens in the Cook Inlet and everything that happens on the North Slope.” The version of HB 247 that passed out of House Resources would have made the fewest changes to the current credit program of any of the bills numerous committee iterations. Sources in the Legislature said the minority’s amendment was spurred by the belief that the administration is crafting another piece of oil and gas tax credit legislation. Walker told the Journal May 25 that it was “too soon to tell” if the administration will introduce another tax credit bill or let an HB 247 conference committee hammer out the differences between the House and Senate versions. In the end, a six-member conference committee was appointed to resolve the House and Senate differences in HB 247. Those committee members are: Talerico; Reps. Kurt Olson, R-Soldotna; and Geran Tarr, D-Anchorage; Sens. Cathy Giessel, R-Anchorage; Peter Micciche, R-Soldotna; and Senate Majority Leader John Coghill, R-North Pole. The House participants all serve on the Resources Committee. Giessel chairs Senate Resources and led an oil and gas tax credit working group last year that outlined possible changes to the program; while Micciche serves on the Senate Finance Committee, which drafted the version of HB 247 that passed the Senate. During a speech at the Alaska Oil and Gas Association’s 50th anniversary celebration May 25 in Anchorage, the governor commended the leaders of the state’s producers and explorers for their willingness to openly discuss directly with him their concerns with his tax credit reduction proposal throughout the legislative session and how it could impact their companies. Industry leaders in the state have reiterated that reform to the credit program would mark Alaska’s sixth oil and gas tax change in a little more than a decade. While some of those changes were supported by industry, the near continuous tax alterations make it extremely difficult for businesses to plan for the future, they emphasize. The oil and gas tax credit legislation — part of the administration’s broader plan to erase the state’s roughly $4 billion budget deficit over the next three years — will help stabilize the state’s overall economic climate and provide the budgeting certainty the state will need to invest in his ultimate goal, a North Slope natural gas pipeline project, Walker said. But as he has for months now, he asked Alaskans to “pull together” and stay away from the “finger pointing” that often happens during turbulent political times. “There’s something for everybody not to like in the (fiscal) plan, whether it’s the fuel tax, it’s the fisheries tax, whether it’s on the oil and gas side, whether it’s income tax, the tobacco and alcohol tax,” Walker said. “There’s plenty of stuff in there so that everybody can find something they don’t like; I understand that. But I guess what I ask Alaskans to do is look at the long game. Where do we want to be in 50 years? What do we want to make sure that our children and grandchildren have available to them in this state?” He, and many of Alaska’s business leaders have said often that not making structural reforms to the state’s budget and how it is paid for and continuing to draw on savings will cripple Alaska’s economy in the coming years. Elwood Brehmer can be reached at [email protected]

Congress approves $561M for Alaska military construction in FY2017

Missile defense and fighter jets could be a just-in-time boon for Alaska contractors feeling the effects of low oil prices and state budget cuts. The U.S. House and Senate each passed appropriations bills May 19 to fund a dozen projects totaling $561 million worth of construction activity in Alaska. Most of that money will go to Interior military installations to upgrade the country’s missile defense system and prepare for the arrival of two squadrons of F-35 fighters to Eielson Air Force Base in 2020. The Senate’s $139.4 billion packaged appropriations bill addressed military construction, Veterans Affairs, Transportation and Housing and Urban Development spending for the 2017 fiscal year that begins Oct. 1. The $81.6 billion House bill funds Defense infrastructure and VA programs. Despite differences in other areas, the bills are nearly identical in terms of military construction funding for Alaska. “The decision to base two squadrons of F-35s, totaling 54 aircraft, at Eielson Air Force Base and position Long Range Discrimination Radar at Clear Air Force Station were major victories for Alaska and the nation. Not only will these systems play an immense role in defense of our nation, they also mean a significant boost to our economy and our local communities,” Rep. Don Young said in a May 19 statement. “Today’s House-passed Milcon-VA Appropriations Act lays the groundwork for these two important basing decisions and further supports the needs of our military men and women.” Sen. Lisa Murkowski added language to the Senate bill in the Military Construction-VA Appropriations Subcommittee encouraging the Defense Department to “conduct outreach to contractors located in Alaska and experienced in Arctic construction techniques in the execution of the military construction program for Alaska,” according to a release from her office. The intent language also urges DOD to maximize local workforce participation and coordinate that work with the state Labor Department and the University of Alaska to provide training for the pending construction work. The language was pulled as the bill moved through the committee process, but was ultimately reinserted in the legislation that passed. Despite Alaska receiving more military construction funding than any other state in the appropriations package, the projects are security investments for the entire nation, Murkowski said in a release. “This funding bill not only allows us to obtain the resources that we need to support our military efforts, such as preparing for the arrival of the F-35s at Eielson Air Force Base and building the Long Range Discrimination Radar at Clear; it also represents a resurgence for Alaska’s construction industry and thousands of new full-time jobs at a time when Alaska’s economy needs it most.” Murkowski’s office estimates the projects could spur nearly 2,700 new construction-related jobs and more than 1,600 permanent positions. Missile Defense Agency Director Admiral James Syring said during a February talk to the Fairbanks Chamber of Commerce that more than $325 million will be spent over the next six years installing the Long Range Discrimination Radar at the Clear Station near Nenana. That work will require a 350-person man camp starting next year, with peak occupancy and construction in 2019, he said. Syring added that the missile defense and detection upgrades in Alaska are all aimed at expanding the country’s defense mechanisms against North Korea. He said he would expect local contractors to get much of the work at Clear Air Force Station at least. Elwood Brehmer can be reached at [email protected]


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