Elwood Brehmer

Legislature preps for lawsuit against Dunleavy

After returning from Memorial Day weekend activities across the state, legislators promptly doubled down on their belief that they have properly funded education for the coming year by preparing for a lawsuit against Gov. Michael J. Dunleavy’s administration. The House voted 23-14 and the Senate voted 14-4 May 28 to authorize the joint Legislative Council to file a lawsuit against the administration for withholding more than $1.2 billion in K-12 formula funding approved last year in House Bill 287. The move is presumptive, given the money cannot be dispersed until after the July 1 start of the 2020 state fiscal year. Legislative Council chair Sen. Gary Stevens, R-Kodiak, said during a rare joint House-Senate press briefing that a suit would not be filed until after July 15, which is when the first round of formula-based yearly K-12 state funding is set to be dispersed to school districts. The 14-member Legislative Council handles business and legal matters for the overall Legislature. Dunleavy insists the Legislature’s actions last year to forward fund education violate the Alaska Constitution because, according to a legal opinion from Attorney General Kevin Clarkson, they improperly dedicate state revenue and attempt to usurp the governor’s line-item veto authority over budget matters. Based on those conclusions there is no K-12 funding for the administration to legally disperse, administration officials stress. Dunleavy — who has repeatedly mentioned the prospect of vetoing portions of the budget the Legislature passes — has also vowed not to veto any education funding as long as it is added to the budget for the coming year. Members of the minority House Republican caucus have sided with the governor on the issue and collectively voted against allowing the Legislative Council to consider a lawsuit. The governor cannot sue the Legislature in this instance, according to legal experts. The current iterations of the state operating budget being settled in a conference committee similarly forward fund education for the 2021 fiscal year. Legislative leaders are adamant last year’s forward funding is legal; it’s something lawmakers did for 10 years before declining oil revenues led them to stop the practice in 2015. For them, it’s a separation of powers issue. The issue has largely united Democrat and Republican leaders in the Legislature who for years have been at odds over how to fix the state’s large structural budget deficits. “We have stood firmly on the forward funding that we appropriated last year for this coming year and we are hoping very much that no lawsuit will be necessary,” Senate President Cathy Giessel, R-Anchorage, said during the briefing. “Education funding has been a political football over these past years when we haven’t forward funded. We want to take that football, put it on the ground and settle this issue.” Legislators last sued the governor as a group in 2015, when former Gov. Bill Walker accepted federal Medicaid expansion funds without the Legislature’s approval. That lawsuit was dismissed by a state Superior Court judge in early 2016. In an impromptu May 28 counter-press briefing Dunleavy said he has talked extensively with legislative leaders about the stalemate. He suggested the Legislature could add the 2020 education money to the budget and the administration could distribute the nearly $1.2 billion meant for the base student allocation, or BSA, payments to districts while withholding the $30 million, one-time supplemental payment also approved in HB 287 to spur “almost a friendly suit just so we can get clarification on things moving forward,” Dunleavy said. “I’d ask the House and Senate to fund education and we can agree on an amount that can be withheld that would initiate a suit so we can get clarification; that way the school districts are certain that they’ve got funding,” the governor added. The administration also submitted bills during the special session to make the BSA and $30 million supplemental appropriations outside the budget. While they seem to have little chance of passing, school administrators from across the state testified during Finance Committee hearings that forward funding education is very important as it allows them to make longer term plans and keeps districts from having to issue layoff notices to teachers each year lawmakers struggle to agree on a budget. Districts are expected to issue “pink slips” if the current situation is not resolved by mid-July, and the year-to-year job uncertainty can make it difficult to retain teachers in a state where teacher turnover is already a pervasive issue, according to school district officials. “Stable and predictable — that’s what our industries ask for. It seems reasonable to assure that to our education system as well,” Giessel said. At the heart of the administration’s claim is the fact that forward funding of education in prior years was done with surplus existing revenue, while HB 287 draws anticipated revenue from the General Fund. Legislators contend all budgeting — particularly for the State of Alaska where income streams are based on volatile oil and financial markets — is anticipatory. The administration’s bills to repay forgone Permanent Fund dividend amounts over multiple years rely on the expectation that money currently in the roughly $19 billion Permanent Fund Earnings Reserve Account will be available when the draws would be made up to three years away, many have noted. However, those funds could dissipate if markets falter. Sen. Bill Wielechowski, D-Anchorage, said during floor debate on the Legislative Council authorization that he believes the administration’s argument could apply to most appropriations the Legislature makes, but this situation is unique since the Supreme Court has determined lawmakers have a constitutional obligation to fund public education. On other issues, the Legislature sent the omnibus criminal justice reform rollback legislation, House Bill 49, to the governor for his signature May 28, which Dunleavy thanked them for. That leaves budget issues and the PFD outstanding in the 30-day special session that is quickly approaching its halfway point. Legislators are close to finishing a budget as the House and Senate versions of the operating budget were similar to start the conference committee — with overall cuts in the $200 million-plus range — but a final version has yet to be released. The House is considering the capital budget that passed the Senate and will likely be minimal again this year, which leaves the PFD as the big hurdle for the Legislature. House Finance co-chair Rep. Tammie Wilson has proposed legislation to pay a full, roughly $3,000 per person PFD this year according to the statutory formula with additional draws of roughly $1.4 billion from the Earnings Reserve and $500 million from the Constitutional Budget Reserve, while halving the PFD formula for future years. The idea was roundly dismissed during public testimony. With the Senate approving a $3,000 PFD — but in an unbalanced budget — the House without a dividend appropriation and Dunleavy firm in his demand for a full payment, it remains unclear as to how the situation will be resolved before the June 15 end of the special session. ^ Elwood Brehmer can be reached at [email protected]

Permanent Fund gains 6.48 percent in Q3

The Permanent Fund rebounded from a tough finish to 2018 with a 6.48 percent quarter that put the $65 billion fund back in positive territory for the year. The gains in the quarter that ended March 31 — the third quarter of the Alaska Permanent Fund Corp.’s fiscal year — gave the fund a 3.07 percent investment return for the 2019 fiscal year so far, according to a May 23 APFC release. Permanent Fund investments lost 3.19 percent of their value in the first half of the state fiscal year. The fund held $65.8 billion of assets under management with approximately $1.6 billion of liabilities as of March 31. It ended the 2018 fiscal year last June 30 with a balance of $64.8 billion, from which the state appropriated roughly $2.7 billion to pay out Permanent Fund dividends and support government services. Most recently, the fund had a net balance of $65.3 billion with slightly more than $19 billion in the Earnings Reserve Account, which is the portion of the fund state lawmakers can appropriate from. Calculated as 5.25 percent of the fund’s five-year average value, the fiscal 2020 percent of market value, or POMV, appropriation is expected to be roughly $2.9 billion. Legislators are currently debating whether or not to make an additional draw from the Earnings Reserve that would be outside of the POMV appropriation — despite warnings from financial advisors about the long-term impacts of such ad-hoc draws — in order to pay the larger Permanent Fund dividends that Gov. Michael J. Dunleavy demands. The latest 6.48 percent quarterly return was driven by “an outstanding” 12.36 percent return on the fund’s public equities or stocks, portfolio, which comprises about 40 percent of fund investments, the APFC release states. For comparison, the Dow Jones Industrial Average gained 10.1 percent over the period. The fund’s $15.5 billion fixed income portfolio generated a 5.77 percent return during the quarter. The public market investments slightly outperformed the corporation’s return benchmarks for the given categories, according to fund managers. However, the fund’s private investments did not fare so well “due to the nature of quarterly appraisals and valuations,” the release states, but still outperformed comparable benchmarks. The $8.5 billion private equity portfolio returned 1.25 percent, compared to a Cambridge Private Equity Index return of -0.53 percent during the quarter. APFC leaders note the fund’s five-year private equity return is 24.3 percent. The fund’s infrastructure and private real estate investments similarly netted quarterly returns in of about 0.2 percent but have proved much more fruitful over the long haul. “These negative short-term distortions are not reflective of the generally strong underlying fundamentals, occupancy and cash flows of the properties,” the APFC release states regarding real estate investments. Real estate has generated a 7.97 percent annual return over the previous five years, according to fund managers. Elwood Brehmer can be reached at [email protected]

Oil Search gets federal approval for Nanushuk project

The company working on one of Alaska’s largest oil prospects in decades now has the key federal authorization to develop the project. Oil Search Ltd. announced Thursday that it has received a favorable record of decision from the U.S. Army Corps of Engineers on the environmental impact statement, or EIS, for its Nanushuk oil project in the Pikka Unit on the central North Slope. The record of decision, signed May 14, marks the end of nearly four years of study on the roughly $5 billion project, which has the potential to produce upwards of 120,000 barrels of oil per day at its peak. Peter Botten, managing director of the Papua New Guinea-based producer said in a formal statement that two appraisal wells the company drilled last winter into the southern portion of Pikka reinforce earlier expectations that the oil available for the project should allow for peak production of at least the long-held estimate of 120,000 barrels per day. The trans-Alaska Pipeline System, commonly known as TAPS, is handling about 500,000 barrels of oil per day this year. North Slope production peaked in the late 1980s at approximately 2 million barrels per day. The project is also expected to support more than 1,000 drilling and operations jobs and “several thousand direct construction jobs,” said Oil Search Alaska President Keiran Wulff, who added in a formal statement that the company “will make every effort to work with companies located within the state of Alaska to maximize local hire.” Oil Search is planning a busy 2019-20 winter season with additional drilling work and the start of laying gravel for the project’s future roads and pads, according to Botten. “We remain very excited about the opportunities for Oil Search in Alaska and are looking forward to making material contributions to the state and the local communities, while also delivering value for Oil Search shareholders,” he said. The company reached a deal with Armstrong Energy in October 2017 to buy into Pikka and take over as the project operator for $400 million. Wulff said last fall it planned to exercise a $450 million option to fully buy out Armstrong from the project this year. An Oil Search Alaska spokeswoman said the buy out is on schedule to be completed by the June 30 deadline set as part of the initial deal. Spanish oil major Repsol is also a 49 percent owner in Pikka. While official estimates are more conservative, Armstrong Energy CEO Bill Armstrong has consistently said he believes more than 1 billion barrels can be produced from the Pikka Unit. First oil production is expected in late 2023, Wulff has said. Most of the oil would come from the shallow, conventional Nanushuk formation. It has been the source for smaller nearby discoveries by ConocoPhillips as well as Conoco’s Willow project in the National Petroleum Reserve-Alaska, which is similar in scale to Pikka but a couple years behind in the development process. The Corps of Engineers ultimately chose Oil Search’s preferred development option, which differed from the plan Armstrong initially submitted for its Clean Water Act wetlands fill permit. Wulff noted in a company release that Oil Search changed the plan at the behest of residents of the nearby Native Village of Nuiqsut, who use the Colville River Delta where the project is located for subsistence harvests. The approved plan moves a drill site near the Colville further from the river; realigns some north-south roads to interfere less with east-west migrating caribou; and narrows roads from up to 38 feet wide to 32 feet among other revisions. The changes will also result in a 22-acre reduction to impacted wetlands compared to the original plan, according to the corps. Overall, the project will fill 266 acres of wetlands, the EIS states. “We are committed to close collaboration with the people and organizations of Nuiqsut and neighboring communities to ensure our activities in the field are conducted in a sensitive and respectful manner,” Wulff said. Elwood Brehmer can be reached at [email protected]

State still working with BP, ExxonMobil to refine AK LNG economics

New conclusions regarding the viability of the $43 billion Alaska LNG Project are still several weeks away from being made public, according to officials from the state agency leading the work. Interim Alaska Gasline Development Corp. President Joe Dubler said the state, BP and ExxonMobil have “preliminary answers” to the competitive assessment they are doing of the Alaska LNG Project and those initial results are being further vetted and analyzed before final conclusions are released. AGDC announced March 8 it had signed a memorandum of understanding with BP and ExxonMobil to assist the state corporation in finding ways to bring project costs down and get it through the federal regulatory process as smoothly as possible. Brett Huber, a senior advisor to Gov. Michael J. Dunleavy, said March 14 that AGDC, in consultation with the producer companies and the state Revenue Department would be conducting a 60-day review of the project to determine the state’s path forward. “We’ve agreed on inputs; we’ve agreed on the mechanics. So we’re using that model to finalize the future of Alaska LNG and what we think the competitive prospects are for the project,” Dubler said during AGDC’s May 22 board of directors meeting. Dunleavy has long been critical of former Gov. Bill Walker’s plan for a state-led Alaska LNG Project. He made it clear soon after being elected last fall that his administration would slow the pace of the project and try to bring the major oil companies back into the fold. In 2016, the international energy consulting firm Wood Mackenzie concluded the Alaska LNG Project likely wasn’t economic if developed by Alaska’s major producers, as first envisioned, in part because of the high internal return requirements oil companies typically have. However, a state-led project with federal tax exemptions could be viable, Wood Mackenzie said at the time. BP and ExxonMobil have major interests in seeing a successful Alaska LNG Project come to fruition. They combined to invest upwards of $4 billion between 2012 and 2016 to develop the North Slope Point Thomson natural gas field, which would be one of the main sources of gas for the project; Prudhoe Bay is the other. They also hold collective rights to approximately 70 percent — not counting the state’s royalty stake — of the 35 trillion cubic feet of gas expected to be available for sale through the project. The companies also signed separate and confidential gas sales precedent agreements with AGDC last year that outline the terms — including price — under which they would sell gas into the project. AGDC and the companies are also revisiting the $43 billion cost estimate, which is about three years old, to see if technological advancements and market conditions could bring it down. Spokesman Jesse Carlstrom said via email that potential cost savings have been identified primarily in the construction of the facilities for the project. Approximately $9 billion of the total project estimate is a contingency for cost overruns. Dubler added that corporation leaders who attended the LNG2019 in Shanghai in early April met with LNG shippers, investors, builders and customers that could be involved in Alaska LNG. He said the prospective participants were comfortable with the state’s new plan to slow the project and not start construction as soon as the Alaska LNG environmental impact statement is finished, likely in mid-2020. “We’re trying to find potential partners to get the state out of the driver’s seat and get other people in,” Dubler said. Officials from the governor’s office along with Natural Resources Commissioner Corri Feige and Revenue Commissioner Bruce Tangeman are planning a trip to China next month to discuss the future of the state’s role in the project with officials from Sinopec, the Bank of China and China Investment Corp., according to Dubler. The state-owned oil giant and financial companies signed a nonbinding joint development agreement with AGDC in November 2017 to advance the prospect of financing up to 75 percent of the project in exchange up to 75 percent of the LNG it produces. LNG exports to China have declined dramatically this year after retaliatory tariffs were imposed and are now scheduled to increase from 10 percent to 25 percent on June 1. Dubler reiterated that the administration feels a 75 percent stake in the project is too much for one investor and wants to spread potential investment more broadly. “We think that once we get the (Federal Energy Regulatory Commission) permitting completed it will open up the door for a lot more different types of firms and industries looking to invest in this project,” he said. FERC is scheduled to release the draft Alaska LNG environmental impact statement, or EIS, next month. AGDC Program Management Vice President said during the meeting that the corporation is anticipating a 90-day public comment period for the draft document, that will distill the roughly 150,000 pages of environmental, socioeconomic, and engineering data AGDC has submitted to FERC into a roughly 4,000-page EIS. Elwood Brehmer can be reached at [email protected]

Hilcorp lone Cook Inlet bidder for third straight year

Hilcorp Energy was the lone bidder in the State of Alaska’s annual Cook Inlet basin oil and gas lease sale for the third consecutive year. The Houston-based independent spent $190,350 on three lease tracts totaling 10,286 acres in the sale held Wednesday morning in Anchorage, according to the Division of Oil and Gas. Hilcorp has been the predominant oil and natural gas producer in Cook Inlet since purchasing significant assets from Marathon Oil in 2012. “We are pleased to see bid activity in the Cook Inlet lease sale,” Deputy Natural Resources Commissioner Sara Longan said in a prepared statement. “We recognize the focus of investment has been on the North Slope in recent years. Nevertheless, significant investment is made to sustain current Cook Inlet production, while exploration activities continue to inform and support future development.” The Cook Inlet sales have been quiet for several years. In 2016 the state received no lease bids for its original oil basin for the first time and industry representatives at the time largely blamed the state’s plans to curtail its tax credit program for exploration and development work. State officials note most of the leases covering the prospective areas in and around the Inlet are already leased. As Longan highlighted the recent North Slope sales, held each fall, have been some of the most lucrative in terms of dollars bid in the history of the state’s regular oil and gas lease sale program, with companies cumulatively spending upwards of $35 million in a single sale to acquire exploration acreage. Two of the leases Hilcorp acquired Wednesday are onshore tracts on the southern Kenai Peninsula near Anchor Point and BlueCrest Energy’s Cosmopolitan oil field; the third is near Trading Bay in the central portion of the Inlet where most of the offshore development has occurred.   Elwood Brehmer can be reached at [email protected]

Interior housing on track to meet demand from F-35 arrivals

Interior Alaska leaders believe early concerns have been quelled over the ability of communities around the Eielson Air Force Base to comfortably absorb the pending influx of thousands of personnel to the region linked to the arrival of two F-35 fighter squadrons. Fairbanks North Star Borough Mayor Bryce Ward said in an interview that an analysis of the housing market around the Fairbanks-area base combined with the building activity he’s observed give him confidence that finding homes for the roughly 3,300 people about to move to the area won’t be a problem. Ward was formerly the mayor of North Pole, the closest city to Eielson, and also has his own general contracting business there. He noted that the Eielson Air Force Base Regional Growth Plan commissioned by the borough and published last fall concluded there would be a need for 532 new housing units around North Pole by 2022 to meet normal growth as well as the F-35 driven demand. The federal government’s study of the impacts of locating two squadrons of F-35s — 54 in total — at Eielson found there would be a need for 974 units to house F-35-related personnel and their families. The first F-35 is scheduled to arrive at Eielson in April 2020 with the rest following over about two years, according to a spokesman for the base. Eielson Public Affairs Officer 1st Lt. Kitsana Dounglomchan wrote via email that a small number of personnel dedicated to the F-35s have already started arriving and the number of new personnel and their families will keep ramping up in preparation for the first aircraft in less than a year. While the Air Force is spending approximately $550 million to prepare the base for the hi-tech, fifth-generation fighters, new base housing is not being built. Dounglomchan said the Air Force is relying on the homes currently on the base as well as the local communities to support the new personnel. “To build the numbers that they were talking about would’ve been a huge undertaking,” Ward said. However, the Air Force’s study presented raw figures and did not account for the specific conditions of the borough’s housing market. State budget cuts and the related three-year statewide recession have led some folks to leave the borough, which has led to more available housing, Ward said. The area also went through about 10 years of a depressed housing market — the combination of the Great Recession and multiple rounds of discussions about shrinking Eielson drastically or outright closing the base. The new stability in the market has encouraged builders, he said. There were more than 100 housing units built in the borough last year beyond what is normally built during a summer construction season, according to Ward, who added there has been increased activity by developers from outside the area, mostly in the multi-family realm. “We exceeded the number of units that we needed to build last year in order to meet our objective and I think we’re on target again for this year to be a very productive year for housing,” he said. Fairbanks Economic Development Corp. CEO Jim Dodson thinks the community will be able to absorb the new residents without a problem, “but it might not be in the North Pole area,” Dodson said. Upwards of 80 percent of current Eielson personnel that live off base reside in the North Pole area and its presumed the new arrivals will similarly want to live close to work. Dodson and Ward both said most new home construction, particularly around North Pole, has been small developments. “Guys that normally build one house (per year) are maybe building two or three a year. We’ve got lots of mom-and-pop type outfits,” Ward said. Because there is now little worry of a housing shortage, borough officials are focused on making sure the new homes are built to a standard that people want to live in, Ward said, adding that it’s a perpetual issue across much of Alaska. “A lot of our efforts have been driven to address the issues of quality and efficiency and to really make sure that the market is able to address those concerns,” he said. The quality of the construction is of particular importance because many of the new active-duty personnel will be coming from warm-weather bases that already have F-35s such as Luke Air Force Base in Arizona, and they likely won’t be prepared to deal with an Interior Alaska winter in a poorly constructed home, Ward emphasized. He stressed further that he’s actually more worried about too much building once all the new members of the community are settled given the early talk about needing nearly 1,000 new housing units to meet the demand. “A couple hundred homes is a big number for us but for some of these larger contractors they could throw up 100 houses in a summer pretty easy; that could be detrimental to the overall economy and the housing market if you overbuild,” Ward said. Elwood Brehmer can be reached at [email protected]

Battle over purse power ensnares education

Gov. Michael J. Dunleavy’s administration is in a constitutional battle with three-quarters of the Legislature over education funding and the start of the special session has shown just how entrenched both sides are. The administration insists the Legislature’s means of forward funding education last year for the upcoming state fiscal year is unconstitutional and therefore invalid. The Office of Management and Budget has indicated a belief that there will not be money to give to school districts in the 2020 fiscal year, which starts July 1, if the issue is not resolved. Most lawmakers — other than the 15 in the minority House Republican caucus — contend the administration is trying to infringe on the Legislature’s appropriating authority. House minority members have said they want to fund education at current levels, but have called on the rest of the Legislature to follow Dunleavy’s request. The governor has asked for language in the 2020 budget to fund education for the upcoming fiscal year so, in his opinion, there can be money to disperse starting July 1. Last year the Legislature passed and former Gov. Bill Walker signed House Bill 287, which funded K-12 education at approximately $1.2 billion for 2019 and 2020 with $20 million and $30 million lump supplemental payments to school districts for the respective years. The bill directs the Revenue Department to transfer the money from the General Fund to the Public Education Fund in two tranches, the first on July 1, 2018, and the second July 1, 2019. The 2020 budget passed by the House and Senate contains a similar forward appropriation for 2021. The administration raised the issue when the House Finance Committee released its version of the budget without language to fill the Public Education Fund for 2020. Attorney General Kevin Clarkson sent a letter to House and Senate leaders April 9 outlining the administration’s position that the particular approach lawmakers took to forward fund public schools in HB 287 is unconstitutional because it dedicates future revenues, which the Legislature cannot do, and nullifies the governor’s line item veto authority. Legislators and their attorneys argue that HB 287 passes muster because while it was passed last year by the 30th Legislature, the 31st Legislature this year had the opportunity to repeal the law but chose not to. Dunleavy originally proposed cutting the K-12 budget by roughly $300 million — to strong public opposition — but he has since promised not to veto education money in the budget as long as the Legislature agrees to add the desired funding language to the 2020 budget. Lawmakers have ignored that request; for them, it is a separation of powers issue. Clarkson reiterated his stance in greater detail when he issued a formal seven-page opinion on the matter May 8. “It is the Department of Law’s opinion that appropriations by the Legislature of future revenues for future years at the end of one governor’s administration in order to side-step the next governor’s line item veto authority violate the Alaska Constitution by improperly circumscribing the governor’s veto power,” Clarkson wrote in his May 8 opinion. “Otherwise, in anticipation of a new governor, an outgoing Legislature could appropriate future revenues for specific purposes for the next four years and negate the incoming governor’s line item veto power over those funds altogether for the entirety of his or her term. “This type of end-run around the strong executive contravenes the clearly-expressed intent of the (constitutional) delegates and the structure of the constitution they created.” The minutiae of the debate was fully fleshed out in May 20 and 21 hearings to consider the administration’s bills to repeal HB 287 and fund education for 2020 through their desired mechanism. An emphatic Sen. Natasha von Imhof, R-Anchorage, said during a Senate Finance Committee hearing that the administration is actually asking the Legislature to do what Clarkson insists is unconstitutional in the governor’s bills to repay the forgone portions of past Permanent Fund Dividend payments. Von Imhof co-chairs the Finance Committee. While those bills are unlikely to pass, they ask this Legislature to appropriate money from the Permanent Fund’s Earnings Reserve Account for dispersal over several years through 2022. For the administration, it comes down to the specific source of the money chosen to fill the Public Education Fund in HB 287: the General Fund. Assistant Attorney General Cori Mills said that because the PFD repayment proposal would pull from the Earnings Reserve, which has roughly $18 billion, it spends existing revenue and could also be changed or repealed by future Legislatures. However, HB 287 “earmarks” revenue that is anticipated to be in the General Fund during the 2020 fiscal year. Von Imhof retorted that every budget anticipates future revenue and the PFD bills just assume the money will be in the Earnings Reserve three years from now. “There’s a lot of money in there now,” she said. “If the markets tank there will not be a lot of money. If this body decides to move a good portion of the funds into the principal there will not be a lot of money. So there’s a lot of unknowns at any given time whether it’s this body or your assumptions of where the money is going to come from,” she said, adding the state had the money to fund HB 287 when it passed. Mills said the department doesn’t believe the PFD repayment plan requires annual budget language because it pulls money already in the Earnings Reserve; but it would need appropriations from a new source if the Earnings Reserve were unexpectedly dry when the draws were to be made. The stalemate is likely to be decided by the Supreme Court. Legal experts note that the governor cannot sue the Legislature, so it would take a suit by the Legislature or a third party to spur the resolution. Administration officials say if HB 287 had similarly been funded from the Earnings Reserve or a savings account the issue would be moot. Mills noted that the Legislature historically forward funded education by overfilling the Public Education Fund and then drawing on that money in subsequent years. She added that the administration’s education funding bills repeal HB 287 simply for “good drafting” purposes. “We have our opinion, we think (HB 287) is invalid but just as when statutes are struck down or found invalid we prefer that they get cleaned up and you don’t have an existing law on the books that’s unconstitutional,” Mills explained. Finance co-chair Sen. Bert Stedman, R-Sitka, asked why the potential problems with HB 287 weren’t raised when it was first reviewed by Law last year; Mills responded that it wasn’t scrutinized in that context. She also said in response to Sen. Bill Wielechowski, D-Anchorage, that HB 287 would also be legal if it directed the money to be moved on June 30, the last day of the 2019 fiscal year, instead of July 1. Legislative Legal Services Director Meg Wallace contended in a House Finance hearing that last year’s action does not dedicate a specific stream of tax revenue, for example, but simply appropriates from the General Fund, which comingles much of the state’s money. “All budgeting is prospective, so in my opinion, if we strictly construed the opinion of the Attorney General we wouldn’t be able to prospectively budget even a fiscal year ahead if we had to wait for all of that revenue to be received by the state before we were able to appropriate those funds,” Wallace said, adding that it’s an open question as to how far out the Legislature can forward fund before it becomes a continuing appropriation. She also noted that HB 287 was subject to a veto last year. That veto power is an authority delegated to the Governor’s Office, she said, but not a particular governor. Association of Alaska School Boards Executive Director Norm Wooten said in an interview that he isn’t worried about a court fight preventing schools from getting the money they need for next fall after. Legislators have told him they would fund schools with stopgap measures if need be, according to Wooten. “It may be month-by-month funding,” he said. School administrators in public testimony mostly avoided taking sides in the legal fight, but stressed the importance of forward funding education for certainty in school district budgets. Elwood Brehmer can be reached at [email protected]

Bids sought for 2020 work at Port of Alaska

Anchorage officials are moving ahead with a plan to build part of a new berth at the city’s beleaguered port while they look for ways to pay for the rest of it. Municipal Manager Bill Falsey said during a May 16 meeting of the Anchorage Assembly’s Enterprise and Utility Oversight Committee that administration leaders want to use the $60 million they have on hand for port work to fund the first year of construction of a new petroleum and cement terminal. Port officials in February released a financial analysis that indicated tariffs levied on fuel and cement imported to the state across the Port of Alaska docks would have to be increased at least five-fold in order for the port to fund revenue bonds to pay for the construction of a new terminal, which has been estimated at $223 million. That caught the attention of both the shippers who call on the port and their customers who expressed fears that sharp tariff hikes could dramatically impact their business, which, because it is in basic commodities, could in turn have significant broader impacts on the overall state economy. For one, Ted Stevens Anchorage International Airport’s flagship cargo business — Anchorage is among the busiest cargo hubs in the world — relies on geography that makes it economically advantageous for cargo planes flying between Asia and North America to stop and refuel in Anchorage. Representatives from companies that handle fuel for the airlines have said any change in the tariffs would force the cargo companies to reexamine the business model. Higher fuel and cement tariffs would also be felt by consumers across Alaska, as the Anchorage port is the primary point of entry for the vast majority of goods sold in the state. The Assembly in 2017 changed the official name of the facility to the Port of Alaska as a means of emphasizing that point, which has also been used to make the case for state funding of the port rebuild. However, officials say some level of tariff increases will be likely to pay for the needed work. Large portions of the docks are nearing 60 years old and are close to doubling their 35-year design life. Port maintenance crews for years have been patching the most badly corroded steel pilings that support the docks. Using the $60 million — a mix of internal port funds, a $20 million state grant and remnants from the first failed expansion plan — to fund a year of construction on the petroleum and cement terminal, or PCT, gives city officials and the Assembly time to reevaluate the scope of the entire port modernization project. The cost estimate has gone from less than $500 million in 2014 to about $1.9 billion today and there is a general belief that the current price tag is prohibitively expensive. Falsey said municipal officials have determined that there is no issue with building a portion of the PCT even if it isn’t immediately completed other than a little initial corrosion before it is put into service. “If we build half the PCT we are one year closer to replacing that facility,” he said. City officials on April 16 released an invitation to bid on the work for the 2020 construction season; the bids are due by June 7. Deputy Port Director and engineer Sharen Walsh said the $60 million should enough to drive the pilings and put decking on the terminal trestles. “It will be a standing unit,” Walsh said. Soliciting bids now should give port officials time to select a contractor before the Assembly approves or rejects the spending, likely in July. Port spokesman Jim Jager said in a brief interview that the PCT plan provides time to order the major steel components that come with long-lead times in preparation for construction next year. The partial-build approach is also recognizes that building the entire PCT in one summer was going to be a time crunch, according to Jager, who noted the $223 million estimate contains significant contingency considerations if construction were delayed. Most in-water work at the port must stop if endangered Cook Inlet beluga whales or other marine mammals are spotted near the port; it’s a work limitation that’s hard to account for. “Risk is expensive,” he said. The PCT development would be the first major actual construction to rehabilitate the port since the prior Port of Anchorage Expansion Project was halted in 2010 when flawed construction techniques and possible design issues resulted in major damage to segments of sheet pile that were being installed at the time to support new dock facilities. Jager added that port officials are “cautiously optimistic” about their chances to get a multimillion-dollar grant from the Federal Emergency Management Agency to fund design components that would make the PCT a super-seismic structure. Those features account for about 5 percent of the cost, he said, but the possible total of the prospective grant isn’t settled. Meanwhile, city and port project leaders will be holding formal meetings with port users to get a better sense of what they truly need in a new, rebuilt port. A two-day “charette,” or design meeting involving stakeholders, is scheduled for June 13-14 and another will likely follow later in the summer, according to Falsey. Many of the design choices now seen as possibly too expensive were selected during charettes in 2013 and 2014 led by former Mayor Dan Sullivan’s administration, Falsey said. “We know that there are a lot of costs that got rolled into the program in the design choice that somebody else was going to pay for and I suspect that we can pull a lot of those things off,” he said. The charettes will also help flesh out what features, such as crane and dock size, that the users are willing to pay for. “We all have to be rowing in the same direction if this is going to work,” Falsey said. ^ Elwood Brehmer can be reached at [email protected]

Cook Inlet independent develops new drilling to reach oil

BlueCrest Energy is drilling from the bottom up to reach oil offshore in Cook Inlet. Benjamin Johnson, CEO of the small Texas-based independent, told members of the state House Resources Committee May 1 that the company has developed new long-range drilling techniques with lower costs to access the oil. BlueCrest is developing the Cosmopolitan oil and gas field near Anchor Point on the southern Kenai Peninsula. The Cosmo field has long been known to hold significant resources but development of Cosmo has been a slow process. A prior owner drilled the first exploration well in 2001. “We know for a fact that we have about half a billion barrels of oil in the ground in the field, but what we don’t know is how much of that oil we’re going to get out of the ground,” Johnson said to legislators. The Cosmo oil reservoir is relatively shallow — down to about 7,000 feet — and about three miles offshore so drilling is being done from an onshore pad. The long, angled wells have been drilled to upwards of 30,000 feet, according to Johnson, using what he often notes is currently the most powerful drill rig in Alaska. BlueCrest began producing small amounts of oil from the original well in 2016 and since has drilled another 11 wells into the field, he said. Company leaders initially planned to tap Cosmo with a series of wells drilled about 800 feet apart. Each of those wells were to be fractured once at the end to encourage oil to flow through the multiple layers of the reservoir and into the wellbore, which is a common practice to produce oil from thick, layered fields, Johnson said in an interview. However, fracking is expensive and inexact, as it’s difficult to control the fractures at the end of the well. That led the company’s drilling experts and consultants to theorize about new ways to drill into Cosmo by fully utilizing the capabilities of BlueCrest’s rig. Johnson said the drillers were very successful at steering the rig to drill pretty much wherever they wanted and it occurred to BlueCrest leaders that they could probably drill through the layers of the reservoir from underneath the oil. The technique utilizes the now common practice of drilling multiple sidetrack wells off of a main wellbore; but those sidetrack wells are usually horizontal wells targeting a specific layer in a reservoir. “We weren’t sure how it would work, how successful it would be but it turned out that it has been successful. We’ve got good wells and we were able to replicate it over and over,” he said. The Cosmo field also has a significant natural gas cap above the oil. It’s believed developing the gas would require an offshore drilling platform. The “fishbone” wells allow BlueCrest to punch numerous holes into Cosmo with fewer main wellbores and without fracking. By drilling up through the layers the company is “drilling the fractures,” Johnson described. The technique provides the same penetration as if the wells were being drilled from the surface every 800 feet. “To our knowledge we’ve never seen anybody drill vertically but we’ve been able to do it ourselves,” he said. While company leaders and state regulators stressed the fracking company officials originally planned to conduct was environmentally safe, many residents of the area expressed concerns when BlueCrest was seeking drilling permits that it could impact marine life and possibly groundwater. “The rock is very good; that’s the other thing that makes this work is our rock doesn’t cave in,” Johnson added. “Other places, if the rock is not consolidated enough the formation would cave in and that would be a problem.” The fishbone wells have increased oil production at Cosmo from a few hundred barrels per day in 2016 to between 1,800 to 2,000 barrels per day now. Now BlueCrest leaders are looking to expand on the bottom up fishbone technique in up to 20 more wells by splitting the main well into three spines, each with its own fishbone ribs for what they are calling a “trident fishbone,” according to Johnson. “It makes it faster, more efficient, less cost and it improves the economics to try to pay for these wells,” he said. Over the next year Johnson said oil production could reach the 3,000 to 4,000 barrels per day range. BlueCrest is also likely to eventually add injection wells to maintain pressure in the oil reservoir. Elwood Brehmer can be reached at [email protected]

PIP Printing marks 40 years with SBA award

Some people don’t find a lifelong career because of an intense calling to a specific field. They pursue happiness instead by avoiding what they don’t want to do: work for somebody else. That was the case for John Tatham, who, along with his wife Jan and her sister Shelley Bramstedt started Anchorage’s PIP Printing of Alaska nearly 40 years ago. The trio was recognized earlier this month as the Alaska Small Business Persons of the Year by the U.S. Small Business Administration. “I didn’t have printer’s ink in my veins or anything,” John Tatham said. “I just wanted to be in business for myself. I didn’t have any money, so I just starting casting around for something to do.” A college friend of John’s knew the owner of the PIP corporate franchise at the time and connected him with John, who inquired in the 1970s about opening a store in Anchorage. However, they were told Anchorage was too remote to justify a store, Jan recalled. That lasted for about nine months until John got a call from company officials asking if they were still interested. They said yes and proceeded to grow their printing shop from the three of them to a total of 38 employees today. “We started with just copy machines and one press,” Jan said. Today, PIP offers traditional printing services, vehicle wrapping, design and virtually every type of sign imaginable. John acknowledged during a tour of the Third Avenue complex they’ve been in for 30 years that the printing portion of the business is contracting. He expects the future of the business is in its sign shop. “Nothing ever really goes away but it does shrink and force you to change your business model,” he said. Early on, the trio managed three stores at the behest of corporate leaders who felt more storefronts was the best way to grow the business. They felt that was inefficient and instead consolidated to their current location and developed an outside sales staff to expand. Jan said the freedom to make their own business decisions was a primary reason for wanting to start a PIP franchise. John noted that PIP corporate liked the idea of outside sales personnel so much they adopted it into the company’s business plan. “We’ve done a couple innovative things like that that put us on the map with the franchise,” he added. PIP President Richard Lowe said in a release recognizing the three that he’s not surprised they earned the award from the SBA. “They invest heavily in technology to support their customers. They have an excellent team and over 40 years of experience in the marketing, signs and print industry. We are very proud of their accomplishment,” Lowe said. Jan said their success started with a $100,000 loan underwritten by the SBA that allowed them to open the business. She said they couldn’t get financed through a private bank because they simply didn’t have a track record in business. “When you don’t have it and you need it, it is huge and the SBA was there for us when we needed them,” John added. SBA Alaska economic development advisor Kimberlee Hayward wrote via email that the PIP group was selected because they are downright great business owners. PIP offers retirement benefits, health insurance and bonuses not provided by many small businesses, Hayward said. Additionally, a large portion of their workforce has been with them for up to 30 years and the company has a great reputation amongst its customers. They are also celebrating their 40th year in a challenging line of work, Hayward noted. “This is a huge feat as the industry they are in has seen huge changes due to technology. They have successfully reinvented themselves and rolled with the times,” Hayward said. SBA Regional Administrator Jeremy Field said after a tour of PIP that what’s particularly impressive about the operation is how responsive they have been to their clients’ needs, which he emphasized is common among successful entrepreneurs. Honoring people who have made the most of the help the SBA was able to offer them — whether loans or counseling or something else — and be a positive force in their community is a highlight of his job, Field said. “It’s not like we’re in the Constitution; we’re not here to defend the country from invaders, but the value that the SBA brings…you can’t quantify it because it gives opportunities to business people that might not otherwise have it,” he said. Elwood Brehmer can be reached at [email protected]

Resource potential expands at Alaska graphite prospect

The potential of a unique Western Alaska mineral deposit keeps growing as its developers inch closer to making it a mine. Stan Foo, chief operating officer of Graphite One Inc., told a gathering of the Alaska Support Industry Alliance on May 9 in Anchorage that infill drilling done last year at the company’s Graphite Creek prospect on the Seward Peninsula helped significantly increase the resource estimates for the deposit. “We’re very excited about the improvements we made. We increased the resource by about 14 percent last year,” Foo said. Located on the northern face of the Kigluaik Mountains about 40 miles north of Nome, the Graphite Creek deposit holds measured and indicated resources estimated at nearly 11 million metric tons of ore at an average grade of about 8 percent graphite. The inferred resource is now at approximately 92 million metric tons of ore at 8 percent graphite, a 29 percent increase from figures released in a June 2017 preliminary economic assessment of the project. Overall, Graphite One now believes the deposit could hold more than 7.3 million metric tons of graphite, according to company filings. Foo said some areas of the deposit are more than 20 percent graphite and chunks of the mineral are scattered on the ground in the exploration area. “Some of this graphite is so continuous it looks like an oversized pencil lead when you see the core box (drilling samples),” he said. “It’s a very prominent mineral in the area.” Formerly Graphite One Resources Inc., the company recently dropped “Resources” so its name would better reflect plans to become an integrated graphite producer and manufacturer, instead of being solely a mine operator, according to Foo. Small-scale mining took place in the early 1900s but the area has mostly gone undeveloped since. Graphite One leaders envision a mine that would be much larger than what was done in the area previously, but would still be fairly small by today’s standards, Foo said. Current plans are for mining about 1 million tonnes of ore per year, which would be distilled at an on-site processing plant into about 60,000 tonnes of 95 percent graphite concentrate. The rough concentrate would then be shipped to a purification plant the company hopes to develop somewhere in the Pacific Northwest, where it would be refined into several types of more than 99 percent pure graphite concentrate. Graphite One partnered with the Alaska Industrial Development and Export Authority in 2017 to analyze the prospect of siting the purification plant in Alaska; however, access to lower-cost power in the Pacific Northwest drove the decision to site the plant further south, according to Foo. Overall development cost for the mine and processing plant was pegged at $233 million in a 2017 preliminary economic analysis of the project. The purification-manufacturing plant would cost another $130 million. Full development would also require about 270 employees at the mine, according to the PEA. The mine itself would be a relatively small open-pit operation, Foo said, and the ore would be processed using basic flotation methods. Other Graphite One officials have characterized the prospective mine as an “oversized gravel pit,” as there is no need for the chemical leaching processes commonly found at metal mines. The Graphite Creek deposit contains four types of graphite — a rarity — which led Graphite One to coin the term “STAX” graphite for its spherical, thin flake, aggregate flake, and expanded flake graphite structures, Foo said. The various types of graphite each have characteristics that make them suitable for different applications, but demand for the mineral these days mostly comes from lithium ion battery makers for use in electric vehicles and other high-stress battery applications. “These are all naturally occurring qualities of this deposit, which makes it very unique and the (U.S. Geological Survey) will be studying our deposit this year to determine exactly why this occurrence has these qualities and can we find others in the United States,” he said. He also noted that lithium ion batteries have 10 to 30 times more graphite than lithium. “We like to think they should be called graphite ion batteries. You talk to the cobalt guys; they’d like them to be called cobalt ion,” Foo quipped. In addition to being a primary component for modern energy storage, graphite has long been a popular dry mechanical lubricant. Its resistance to heat also makes it useful in high-temperature applications and its strength and flexibility make it the go-to material for fishing rods and many other uses — in addition to pencils. If developed, Graphite Creek would be the sole domestic source of graphite. China currently controls most of the world’s supply and graphite is on the U.S. Geological Survey’s critical minerals list as a strategically important material for which the country relies on imports. This year, the company will continue its resource evaluation and environmental baseline data collection work while also conducting a pre-feasibility study to evaluate the viability of the project in more detail, Foo said. He added that environmental permitting could be “very straightforward” and suggested the project could warrant a simpler environmental assessment — avoiding the rigorous environmental impact statement process — depending on the U.S. Army Corps of Engineers’ determination on the likely impacts to wetlands. If it all goes as planned, Foo said Graphite One could be turning ground in about four years. Elwood Brehmer can be reached at [email protected]

Legislature, RCA press utilities to coordinate as talks stall

The legislative session is winding down but work continues on efforts to compel the six Railbelt electric utilities to act more as one. The House Energy Committee introduced legislation May 3 to give the Regulatory Commission of Alaska the authority to enforce the standards of an electric reliability organization and jurisdiction over some utilities’ large capital decisions. House Bill 151 comes just as the RCA is preparing to send lawmakers a progress report on the utilities’ current voluntary efforts to pool generation capacity for fuel efficiency and cost savings to ratepayers, which the five-member commission says have stalled. The RCA issued a series of recommendations in a June 2015 letter to the Legislature that outlined ways the electric utilities operating from Fairbanks to Homer could work together, such as combining their generation and transmission assets, as a means to ultimately achieve a more efficient and reliable system. The Legislature requested insight into Railbelt utility operations the year prior. In the letter, the commission characterized the Railbelt electric system at the time as “fragmented” and “balkanized.” It also insisted that if the utilities would not voluntarily work together for the betterment of their customers, the commission would do what it could to mandate better cooperation, either through its own regulations or by seeking statutory help from the Legislature. Some critical observers of the Railbelt electric system contend the six utilities — spread over a large area but with collective demand less than many single Lower 48 utilities — have overbuilt generation capacity in recent years while ignoring transmission investments that could make it more cost effective to move lower cost power from one end of the system to the other. The 2015 letter notes the utilities had spent roughly $1.5 billion on new generation facilities over the previous five years. Utility leaders spent much of the interim period investigating the viability of establishing a transmission company, or transco, that would make large capital decisions based on the system-wide need for an investment. Concurrently, they also looked at establishing a unified, or independent system operator structure, which at a basic level would act as a system-wide power dispatch organization. When properly combined, proponents say the transco and system operator groups would reform the Railbelt grid to resemble more integrated Lower 48 electric utility operations. Currently, the Railbelt utilities continuously buy and sell power to each other; however, they also each apply their own transmission, or wheeling, tariffs, when power is sent across the portion of the main transmission lines they own. This can lead to situations where tariff “pancaking” disincentives power transactions that could otherwise maximize the efficiency of the system as a whole. Renewable energy advocates, in particular, stress that an open-access transmission system with a flat wheeling tariff would allow independent power producers to compete on a level playing field with current power plants for power sales and would incentivize more investment renewable projects in the region. The Alaska Energy Authority released a study in early 2014 estimating that a $900 million overhaul to the transmission system would provide additional power moving capacity that could save Railbelt ratepayers up to $240 million per year by maximizing transmission efficiency and economies of scale in the system. Utility leaders have largely questioned the conclusions of that study, contending the need for investment and corresponding benefit figures are overblown. AEA commissioned a revised Railbelt transmission study in 2017 that reached mostly similar conclusions. In January 2017, Matanuska Electric Association, Anchorage Municipal Light and Power and Chugach Electric Association announced a power pooling and joint dispatch agreement that had accompanying estimated savings in fuel costs — primarily through burning less natural gas — totaling up to $16 million per year collectively. Since early 2013, each of the utilities in the pooling partnership has built new, higher efficiency natural gas-fired power plants. While the plants are individually more efficient than the generation they replaced, jointly orchestrating how they are used can take that efficiency further, according to utility officials. Utility leaders said at the time that the short-term agreement was a step towards a firm 20-year pooling partnership. But during a May 8 meeting, Commissioner Bob Pickett, who has led the RCA’s review of the Railbelt utility operations, said that progress towards the long-term arrangement has stopped. He said it is time for the commission and the Legislature to move toward mandating the utilities work closer together as their voluntary efforts have not been wholly successful. “This does not mean, however, that no value has resulted from the utilities’ efforts over the past four years,” Pickett said. “There has been increased interaction between the dispatch centers and a better understanding between the electric utilities of each other’s generation units and heat rates, operation and maintenance costs. This has provided a better foundation for discussions about pricing and development of transactions.” He continued to note that it’s unlikely the voluntary efforts will resume until 2021, when Chugach’s proposed $1 billion purchase of MLP is likely to be formally completed. Chugach spokeswoman Julie Hasquet wrote via email that efforts to achieve a firm, or tight power pool are continuing. The three Anchorage-area utilities in October notified the RCA that they would pause the three-party negotiations to focus on the utility merger, Hasquet said, adding that Chugach’s acquisition of MLP will realize most of the savings from a tight power pool. “Chugach has committed to MEA that we will continue to negotiate the tight pool following the RCA process on acquisition. The processes developed to operate as a tight power pool can easily be expanded throughout the Railbelt,” she said, “and we welcome the other utilities to join in.” In late February, four of the six Railbelt utilities — minus Chugach and MEA — applied with Wisconsin-based ATC Development Company LLC to the RCA to form Alaska Railbelt Transmission LLC, a transmission-only utility based on the transco model. MEA leaders have long said they believe a complex transco is unnecessary to realize efficiencies in the system and could force utilities into making investments that are ultimately detrimental to their operations, which would be counter to their obligations to their own ratepayers. MEA officials contended in comments on the transco application that it does not demonstrate how the transmission utility’s proposed activities would serve the public interest. MEA also questioned the ability of the startup utility to provide the touted benefits. Lee Thibert, CEO of Chugach, which did not join Alaska Railbelt Transmission, said in comments to the RCA that the utility has concerns about how being a member the for-profit transmission utility would impact the cooperative’s tax-exempt status and how its formation could impact Chugach’s potential purchase of MLP, among other issues. ^ Elwood Brehmer can be reached at [email protected]

Fire from ice: Research advances into unlocking methane hydrate

A research well drilled last winter into the Prudhoe Bay oil field could be a key to unlocking vast stores of yet untapped energy. Last December, a consortium of scientists from the U.S. Geological Survey, Department of Energy and Japan Oil, Gas and Metals National Corp. partnered with BP to drill a shallow test well from an unused pad in the western portion of the large Prudhoe field into the rock layers above the oil and gas pools . The well successfully targeted two formations of natural gas hydrate, according to an April USGS release. It was also the start of a multi-year research endeavor with the ultimate goal of better understanding the viability of commercial gas hydrate production. USGS Senior Scientist and University of Alaska Fairbanks graduate Tim Collett said the Prudhoe well represents what is likely the first gas hydrate research that goes beyond the realm of experimentation and into an actual production test. “The (research) world pretty much knows this project well and points to it as a real pivotal event in gas hydrate, as you can imagine,” Collett said in an interview. While an emerging and understudied potential energy source, the fundamental elements of gas hydrate are simple and well understood. Gas hydrate is ostensibly made of natural gas trapped in ice crystals. On the North Slope it is known to occur above the Prudhoe Bay and Kuparuk River oil and gas fields in conventional porous sand formations, according to Collett. It forms under a range of temperature and pressure conditions — just below the freezing point in permafrost as shallow as 1,000 feet down to temperatures as high as 50 degrees at depths of about 3,000 feet. The ideal pressure for gas hydrate is in the 1,500 pounds per square inch range, he said. “It’s basically just a cage of water molecules organized around a gas molecule under a certain range of PT (pressure-temperature) and under those conditions the cage becomes rigid, so it’s a solid,” Collett described. Gas hydrate reservoirs are appealing because they generally have more capacity to store than conventional gas reservoirs and they consistently form at relatively shallow depths, he added. The Prudhoe well struck reservoirs at about 2,300 feet and 2,770 feet below the surface. Gas hydrate was found to be filling 65 percent to more than 80 percent of the spaces, or porosity, between the grains of sand and silt in the upper reservoir that comprise the rock formation, according to the USGS. The gas hydrate accumulations on the North Slope hold the same natural gas as is found in the conventional reservoirs. When the hydrocarbon-bearing formations of Prudhoe Bay were charged 60 million to 120 million years ago they were tilted into an uplifted position and some of the gas and oil migrated to the upper end of the structure, Collett explained. Much of the gas that moved upward ended up in the zone where pressure and temperature conditions would eventually become suitable for hydrate formation. “About 1.6 million years ago, when Arctic conditions were established and permafrost originally formed — this is the period of glaciation — those gas accumulations were converted to hydrates,” Collett described. Solid estimates The greater gas storage capacity in hydrate reservoirs comes from the fact that it is in a solid form. “If I had a block of gas hydrate on my desk that was 1 square-foot it would produce approximately 164 cubic feet of gas and about 0.9 cubic feet of water,” Collett said. A 2008 USGS assessment estimated there are roughly 85 trillion cubic feet, or tcf, of technically recoverable natural gas trapped in hydrate form beneath the surface of the Slope. For comparison, the North Slope’s massive conventional proven gas resources total about 35 tcf. Collett noted that about one-quarter of the world’s land mass is underlain by permafrost and has the potential to hold gas hydrate. It is also found in some of the first layers of sediment where the ocean reaches depths of about 1,500 feet or more. Those are the places where the pressure and temperature regimes are favorable for hydrate formation. Beyond that, Collett said, hydrate needs the same processes and conditions needed to form conventional hydrocarbon occurrences. Global hydrate estimates “are on order of tens of thousands trillion cubic feet” of gas, compared to about 7,000 tcf of proven gas resources worldwide, according to the Department of Energy. With hard-to-fathom potential, it’s natural to wonder why more work has not been done to commercialize gas hydrate. For starters, “The samples are very difficult to collect and take back to a lab and study,” said Ray Boswell, a geologist with the National Energy Technology Laboratory. Additionally, the deep sea hydrate tests are exceedingly expensive and difficult to conduct long-term, Boswell said; and previous tests at Prudhoe in 2012 and Canada’s Mackenzie Delta 15 to 20 years ago were done on ice pads, which limited their duration to weeks instead of months or years. Collett said gas hydrate was first identified in the 1940s in natural gas pipelines in Siberia; they would form and plug pipelines and that is still industry’s primary interest in hydrate formation. The first samples from gas hydrate reservoirs were not taken until the mid-1990s, according to Collett. Producing interest U.S. government agencies have been studying gas hydrate for about 35 years and that work has mostly been focused on identifying the conditions needed for it to form, according to the researchers. Boswell said the current test — fortuitously on an old, mostly unused gravel exploration pad — is focused on determining if gas hydrate can be produced long-term. Japan Oil, Gas and Metals National Corp. is involved to learn more about gas hydrate on the hope of eventually being able to produce natural gas from subsea hydrate occurrences near the country, according to Collett. He said Japan and China in particular are interested in advancing gas hydrate development through their national oil companies because they currently import large amounts of energy through coal and liquefied natural gas. Natural gas is produced from hydrate by depressurizing or warming the reservoir, which dissociates the gas and water. Depressurizing the reservoir can be as simple as drilling a well into it, but maintaining those conditions can be difficult. The researchers also noted that heating a hydrate reservoir requires heating all of the associated rock formation, which requires a lot of energy. Finally, the dissociation of the water and gas is an endothermic reaction, meaning it results in cooling that drives the hydrate back into equilibrium — yet another challenge. “The reservoirs are in a solid state and they like it that way,” Boswell said. As for the Slope study, BP Alaska spokeswoman Meg Baldino said the company allowed access to the pad, drilled the well using one of its contracted rigs owned by Parker Drilling and has supported hydrate research for decades. Boswell said the Prudhoe owners — BP, ConocoPhillips and ExxonMobil — also let government researchers review confidential data that helped in the site selection process. Collett surmised that private industry has been slow to investigate gas hydrate commercialization because it is such a new realm of study and recent breakthroughs in unconventional oil and gas production mean there are ample opportunities for less speculative investments. The next couple years will be spent turning the test well into a well to monitor another yet-to-be-drilled well for production tests. A third well will also drilled to monitor production tests, according to Collett. When those additional wells will be drilled is unclear at this point, as the agencies need to coordinate with the companies to work out when a drilling rig will be available again. He said BP used drilling the first well “as an opportunity before the winter drilling season to, quote, ‘warm up a rig,’” and then moved on to the rest of their work. With so many variables, the final cost of the research is also unclear at this point, but “as with anything in Alaska it’s not cheap,” Collett noted. The data from the test and monitoring wells will eventually be entered into models that can estimate hydrate production over many years, which he said researchers are confident in. However, they have never had access to enough data to fully form the models. “There’s many variables in this story and we try to simulate those in production models but without long-term tests to calibrate them you’re just at a limit to how much you can trust your modeling,” Collett said. Melting methane Melting permafrost has also been identified as a potential unwanted source of greenhouse gases; that is, if much of the world’s permafrost were to melt it could release the methane stored in gas hydrate form into the atmosphere. Such a process could exacerbate climate change because methane — pure natural gas — is a much more impactful greenhouse gas than carbon dioxide. Collett and Boswell said recent research by USGS scientists has largely quelled that fear. A 2017 report by Carolyn Ruppel and John Kessler entitled “The interaction of climate change and methane hydrates” concludes that large releases of gas hydrate-derived methane are unlikely in the near future simply because most of the landside hydrate formations are beneath more than 1,000 feet of permafrost. “If we changed the temperature at the surface at Prudhoe Bay onshore 20 degrees (Fahrenheit) the base of the permafrost would not even see that change for 10,000 years,” Collett described. “That’s well documented; it’s good science.” He said shallow subsea Arctic hydrate formations, such as under the Beaufort Sea, could release methane sooner as ocean temperatures rise, but it’s unlikely that would occur over a “human timeframe” — hundreds or thousands of years. However, he acknowledged that does not change the fact that gas hydrate is another form of fossil fuels that if developed would add to global carbon emissions. “You go down that (hydrate) pathway, you start dealing with the role of natural gas relative to coal, relative to renewables. There’s a whole series of additional discussions,” he said. Boswell, Collett and the 2017 study all also note that methane releases from gas hydrate formations is a different issue than potential releases of carbon sourced from organic microbial processes trapped in shallow, discontinuous permafrost. ^ Elwood Brehmer can be reached at [email protected]

Senate bill would strike down initiatives modified in court

A bill that would make it a little harder for Alaska voters to change or make laws on their own is halfway through the Legislature. The state Senate passed Senate Bill 80 on a 15-4 vote May 2, which would require the lieutenant governor to automatically reject a voter-sponsored initiative if the courts deem a portion of the initiative unconstitutional. SB 80 sponsor Sen. Chris Birch, R-Anchorage, said during floor debate that the bill is aimed at assuring an initiative — a proposed change to state law — that makes it on a statewide ballot matches what voters signed for early in the process. Alaska is one of 24 states that allow citizens to enact legislation through a voter-driven initiative. In Alaska, initiative sponsors have up to one year after the lieutenant governor certifies their application to collect signatures from registered voters at least equal to 10 percent of the number of voters in the prior general election with voters from at least 30 of the 40 state House districts. From there, the sponsors file the petition booklets with the Division of Elections for review. The division and the lieutenant governor, whose primary responsibility is overseeing elections, then have 60 days to certify the initiative as eligible to appear on a statewide ballot or reject it. However, the timing in that process can sometimes lead to incongruities between what initiative supporters sign their names to and what actually appears on the ballot. It’s what happened last year with the “Stand for Salmon” initiative and what Birch says SB 80 seeks to avoid. “Voters should be assured that the language on the ballot has not changed from the language in the petition booklets supported with signatures,” Birch said. According to the Department of Law, just two voter-sponsored initiatives have been amended by state courts and appeared on the ballot: the salmon habitat initiative and another, which also failed in 1988, relating to the state university system. Overall, Alaskans have voted on 54 ballot initiatives since statehood, according to Division of Elections records. The sponsors of the Stand for Salmon initiative — which sought to overhaul the state’s salmon habitat permitting regime and set higher bars for development projects in those areas — had their petition application rejected by former Lt. Gov. Byron Mallott in September 2017. Mallott rejected the proposed initiative language on the advice of Department of Law officials who said the salmon habitat initiative violated aspects of the state Constitution. That led to a Superior Court review of the initiative language and Judge Mark Rindner in October 2017 overturned Mallott’s decision, allowing the initiative to proceed. Rindner’s decision, in turn, was appealed by the Department of Law to the Alaska Supreme Court while the Stand for Salmon sponsors were gathering the more than 32,000 signatures needed to get their initiative on the fall 2018 ballot. The Supreme Court ultimately ruled unanimously in August 2018 that the most restrictive requirements the proposed initiative would have placed on development proponents were unconstitutional. The justices stripped those portions of the initiative out and allowed the remaining aspects to move ahead for a public vote because they determined it remained substantially similar to the original, but the version of Stand for Salmon that appeared on the ballot did not match what signatories supported; it was watered-down. The Stand for Salmon initiative eventually lost by nearly a 2-1 margin after an intense campaign. Birch, who strongly opposed Stand for Salmon, said in an interview that SB 80 is in response to how the salmon habitat initiative played out, but he noted that it “cuts both ways” for future initiatives if SB 80 passes. Public support in Senate hearings for the bill came primarily from pro-development groups that campaigned against Stand for Salmon last year, such as the Resource Development Council for Alaska, the Alaska Chamber and the Alaska Support Industry Alliance. “I think when you sign something in front of the REI store the expectation is presumably whatever you sign is going to be on the ballot and not substantially rewritten by the courts,” Birch said. Those groups stressed in written testimony that the language of a ballot initiative needs to remain wholly intact throughout the process and if it is changed by a court the Legislature should have an opportunity to review the modified initiative. The Legislature can nullify an initiative by passing a law that is “substantially the same” to the initiative, according to the Constitution, which lawmakers did last year in response to an initiative dealing with legislative pay and conflict of interest laws. The groups also contend SB 80 would limit the number of protracted legal battles over voter initiatives and discourage sponsors from drafting ambitious language with an implicit understanding that the courts can do the requisite editing. Sen. Jesse Kiehl, D-Juneau, said during floor debates that SB 80 would likely result in the opposite; opponents of an initiative could challenge it and hunt for any small inconsistencies that could result in the whole thing being sent back to square one. Valerie Brown, legal director for the environmental law firm Trustees for Alaska represented the Stand for Salmon sponsors in front of the Supreme Court, dismissed the notion that sponsors “shoot for the moon” in drafting an initiative and rely on the courts to refine its legality. “That whole (legal) process — you don’t want to go through it if you don’t have to. It’s time consuming; it’s expensive. You want language that adheres to the allowable restrictions on initiatives that do exist,” Brown said in an interview. She characterized SB 80 as a way to restrict citizens’ voices in the lawmaking process. “They saw a citizens’ uprising essentially demanding better protections for salmon and now we have this bill that’s an attempt to add another restriction to how you can use initiatives,” she said. SB 80 also faces legal questions of its own. An April 23 memo to Kiehl from Legislative Legal Services attorney Alpheus Bullard surmises that the bill could be unconstitutional because it would place additional restrictions on the initiative process beyond what is called for in the Alaska Constitution. Article XII of the Constitution, according to Bullard, requires that the rules for direct citizen lawmaking cannot be more restrictive than what the Legislature must abide by; and bills going through the traditional legislative process can be parsed. For his part, Birch points to Article XI, which states that, “Additional procedures (beyond those in the Constitution) for the initiative and referendum process may be prescribed by law.” “I understand protecting the public’s right for redress and petitioning their government but at the same time there’s an issue of overreach,” he said. “You can just put anything willy-nilly into the legislation and then it finds its way onto the ballot and you’ve got a huge (campaign) cost and impact.” More than $10 million was spent on a campaign opposing Stand for Salmon, while its supporters spent roughly $3 million. Brown suggested as an alternative to SB 80 that a formal process be set up in which initiative sponsors could consult with Department of Law officials about the constitutionality of their proposal. Currently, she said, it’s up to the department if such guidance is going to be offered. In the case of Stand for Salmon, Law attorneys first notified the sponsors before Mallott rejected it that several aspects of the initiative likely did not pass constitutional muster. The sponsors subsequently resubmitted a new version of their habitat permitting law change — which again was ultimately rejected by Mallott — but Law officials were criticized by opponents of the initiative for their assistance. “They caught a lot of flak for even being willing to tell us what they thought was wrong, so if they had an administrative process where in good faith the sponsors could work with the Department of Law that would be a chance to keep some of these challenges out of court,” Brown said. Ballot measure spending The version of SB 80 that passed the also includes a late amendment by Sen. Bill Wielechowski, D-Anchorage, that would prohibit state money from being spent to influence ballot measures such as initiatives, referendums, recalls and proposed constitutional amendments. Wielechowski said he thinks most people likely already believe it is illegal for state money to be spent on a ballot measure campaign; however, it is legal if the funds are specifically appropriated for that purpose. “The state’s role in the ballot process should be to conduct fair elections and then should be to implement the will of the people,” he said during debate on SB 80. To that end, the bill could make Gov. Michael J. Dunleavy’s radio ads promoting his administration’s proposed constitutional amendments illegal. Officials in the Governor’s Office said in a March 21 press release that a series of radio spots costing approximately $9,000 in support of his plan to enshrine the Permanent Fund Dividend in the Constitution would air in the Kenai, Mat-Su and Fairbanks areas. SB 80 is now up for consideration in the House, where it has been referred to the State Affairs and Judiciary committees. No hearings have yet been scheduled. ^ Elwood Brehmer can be reached at [email protected]

Dunleavy poised to lose battle over education budget cuts

Funding for public education is an omnipresent issue nationwide, but it can become particularly contentious in Alaska where often unavoidably high costs meet standardized test scores that rank near the bottom nationally. While the debate usually falls along party lines, this year Republican Gov. Michael J. Dunleavy’s administration has pitted itself against legislators of all political stripes. Dunleavy has repeatedly cited poor standardized reading and math test scores for Alaska 4th and 8th graders as reasons the state needs to overhaul its K-12 education system. Correspondingly, his budget proposal released in February calls for cutting the Department of Education budget by $325 million, or about 24 percent, of the $1.3 billion budget, which administration officials have said is a precursor to overall education reform that will focus on reading proficiency in early grades and algebra in middle school. The vast majority of that cut, $269 million, would be to the block of money that funds the state base student allocation, or BSA, formula that calculates how much state money each school district gets per student. Dunleavy also proposed pulling back a $30 million one-time appropriation for school districts that the Legislature last year for the upcoming 2020 fiscal year. The $30 million is in addition to the larger BSA block that the Legislature forward-funded in last year for the upcoming budget. However, Attorney General has Kevin Clarkson outlined the administration’s position that forward-funding state appropriations could violate the constitutional prohibition on dedicating revenue and the governor’s authority to veto appropriations. Attorneys for Legislative Legal Services contend that the future appropriations signed into law last year by former Gov. Bill Walker are not eligible for Dunleavy to veto unless the Legislature amends or repeals them. The administration has also withheld a $20 million supplemental payment approved for the current budget until the Legislature officially rejects a proposal in the supplemental budget to repeal it, prompting a lawsuit by the nonprofit Coalition for Education Equity. Legislators from every caucus — including the House Republicans who have been most supportive of Dunleavy’s policies — have supported funding K-12 at least at last year’s levels. Dunleavy said during a March meeting with the Journal and Daily News that the $269 million formula reduction close to matches what Alaska’s 53 school districts had available in reserves statewide. The districts could use that money to mitigate the impacts of the budget cuts as the policy reforms are implemented, according to the governor. “In my mind, I’m thinking, how can we do this so school districts have some money to work with so they can do a step down,” Dunleavy said. The governor’s spokesman Matt Shuckerow provided a chart indicating districts collectively had $291 million in operating, pupil transportation and capital funds in fiscal year 2017. The governor said at the time that his administration would be releasing education reform bills within weeks, but those have not yet been submitted. A March 8 letter from OMB Director Donna Arduin to the Senate Finance co-chairs states that the 2018 district fund balance totals weren’t fully available, but the administration estimated it would be $143 million. Association of Alaska School Boards Executive Director Norm Wooten said the districts use the reserves to manage cash flow and respond to unforeseen expenses as most other types of organizations do and it’s not in a district’s purview to have more money than they need to operate. State law limits districts’ reserves to 10 percent of their annual budgets. “It’s disingenuous to think we can run schools without a fund balance and there’s not a school district in the state to my knowledge that has an excess amount of fund balance that they are socking away,” Wooten said. The House and Senate have also agreed to at least partially fund the portion of school construction bond debt the state agreed to pay in prior years. The House budget funds half of the state’s $107 million prorated share, while the Senate fully funded the commitment. Dunleavy proposed eliminating the payments in his budget. Elwood Brehmer can be reached at [email protected]

PFD is TBD entering final week of session

As is often the case, activity in Juneau is ramping up as the legislative session is winding down. The budget is at the center of almost everything legislators have done so far, but lawmakers in the House are also close to sending an omnibus crime bill to the Senate. That legislation, House Bill 49, would roll back many of the provisions of Senate Bill 91, the 2016 criminal justice reform package aimed at reducing state incarceration rates that has drawn ire from the public. SB 91 has largely been blamed for the statewide spike in property crimes in recent years, although Alaska’s concurring opioid epidemic and drawn-out recession have also been cited as reasons for the rise in crime. However, it’s unclear at this point what the Senate will be able to do with HB 49 with only about a week left in the regular session and the budget still unresolved. Gov. Michael J. Dunleavy has said he would be willing to call a special session if crime legislation is not addressed this year, but those calls will likely be left for after May 15, the last day of the regular session. House and Senate Finance leaders convened briefly May 7 for the initial operating budget conference committee meeting. The joint operating budget conference committee is being chaired by House Finance co-chair Neal Foster, D-Nome. At the highest level and on items other than the Permanent Fund dividend, the Senate’s unrestricted General Fund budget is $2 million less than what passed the House in April. Both budgets contain about $720 million more for agency and statewide spending, such as debt service, than Dunleavy proposed in February. While Dunleavy has emphasized closing the roughly $1.6 billion budget deficit without new revenues or reductions to the PFD, nearly half of his plan to close the budget gap came from redirecting existing state funds or diverting local petroleum property and fishing landing tax revenues to the state. The administration’s bills to shift the local taxes to state coffers have mostly been ignored by the Legislature. On the big budget items, legislators, to varying degrees, have split the difference between Dunleavy’s budget and current state spending levels. The Senate approved just more than $1 billion for the Department of Health and Social Services, while the House included an additional $54 million on public health and assistance programs. The difference is largely due to differing beliefs regarding how much of the administration’s roughly $100 million in regulatory and efficiency cuts to Medicaid can be achieved this year. Many of the administration’s cuts in DHSS to areas other than Medicaid were scaled back by legislators. The Senate DHSS budget is $142 million less than current, fiscal year 2019 spending, while Dunleavy had proposed $309 million in Health Department cuts. State hospital leaders said the administration’s original plan to cut upwards of $270 million from the state’s portion of the Medicaid program — which would mean forgoing approximately $470 million in federal matching funds — would severely strain the finances of smaller hospitals in the state, discourage providers from accepting Medicaid and would greatly harm the state’s already fragile economy. The Senate also roughly halved the governor’s $95 million cut to the Alaska Marine Highway System with a $44 million reduction that would keep the ferries running at reduced levels year-round. The House cut ferry funding by just $10 million. The governor’s plan to shut down the ferry system Oct. 1 while in the meantime studying alternative management structures was admonished by many coastal residents and legislators, particularly given statements during his campaign that he did not plan to drastically curtail ferry service. Dunleavy’s $134 million cut to the University of Alaska system was also largely disregarded. The House agreed to a $10 million university cut; in the Senate it’s $5 million. The Senate also chose to add $11 million above current levels to the Department of Corrections current $291 million budget, while the House landed on a $14 million cut and the governor proposed a $19 million reduction to Corrections spending. Both bodies also added about $10 million to the Public Safety budget, while Dunleavy planned to cut it by $3 million. They also left Department of Education funding largely unchanged from current levels after forward funding it last year. The Senate Finance Committee is also in the midst of finalizing its version of the capital budget. The Senate’s capital spending plan calls for $172 million in unrestricted General Fund spending largely to match just more than $1 billion in federal funds, mostly for highway and airport projects. The governor’s capital budget calls for $95 million in discretionary General Fund appropriations. The latest version of the capital budget also restores Alaska Marine Highway vessel maintenance and Tustumena ferry replacement funding. It also funds the Alaska Housing Finance Corp.’s popular home weatherization program and its Cold Climate Housing Research Center. What will be the final totals for both budgets is unclear at this point and Dunleavy’s expressed willingness to veto parts or all of the state’s budgets adds another major wrinkle to the situation. However, the strong and unusual bipartisan support for the budget in the Senate — it passed 19-1 — is an indicator that there could be enough support for the Legislature’s final budget to override any vetoes. Overriding a budget veto requires support from 45 of 60 legislators. Permanent Fund budgeting There are glaring holes in different places related to the PFD in both the House and Senate budgets. Despite being crafted by Republican Finance co-chairs Sens. Bert Stedman of Sitka and Natasha von Imhof of Anchorage — both of whom have stressed the need to protect the Permanent Fund and recalculate the dividend formula — the Senate’s budget contains full funding for a roughly $3,000 PFD. However, the large dividend results in a $1.2 billion deficit in the Senate’s plan. A fully funded 2019 PFD will cost the state slightly more than $2 billion, according to the Legislative Finance Division. The Senate’s budget would balance with funding to support roughly $1,200 PFDs, according to Finance figures. On the House side, the issue is the complete lack of a PFD in the budget. House leaders have said the PFD would be addressed in separate legislation; but the huge discrepancy leaves ample room for a compromised PFD amount to be worked out in the conference committee, which Stedman and von Imhof have indicated was at least partly behind their thinking to initially appropriate for full dividends. As a counterbalance, the Senate budget would also move $12 billion from the spendable, $18 billion Earnings Reserve Account of the overall $65 billion Permanent Fund to the constitutionally protected corpus of the fund. Such a transfer would discourage legislators from violating the 5.25 percent of market value draw limit on the Permanent Fund established last year, but could also put the Earnings Reserve at risk of being depleted if financial markets have several successive down years. This year’s 5.25 percent draw calculates to approximately $3 billion to be split for PFDs and government services. Completely draining the Earnings Reserve through ad hoc draws, poor returns, or a combination would leave no money for dividends or government support in future years. The House Finance Committee on May 6 sent a proposal to the floor from Sitka Democrat Rep. Jonathan Kreiss-Tomkins to transfer $8 billion from the Earnings Reserve to the Permanent Fund corpus. The smaller transfer is seen as a way to still protect billions from being spent while leaving additional headroom in the event of market downturns. Elwood Brehmer can be reached at [email protected]

FWS wants most conservative ANWR option

The federal agency tasked with managing the Arctic National Wildlife Refuge is recommending the most conservation-minded option available for oil and gas development in the Coastal Plain. The U.S. Fish and Wildlife Service Alaska officials asked the Bureau of Land Management to select Alternative D-2 from the draft environmental impact statement published in December for leasing areas of the roughly 1.5 million-acre Coastal Plain. The alternative request and other management recommendations were made in 59 pages of comments on the draft EIS submitted to BLM March 13. Alternative D-2 would open just more than 1 million acres to oil and gas leasing; however, activity on 708,000 of those acres would be restricted by a “no surface activity” designation and another 328,000 acres would be subject to some limitations on type and timing of use to minimize development impacts on wildlife. The D-2 management option would meet the requirements of the tax reform bill while also best preserving the wilderness features prescribed in the 1980 Alaska National Interest Lands Conservation Act, according to the memo signed by FWS Alaska Director Greg Siekaniec. The act, best known as ANILCA, doubled the size of the refuge and also opened the door to potential oil and gas activity in the Coastal Plain. Additionally, the FWS preferred alternative would maintain the natural qualities of rivers within the refuge that could qualify to be added to the National Wild and Scenic River System and best aligns with Endangered Species and Marine Mammal Protection Act management requirements, the memo states. For comparison, the least restrictive alternative would open all 1.5 million acres for leasing and just 359,000 acres — mostly along rivers in the refuge and near Kaktovik — would fall under the designation for no surface occupancy. BLM Alaska officials noted that winter exploration activities could be conducted on no surface occupancy areas, which could be developed using directional drilling from adjacent facilities, but permanent infrastructure would be prohibited. Alternative D-2 would place areas across the Coastal Plain under the no surface occupancy designation and 526,000 acres mostly in the southeast portion of the refuge would be off-limits to leasing to protect Porcupine caribou herd summer calving grounds. The eastern Alaska-western Canada caribou use large swaths of the Coastal Plain as calving grounds and what impact oil development could have on the herd has been a primary debate point in the battle over ANWR oil exploration. The ANWR rider to the Tax Cut and Jobs Act passed in December 2017 directs the Interior Department to hold two oil and gas lease sales, each covering at least 400,000 acres of the coastal plain before 2025. It limits permanent development to 2,000 acres of federal land. FWS and BLM are sister agencies under the Interior Department umbrella. The Alaska Native village corporation Kaktovik Inupiat Corp. also owns about 92,000 acres around the coastal village of Kaktovik within the refuge that would also be open to development. FWS Alaska officials also stressed a desire for in-depth consultation with their BLM counterparts to reach a consensus on oil and gas decisions that would impact the wildlife and aquatic resources managed by the service. Interior spokeswoman Molly Block noted in response to questions about how the BLM will weigh the FWS comments in the final EIS that more than 1 million comments were submitted on the draft Coastal Plain EIS. “BLM has an obligation to consider all of these comments — including those from its sister agency and the federal family — and anticipates they will inform the final EIS in multiple ways,” Block wrote via email. Interior leaders have stressed a desire to hold a Coastal Plain lease sale late this year and public meeting presentations indicate the final draft of the EIS could be released in late summer. Exactly what level of interest industry will have in the Coastal Plain leases is also unknown. The most recent U.S. Geological Survey assessment of the oil and gas underneath the coastal plain, done in 1998, put the mean oil estimate at 7.6 billion barrels for the Coastal Plain 1002 area. A plan for a 3-D seismic survey over much of the Coastal Plain last winter was scuttled by the extended government shutdown and a lengthy review by Fish and Wildlife regarding the impacts of the survey on denning polar bears. The FWS comments also detailed a strong belief that polar bear denning habitat should be given significant consideration when lease offerings and associated stipulations are made. The Coastal Plain is a primary area of the Slope the bears use for denning and surveys of denning habitat should be required under all development options, according to FWS officials. The importance of those surveys will likely continue to escalate as land-based denning increases while sea ice declines, the memo states. FWS officials are also requesting that the final EIS explain how BLM will define the areas of the Coastal Plain with the highest hydrocarbon potential because the law authorizing exploration explicitly states that the 400,000-plus acres offered in each lease sale must correspond to the areas deemed to have the best resource potential. “Specifically, it is not clear how the draft EIS arrives at delineating an area of moderate potential and how this area meets the high (hydrocarbon potential) criteria set forth in the Tax Act for lease sales,” the memo states. The draft environmental review also lacks sufficient description of how BLM plans to prevent or deal with the introduction of invasive species to the refuge from oil development, according to the memo. Finally, FWS officials want more examination of how the rapidly warming Arctic climate will impact the Coastal Plain and oil and gas infrastructure in particular. Their memo cites a recent study that concluded melting permafrost “will be an engineering hazard to (North Slope) infrastructure by mid-century.” “Effects of these changes have shown to be more severe in areas with topographic complexity such as the (Coastal Plain),” it states. “We recommend that studies like these be included in the analysis of potential impacts to various development scenarios.” Elwood Brehmer can be reached at [email protected]

Severe winter weather costs Alaska Airlines in first quarter

Alaska Airlines muddled its way through unusually bad winter weather on its home turf to lead its parent company to a $4 million profit to start 2019. Seattle-based Alaska Air Group Inc. operates Alaska Airlines and regional carrier Horizon Air. Company leaders said during an April 25 first quarter earnings call with investors that February storms made for the most significant winter weather the Pacific Northwest has seen in almost 50 years and led to roughly $15 million in forgone revenue. “Our teams went above and beyond to keep our guests and each other safe and to minimize the number of flights we had to cancel,” CEO Brad Tilden said while noting Alaska and Horizon canceled approximately 1,100 flights as a result of the winter storms. Tilden also said lower than expected market rates for last minute tickets on transcontinental flights challenged revenue generation as well. The $4 million net income in the first quarter — easily the slowest period in the airline business — matches Alaska Air Group’s results to start 2018 when the company was focusing on integrating Virgin America employees and aircraft into its network. The profit equates to 3 cents per diluted share of Alaska Air Group stock, which has rebounded from a 2.9 percent post-earnings call dip since April 25 and opened trading May 1 at $62 per share. Alaska Air Group paid a dividend of 35 cents per share and repurchased approximately $13 million worth of shares during the quarter. Tilden said the work to blend Virgin America into Alaska Airlines that has been ongoing since late 2016 is pretty much complete and the company is “on track to realize $330 million in revenue synergies this year.” Virgin and Alaska flight attendant crews were fully integrated as of Jan. 31 and the last of Virgin’s fleet of 71 Airbus aircraft will be repainted in Alaska livery by June, according to Air Group leaders. Alaska Airlines also added four new Boeing 737-900ER aircraft to its fleet in the first quarter. The airline, which for years before buying Virgin solely flew the popular 737 series, does not have any of the 737 MAX aircraft that have been grounded worldwide. The $4 million profit stemmed from nearly $1.9 billion in quarterly operating revenue, a 2 percent year-over-year increase on 0.2 percent capacity growth. While Alaska Air Group saw small growth in its passenger and smaller ancillary revenue segments, the company enjoyed 22 percent growth in its cargo business, which generated $50 million during the quarter. Alaska Airlines has used the formerly Virgin America Airbus fleet in part to expand its Lower 48 cargo offerings. Last summer it also began flying three cargo-dedicated Boeing 737-700s across Alaska. The new cargo jets are more fuel efficient than the much older Boeing 737-400 “combi” aircraft that were well known to in-state Alaska travelers for years and collectively offer 20 percent more cargo capacity, according to the airline. Alaska Air Group’s two largest expenses, wages and fuel, increased by 4 percent and 3 percent respectively, compared to 2018. The company generated $470 million in operating cash flow and held roughly $1.4 billion in cash at the end of the quarter, according to the earnings report. Its debt-to-capitalization ratio held steady at 47 percent. Looking ahead, company executives said near-term growth will be slower and more work needs to be done to control costs but they are generally positive about the future. Tilden said the previously stated goal of consistently hitting profit margins in the 13 percent to 15 percent range is achievable and “viewed through that lense our first quarter results were solid.” “On factors we can control that drive long-term value we’re headed in the right direction,” he added. Chief Financial Officer Brandon Pedersen said the company continues to renegotiate agreements with vendors for greater cost containment and thanked the companies Air Group works with that have been willing to make those adjustments. For the second quarter Air Group expects costs per seat mile to increase about 5 percent on a 1 percent increase in capacity because of capacity growth weighted to regional flights and aircraft maintenance that is often frontloaded to the first half of the year. Full-year consolidated capacity growth is forecasted at about 2 percent with per-unit costs expected to increase 2.1 percent. “We’ve slowed our growth to let recent investments mature and to focus our energies on making better use of what we have,” Tilden said. “We’re investing in our people, our product and we’re coming together as one team to realize the great potential of our platform.” ^ Elwood Brehmer can be reached at [email protected]

ConocoPhillips boosts Alaska output by 20% in 1Q

ConocoPhillips continued its run of strong returns to start 2019 with its third consecutive quarterly profit of $1.8 billion as its Alaska oil production increased nearly 20 percent. The Houston-based explorer and producer netted $384 million in the first quarter from its North Slope operations compared to $445 million in 2018, according to its earnings report released April 30. In turn, ConocoPhillips paid $249 million in taxes and royalties to the State of Alaska, according to spokeswoman Natalie Lowman. The $1.8 billion first quarter profit companywide was a drastic improvement over the $888 million ConocoPhillips earned in the first quarter of 2018. The recent profit translates to $1.60 per share and came on the back of $10 billion in revenue. ConocoPhillips generated $1.3 billion in free cash flow and with that repurchased roughly $800 million worth of stock shares and paid another $300 million in dividends, according to a company release. It ended the quarter holding $6.5 billion in cash. Venezuela was also ordered to pay ConocoPhillips $8.7 billion via a ruling issued during the quarter from the International Centre of Investment Disputes for its previous expropriation of the company’s assets in the country. CEO Ryan Lance said in a formal statement that the company’s efforts to better insulate itself from volatile oil and gas markets are paying off. ConocoPhillips leaders Alaska have said they set a “breakeven” goal of $40 per barrel for their operations in the state after the 2014-15 oil price decline, in large measure to compete with ever-cheaper to produce Lower 48 shale oil prospects. “We continue to execute and deliver on a plan that’s resilient to lower prices, while offering investors upside at higher prices. We approach the business with an aim to level-load our investment and distribution programs, rather than chase cycles up or down, because we believe that is the best way to create sustained value in the energy sector,” Lance said. “By focusing on free cash flow generation and distributing a significant portion of cash flows to shareholders, we offer the market a path to value creation in this cyclical business.” ConocoPhillips stock sold for $63.12 per share when markets closed April 30, up slightly from a pre-earnings report April 29 closing price of $62.65 per share. Specifically to Alaska, ConocoPhillips produced an average of 210,000 barrels of oil per day in the state, up significantly from an average of 174,000 barrels per day to start 2018, according to the report. The company operates the large Kuparuk River and Alpine oil fields on the North Slope and oil production at its Greater Moose’s Tooth-1 project — an Alpine satellite with peak production near 30,000 barrels per day — began last October. GMT-1 startup marked the first oil produced from federal leases within the massive National Petroleum Reserve-Alaska on the western Slope. ConocoPhillips Alaska oil and gas production accounted for 16 percent of the company’s worldwide production, while its earnings from the state accounted for 21 percent of its quarterly profit. Work is ongoing at its slightly larger GMT-2 project. The company is also in the midst of permitting its large Willow oil prospect, also in the NPR-A, which has been estimated as a roughly $5 billion undertaking to fully develop. ConocoPhillips spent $410 million on North Slope capital investments during the quarter — about 25 percent of its overall investment portfolio. Alaska investments have accounted for about 20 percent of the company’s capital budget in recent years. BP, which operates Prudhoe Bay, reported a $2.4 billion replacement cost quarterly profit April 30 and ExxonMobil also netted $2.4 billion to start 2019, according to an April 26 release. Elwood Brehmer can be reached at [email protected]

Trilogy keeps refining Arctic project as it awaits road permit

Trilogy Metals is in the midst of advancing two mineral prospects in Northwest Alaska but it’s still on the lookout for additional opportunities in the region. The Vancouver-based mining company is preparing its most advanced Arctic copper, zinc and precious metal deposit for permitting. CEO Rick Van Nieuwenhuyse wrote via email that Trilogy is specifically developing an environmental evaluation document to ostensibly organize and vet all of the information about the prospect and planned open-pit mining operations before it is submitted in formal state and federal permit applications. The environmental evaluation goes hand-in-hand with a feasibility-level study of the mine and its forecasted economics, according to Van Nieuwenhuyse. Trilogy has $7 million budgeted for the feasibility and environmental work this year with a goal of having the feasibility study done in early 2020. He expects to formally start the permitting process once the Ambler Mining District Industrial Access Project is “substantially permitted” through its own environmental impact statement process, he wrote. Generally referred to as the Ambler road, the access project is a state-led plan for a 211-mile unimproved industrial road off of the Dalton Highway to reach the large Ambler mining district, which holds Trilogy’s Arctic and Bornite prospects, among others, on the southern flank of the Brooks Range. The road project has drawn opposition from residents of the area and environmental groups who are worried the project will disrupt caribou migrations, which Van Nieuwenhuyse acknowledges is the most significant subsistence food source in the region. The proposed mines have also drawn scrutiny for potential impacts to salmon and whitefish runs in the Kobuk River drainage. The Alaska Industrial Development and Export Authority is leading development of the road, which has an estimated cost of between $305 million and $346 million for a basic, single-lane gravel road. It would be financed by the authority with bonds that would be paid back through tolls paid by Trilogy Metals and any other companies that would develop one of the other prospects in the Ambler mining district. The Bureau of Land Management is writing the road EIS and the first draft of the environmental review is expected in late summer or early fall with a final EIS published towards the end of 2019, according to BLM’s project website. At its core, the Arctic prospect is about as good as undeveloped metal deposits come these days, according to Van Nieuwenhuyse. With just more than 43 million metric tons of probable reserves averaging 2.3 percent copper, 3.2 percent zinc and smaller amounts of lead, gold and silver, it’s roughly 10 times the average grade being mined in many other open pit copper mines today, he has said previously. Trilogy’s prefeasibility study of Arctic estimates the relatively small but high-grade prospect would cost $911 million to develop and operate over a short 12-year life but with roughly $450 million in annual free cash flow it would have just a 2-year payback. The mill and other facilities at Arctic could also be used for the company’s other, larger, but less explored Bornite copper and cobalt prospect about 20 miles to the southwest. While most of the exploration drilling at Arctic is done, Trilogy has a $9.2 million drilling program planned for the upcoming summer at Bornite. That work will be a combination of infill and expansion drilling for the existing known deposit, according to a company presentation. The Bornite prospect is on NANA Regional Corp. lands and under a partnership with Trilogy, the Alaska Native corporation can receive up to a 2.5 percent royalty on the ore concentrates produced from the prospect if it is developed into a working mine. Trilogy drilled 12 boreholes at Bornite in 2018. The prospect holds about 900 million pounds of indicated copper and 77 million pounds of indicated cobalt with another nearly 5.5 billion pounds of copper inferred, according to Trilogy’s resource analysis. Finally, Trilogy is also spending $2 million this year in a joint venture with South 32 Ltd. to conduct an electromagnetic geophysical survey of the entire roughly 75-mile long Ambler district belt. The airborne survey is being done as a new way to hunt for metal deposits in the area where dozens of prospects have been identified over the years. Targets identified by the survey will be examined more closely with follow-up drilling, Van Nieuwenhuyse said in a February company release. “It is exciting to be drilling new exploration targets again,” he said. “We are confident that we can find additional high-grade polymetallic resources along this prolific mineral belt.” ^ Elwood Brehmer can be reached at [email protected]


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