Elwood Brehmer

Gold claims contested amid Pogo sale

A lawsuit over who has rights to thousands of acres of promising Interior Alaska gold claims has ensnared the new and former owners of the Pogo gold mine. Nevada-based Great American Minerals Exploration Inc. sued former Pogo owner Sumitomo Metal Mining America Inc., RCI Capital Group Inc., a Canadian finance firm and the new Pogo owners, on Nov. 6 in Alaska Superior Court claiming Sumitomo and RCI Capital conspired to sell gold claims near Pogo out from under Great American Minerals as part of a $260 million sale of the mine in 2018. Sumitomo announced in late August 2018 that it had agreed to sell the underground Pogo mine to Australian-based Northern Star Resources Ltd. in a deal that, unbeknownst to Great American Minerals at the time, included the roughly 36,000 acres of state mining claims known as the Monte Cristo property. According to the complaint, Great American Minerals Exploration, or GAME, signed an option agreement with Sumitomo and its subsidiaries in late August 2016 that gave GAME exclusive rights to eventually purchase the Monte Cristo claims provided it made good on a series of work and payment requirements before the end of 2019. On Dec. 30, a day before the option agreement between GAME and Sumitomo was set to expire, Judge Jennifer Henderson issued a preliminary injunction in the suit that essentially freezes the agreement until Henderson lifts the injunction or the case is resolved. GAME paid Sumitomo $700,000 in installments over two years and additionally made good on commitments to perform at least $8.5 million of exploration work at Monte Cristo from 2017 to 2019, according to the complaint. Sumitomo, in its response, denied the vast majority of GAME’s allegations, but acknowledged that the exploration company fulfilled its work commitments in 2017 and 2018 and also made its final option fee payment of $250,000 on Aug. 29, 2018, a day before the sale of Pogo was announced. Matt Singer, an attorney for GAME, said in an interview that the company also conducted more than the $5 million of work in 2019 at Monte Cristo that it was required to under the option agreement. The company believes the property is a very promising prospect as it sits between the Pogo and Fort Knox gold mines near Fairbanks and holds similar geology, Singer added. “(GAME) had one of the largest drill programs in the state in the last year,” he said. “Those are real jobs and it’s real activity.” According to Singer, the company simply wants to clarify its right to Monte Cristo and move ahead with acquiring and further exploring the property. Under the option agreement, GAME was to pay Sumitomo $15 million, or $10 million plus a 1.5 percent royalty on future gold production, no later than 45 days after the end of the option agreement to fully purchase Monte Cristo. As an alternative, GAME could extend the option by a year with a $2 million payment, according to the option agreement. Information published in 2018 by Northern Star and Sumitomo on their websites regarding the Pogo sale references exploration opportunities as part of the transaction but the Monte Cristo property is not specifically named. A statement following the injunction order by Holland and Knight, the law firm representing GAME, estimated the value of the Monte Cristo property at approximately $40 million. The complaint alleges Sumitomo did not believe GAME would fulfill its requirements under the option agreement and therefore began searching for another potential buyer for Monte Cristo. It additionally asserts that Sumitomo, Northern Star and RCI Capital disparaged GAME to potential investors to prevent the explorer from raising the funds needed to meet its end of the deal. “Investors don’t want to get involved in a mining claim if there’s any question about ownership and clear title,” Singer said. “The conduct of Sumitomo and RCI put hair on this deal and scared the investment community off,” Singer said. Attorneys for Sumitomo, Northern Star and RCI Capital either could did not respond to requests for comment or declined to comment on the lawsuit. Northern Star, in its answer to GAME, also denied nearly all of the allegations in the complaint. According to Northern Star, it did not purchase the assets of Stone Boy Inc., the former subsidiary of Sumitomo that holds Monte Cristo, partly because Stone Boy is just a holding company that has not day-to-day operations, according to Northern Star. Rather, Northern Star purchased 100 percent of Stone Boy’s stock in an equity sale. Singer said when GAME didn’t default as Sumitomo and RCI Capital expected, “Sumitomo was less-than-candid with my client — essentially concealed the transaction for a period of time.” Northern Star wanted to tell GAME about the Pogo deal possibly including the Monte Cristo claims and wanted the company’s consent for the transaction, but “Sumitomo was scrambling, trying to figure out what to do and kept the deal quiet,” Singer said. Northern Star’s 2019 annual report dated Aug. 27, states in a footnote that GAME holds an option to purchase Monte Cristo. The report also lists Northern Star as a “joint holder” of the claims. “No sale of the Monte Cristo property occurred because at that time (of the Pogo sale) the plaintiff had not been asked for, nor had it given its consent for the assignment of the option agreement,” Northern Star attorneys wrote in response to GAME. ^ Elwood Brehmer can be reached at [email protected]

Assembly approves tariff increase to fund Port of Alaska work

Beginning Jan. 1 it will be a little more expensive for most companies to move fuel and cement across the docks at the Anchorage port. That’s because the Anchorage Assembly approved new tariffs on the commodities on Dec. 17. While the import charges are regularly updated to account for inflation and operational costs at the port — renamed the Port of Alaska in 2017 — the latest tariff hike is significantly greater than normal in order to help fund construction of a new, roughly $200 million petroleum and cement terminal, or PCT. The new PCT will be the first construction of new dock facilities at the aging port since 2010 when severe damage to installed sheet pile was discovered and the original port expansion project was halted. That project spent roughly $300 million of public money but left little to show for it. No one disputes that the badly corroded docks at the port need to be overhauled or replaced, but representatives from fuel and cement companies that use the port have consistently argued against immediate major tariff increases throughout the nearly yearlong debate on the issue. They insisted changes should not be made to tariff rates until a construction and funding plan was again in place for the overall port modernization project, not just the PCT. In February, city officials presented an analysis to the Anchorage Port Commission, an advisory board, that concluded current tariffs of 16.4 cents per barrel of fuel and $1.67 per ton of cement would need to be increased 500 to 600 percent over 10 years to fund PCT construction solely through higher tariffs. The analysis was met with sticker shock by individuals from port user companies who said those increases would likely drive business away from the port and make it more difficult to recover the desired revenue for PCT construction. Specifically, the 10-year tariff schedule would cover the debt service for revenue bonds the officials at the municipal-owned port would sell to fully fund construction sooner. Municipal Manager Bill Falsey has said other fees the port levies could be raised to support PCT funding but there is a general goal to apply new or increased charges only to the port customers that will benefit from the new infrastructure. The new tariff hikes approved unanimously by the Assembly are more gradual than those initially contemplated; charges on fuel will increase 4 to 5 cents per year to reach 56.3 cents per barrel by 2029. For cement, the final tariff will be $5.72 per ton in 2029. Port spokesman Jim Jager noted that the tariff increases for fuels and cement are equal on a per-ton basis. According to documents prepared by Port Finance Manager Cheryl Beckham, the new tariffs will add 1.3 cents per gallon to the cost of gasoline in Anchorage after 10 years and 0.3 cents per pound to the cost of retail cement. The relatively more gradual tariff increases would provide debt service coverage for approximately $80 million in bonds to finish the PCT after city officials decided to put all of the funding left from the prior project and other available sources towards the terminal, rather than reserving some of it for other dock work. Port officials also secured a $25 million development grant from the U.S. Department of Transportation in November for the PCT and the lone bid for 2020 construction came in about $20 million lower than expected. The PCT should be finished in the fall of 2021 under the current construction schedule. The PCT — which will be south of the current docks — needs to be built to free up space to build new cargo terminals while also allowing daily operations at the port to continue. Additionally, it needs to be done very soon so all of the port’s docks can be rebuilt before the existing infrastructure has to be closed for safety concerns, according to Falsey. Engineering studies commissioned by port officials have concluded the corroding steel pilings that support the docks have roughly 10 years of working life left before they will not be able so safely support vessel operations at the port despite an ongoing $2 million per year program to patch the piles in the worst shape. (Editor's note: This story has been corrected to reflect that the petroleum and cement tariff increases are equal on a per-ton basis. The story originally stated incorrectly that the 2029 cement tariff would be greater than the charge on petroleum products.) ^ Elwood Brehmer can be reached at [email protected]

Railbelt utilities sign historic agreement

The leaders of Alaska’s Railbelt utilities have signed a long-anticipated agreement to potentially transform and modernize operation of the region’s power grid. Nearly five years after regulators demanded it, the memorandum of understanding signed Dec. 18 by the general managers and CEOs of the six electric utilities covering an area from Fairbanks to Homer is the framework by which utility officials and stakeholder groups can form a semi-independent regional grid reliability and planning organization. Chugach Electric Association Chief Operating Officer Brian Hickey called signing the eight-page agreement “a huge let-go moment” for utility officials because it voluntary cedes much of their autonomy to a yet-to-be-formed group that they will be part of but not have control over. Matanuska Electric Association CEO Tony Izzo similarly called it “a big let-go moment” in a separate interview. That group, the Railbelt Reliability Council, will have a governing board comprised of representatives from each of the six Railbelt electric utilities and six non-utility stakeholders. The council’s CEO will provide a 13th vote when it is needed to break a tie on the board, according to the MOU. The non-utility board members will be an official from the Alaska Energy Authority, which owns transmission lines and the Bradley Lake hydroelectric project; two independent power producers; a consumer advocate; and two other subject matter experts. Representatives of independent power producers — such as wind or solar farms — and other renewable energy advocates have long pushed to have some part of decision-making authority over long-term grid planning in the Railbelt to make accessing the transmission network with their power simpler and more affordable. Utility officials have generally said they support more collaboration with stakeholder groups to gain operational efficiencies and provide lower-cost and cleaner power sources, but getting leadership from all six utilities aligned on the details of such a cooperative arrangement had been the hang-up. RCA spurred action Work to formally coordinate Railbelt utility operations became more urgent following a sternly worded June 2015 letter from the RCA to the Legislature in which the commission characterized the Railbelt electric system as “fragmented” and “balkanized.” The RCA 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 individual 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. 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. Rate pancaking can also kill the economics of otherwise lower-cost independent power projects that aim to sell power to utilities across the grid. As a result, independent power producers are strong advocates for a single system wheeling tariff that allocates revenue to the participating transmission owners, usually utilities. Organizations like the Railbelt Reliability Council have been set up across the country but the Dec. 18 MOU is the closest the Railbelt utilities have gotten to establishing one in Alaska. “We have a fiduciary responsibility to our membership, to the people that own these (grid) assets. We have hundreds of millions of dollars invested in it and what we’re saying is we’re going to allow people who don’t have a direct financial linkage to those assets help us plan the system,” Chugach’s Hickey said. He added that much of what the agreement calls for has been done by the utilities for years on an “ad hoc basis;” the MOU is simply a contract to formalize and expand utility coordination. Some skeptics say strained personal relationships between utility leaders and an unwillingness to give up some local decision-making authority had historically prevented progress on the issue, while utility officials say it is more the gradual maturation of the Railbelt electric system that was first set up to serve a handful of isolated areas. Hickey said the utilities have historically done well by their members, keeping the power on across networks with relatively few customers and challenging terrain and weather. The Railbelt Reliability Council will just help them do it better together. He said utility leaders spent much of 2018 — when there was ample talk that a groundbreaking agreement was close in RCA hearings — negotiating the MOU amongst themselves. From there, it was taken to stakeholders for their input. “There was about 30-some meetings, 30-some revisions to this over the past 12 months that got us to this place,” Hickey said. “It’s one of those processes — I think it seems to have taken a long time but there is a lot included in those eight pages.” Overcoming obstacles Homer Electric Association General Manager Brad Janorschke wrote in an Aug. 19 letter to the RCA that an early version of the MOU drafted in May was problematic because, among other reasons, it expanded the scope of the Railbelt Reliability Council beyond what leadership from several utilities had previously agreed to. Hickey said those comments helped produce a better agreement — the proof being that Janorschke ultimately signed the revised MOU. Officials from HEA and Fairbanks-area Golden Valley Electric Association did not respond to requests for comment during the Christmas week, but Janorschke said in a joint statement announcing the MOU that HEA “looks forward to working symbiotically with all the Railbelt utilities and non-utility stakeholders alike to make this happen.” A copy of the draft MOU dated May 16 and attached to Janorschke’s letter to the RCA largely mirrors the final version. However, the signed agreement includes a clause that says the council can require that grid infrastructure be built if it’s deemed to benefit grid reliability or efficiency but it “shall not mandate, deny, or approve the construction of any generation or transmission facility by any specific utility.” Some transmission projects proposed by AEA and other Railbelt observers that could improve the ability of utilities to efficiently move or sell power across the regional grid, known as economic dispatch, have been met with resistance by the utilities in the areas of those projects because they would bear the cost of the infrastructure but might not see a corresponding benefit. Chris Rose, executive director of the nonprofit Renewable Energy Alaska Project is one of the stakeholders that has followed the conception of the agreement closely. According to Rose, while the agreement does not require the all of the Railbelt utilities to participate in mandated economic dispatch, it does call for a cost-benefit analysis of single-system power dispatch and lays out the parameters under which an associated single tariff could be developed. He said regional transmission and generation planning is a big benefit of the agreement. “It’s a good starting point to get a regional forum,” Rose said of the Railbelt Reliability Council. MEA’s Izzo said that while the MOU and eventually the council won’t be a cure-all for the region’s power transmission and dispatch issues, it’s a big step forward. He acknowledged that bills with bipartisan support pending in the Legislature to mandate the Railbelt utilities to participate in an organization like the council — or direct the RCA to set one up by October 2020 if the utilities don’t — are a big impetus for getting the MOU signed now. Izzo said MEA supports Senate Bill 123, which was introduced last May by a special Senate Railbelt Electric System Committee chaired by Fairbanks Republican Sen. John Coghill. SB 123 would also give the RCA explicit authority to approve or deny new large generation or transmission projects based on the grid reliability and efficiency that could be gained region-wide. Hickey said Chugach believes SB 123 “could use some fine tuning” but the Anchorage utility generally supports granting the RCA specific authority to establish and implement the Railbelt Reliability Council or something similar. He said the RCA commissioners have somewhat pushed the utilities to this point as well. “They finally decided that this needs to happen and I think it’s great,” Hickey said. From here, the utilities will select the stakeholder representatives that will help form the council implementation committee; that committee will then morph into the council’s initial governing board that will select the CEO. According to Hickey, the implementation committee should be set by April and the MOU calls for the committee to have a business plan ready for the council by Dec. 1. The costs associated with forming the council will be apportioned to the utilities based on their portions of the overall Railbelt system electric load, according to the MOU. Hickey and Izzo said it’s too early to know exactly what those costs will be but the benefits will show in more reliable and efficient delivery of one of societies most basic and important commodities. “I think overall we can enhance economic growth by keeping rates low regionally and I think it will help us do that,” Hickey said. “I think the benefits will outweigh the costs significantly.” ^ Elwood Brehmer can be reached at [email protected]

Gov pitches united front on resource development to Anchorage chamber

Gov. Mike Dunleavy shifted his message on Alaska’s finances during a Monday lunch hour address to Anchorage Chamber of Commerce members by appealing to those who oppose the cuts-first approach that largely defined his first year in office to instead “lock arms” with him in support of resource development projects statewide. In a wide-ranging speech in which he also briefly discussed Alaska’s history, public safety, education, his trips to the East Coast and the series of public policy forums he intends to hold leading up to the pending legislative session, Dunleavy spent most of the hour emphasizing that Alaska is a resource-driven state. He stressed that without a unified front to counter interests that want to limit resource projects in the state, Alaska could revert back to a state that is even more dependent upon the federal government than it already is. “If we can’t develop our resources to create wealth for Alaskans to provide jobs for Alaskans and revenue for Alaska to be able to pay for programs — a lot of social programs — that people want, how are we going to make a go of it? That’s the question we need to ask ourselves,” Dunleavy told the business crowd. To that end, he said members of his administration have had conversations with representatives from Goldman Sachs regarding the global finance giant’s recent announcement that it will no longer invest in Arctic oil development. The firm will be sending a contingent to Alaska soon to continue those talks, he said. Dunleavy has since questioned whether the State of Alaska should be doing business with a company that is at-odds with its flagship industry and Acting Department of Revenue Commissioner Mike Barnhill told Goldman Sachs CEO David Solomon in a Dec. 20 letter that the company will not be considered as a potential underwriter of the state’s plan to sell up to $700 million in bonds in 2020 to finance unpaid oil and gas tax credits. Dunleavy said his trips to Washington, D.C., and elsewhere on the East Coast — most recently in mid-December — are mostly to discuss resource development policies with President Donald Trump and spread the word to investors about Alaska’s resource potential as well as bringing other industries to the state. Without such championing of the state’s traditional economic prospects, he said, Alaska could ostensibly be turned into a “park” for Lower 48 visitors that do not understand the realities of living in the state. “You have well-intentioned folks that believe that they’re doing something good coming from the heart to help save our state from ourselves, but at the same time that is going to put us on a course, potentially, to insolvency,” Dunleavy said. He also remarked that Alaska was first purchased from Russia in 1867 and was allowed to become a state based on its resource potential. “If we can’t mine and we can’t drill what is Alaska going to do?” Dunleavy questioned further, comparing limitations on resource development in the state to prohibitions on software and aircraft development in Washington state (home to Microsoft and Amazon headquarters and where Boeing builds aircraft). “No one does resource extraction and development better than Alaska does.” For those staunchly opposed to oil and gas development because of its downstream implications, the governor also highlighted that Alaska has world-class reserves of many of the metals and minerals that serve as building blocks for renewable energy technologies. The aptly named Graphite Creek prospect near Nome holds large quantities of high-grade flake graphite needed for lithium ion batteries used in electric cars as well as for storing and dispatching power generated from highly variable renewable energy projects, he noted. Additionally, the Bokan Mountain rare Earth element deposit on southern Prince of Wales Island could provide a host of specialty metals needed for advanced technologies and devices, Dunleavy said. “These deposits are located where they can do the most good for the people of those regions for jobs, for taxes, for programs right there,” he said. “But if we’re going to say ‘no’ to development for Alaska, we’re going to push it overseas — the wealth overseas, the opportunities overseas,” adding that there is a much higher likelihood for resource development projects to lead to environmental damage in countries without the modern environmental protections and regulations of the U.S. Dunleavy called for “balance” in the state and national resource development policies. “We don’t have to be a slash-and-burn state; that’s not necessary. But at the same time, we don’t have to zip (Alaska) up and tie it up and put it behind a glass frame and just let people look at it. In other words, we can be both,” he said. Dunleavy answered selected written questions from the luncheon audience but did not take questions from reporters following his speech. On the budget, Dunleavy reiterated his belief that Alaska needs to drastically revise its constitutional spending limit downward so it can be an effective cap on state spending. While passing an amendment to the state constitution requires two-thirds affirmative votes in both the House and Senate — often a prohibitive requirement — before the proposal is adjudicated by voters, both Senate President Cathy Giessel and House Speaker Bryce Edgmon have indicated support for addressing the issue this year. The $2.5 billion general fund appropriation limit passed in 1982 allows for population growth and inflation adjustments that put it at about $12 billion today, according to Edgmon, or roughly twice the current state budget. Resetting the spending cap is especially important to limit the growth of formula-driven programs, which automatically increase the state budget year-to-year, Dunleavy said. He again asserted his willingness to discuss changes to the Permanent Fund dividend formula in the legislative session that starts Jan. 21, but said that unless other formula-driven programs, such as education and Medicaid, aren’t also revised, they will continue to shrink the pool of funds available for annual PFDs. However, Dunleavy has said he doesn’t currently have plans to submit legislation that would overhaul those formula programs. The administration’s attempts to cut Medicaid spending through regulatory changes and other means in the current state fiscal year largely fell flat, leading to a $120 million supplemental budget request. Officials in the governor’s office and the Department of Health and Social Services have said their Medicaid reforms haven’t been as successful as anticipated in part due to unexpected requirements from the federal Centers for Medicare and Medicaid Services. This is where the series of public policy discussions comes in, according to Dunleavy. Rather than pushing for more cuts to close the state’s $1.5 billion deficit as he had indicated for months would happen, he surprised many Alaskans by proposing a mostly flat state budget Dec. 11 and instead called on lawmakers and the public to specify programs and services they feel are crucial for the state to continue. The Monday talk before the Anchorage Chamber of Commerce was unofficially the first of those discussions in what will be an ongoing dialogue, according to Dunleavy. “I’m going to be going to every community that I possibly can in the state of Alaska starting with this conversation today. I will be visiting every community to talk to folks in those communities about what they think Alaska should look like. I’ll be meeting with chambers; I’ll be meeting with Tribes; I’ll be meeting with school districts; I’ll be meeting with boroughs and cities,” Dunleavy said. “I’ll be meeting with individuals and at the end of these meetings in these cities and boroughs, small towns, big towns, we’ll have a town hall so people can come and let me know what services they value.” Dunleavy’s spokesman Jeff Turner said a schedule for the town halls is still being worked out. He continued to say that what services the state should provide, and at what level, is up for debate but everyone should demand better outcomes from a couple of the state’s core services, namely public safety and education. On public safety, Dunleavy said the state hired more State Troopers in 2019 than were hired in roughly the past decade. His budget proposal also shifts funding from other programs to support hiring 15 more State Troopers in the 2021 fiscal year. As for education, the governor said some of Alaska’s urban schools produce students with test scores that are on par with some of the best in the country while many students in small, rural schools continue to struggle. His solution is to require all students to read at grade level before leaving third grade and be proficient in algebra by eighth grade. His administration will submit legislation to reform the state’s reading requirements and Dunleavy has also suggested Tribal compacting for education, but the details of those concepts are unclear. Elwood Brehmer can be reached at [email protected]

2020 Forecast: BP, Hilcorp to seal deal, CP keeps drilling, taxes on the table again

By all accounts 2020 is going to be a busy year on the North Slope. In boardrooms, campaign offices and around dinner tables elsewhere in Alaska, it is likely to be another year of examining the state’s oft-debated oil tax system. BP and Hilcorp will spend the first months of the year working to close the $5.6 billion deal agreed to last August to transfer all of BP’s North Slope assets — including the operator position at Prudhoe Bay — to Hilcorp. Alaska leaders for the companies have said they hope to clear the requisite regulatory hurdles and finalize the deal in the second quarter of the year. According to Hilcorp, the Houston-based producer had offered jobs to more than 800 of BP’s roughly 1,500 Alaska employees as of Dec. 19. Hilcorp expects to offer another 150 positions over the coming months, according to a formal statement from the company, and current BP employees not moving to Hilcorp as a part of the deal are either taking severance packages from the company or moving elsewhere to continue work with the London-based oil giant. While Alaska bids farewell to BP following a 60-year relationship, ConocoPhillips is doubling down on the state. ConocoPhillips executives said in November that they are looking for an investment partner to take up to a 25 percent share of the company’s Alaska operations, a move Alaska President Joe Marushack said is simply to get back to the common practice of partnering to fund its large projects. The company expects to drill seven more exploration wells in the National Petroleum Reserve-Alaska this winter work season to hunt for oil in green field areas and further evaluate its large Willow prospect for one more year. The drilling work will necessitate ConocoPhillips’ biggest single season of ice roads; the company expects to build about 165 miles of ice roads on the Slope this winter. As winter turns to spring ConocoPhillips will also be moving a new extended-reach drilling rig to its long-term home at the Alpine field, where the rig — owned by Doyon Drilling and dubbed “the beast” — will help access oil in Fiord West pool previously unreachable from an existing drill site. ConocoPhillips will also continue work on its $1 billion-plus Greater Mooses Tooth-2 oil project in the NPR-A. First oil is expected from GMT-2 in late 2021 at a projected peak production of up to 40,000 barrels per day. At the Nuna project purchased this year from Caelus, ConocoPhillips expects to employ about 400 workers with first oil targeted for 2022. The Bureau of Land Management is also expected to hold a long-anticipated, or dreaded, oil and gas lease sale for the coastal plain of the Arctic National Wildlife Refuge early next year barring legal challenges. The sale was once tentatively scheduled for late this year but timing issues pushed it into 2020. On the policy side of the oil industry, Alaskans could have another choice to voice their position on the state’s oil tax system known as SB 21. The sponsors of the Fair Share Act, who aim to increase Alaska’s oil tax collections by upwards of $1 billion per year, are currently collecting signatures. If they gather the roughly 28,000 signatures they need before the Jan. 21 start of the legislative session, the initiative, which faces strong opposition from many Republican lawmakers and business groups, the oil tax initiative will be on 2020 election ballots. The Fair Share Act sponsors contend SB 21 gives Alaska one of the most industry-favored oil tax regimes on Earth and provides a slew of loopholes that producers use to reduce their annual production tax payments well below industry norms. Opponents argue that Alaska current oil tax rates account for the unavoidably high cost of doing business in the state and overhauling a policy as complex and impactful as the state’s oil taxes should not be done via ballot initiative. A prior attempt to repeal SB 21 shortly after it took effect in 2014 failed by a 5.4 percent margin. On the regulatory front, BLM should release its final NPR-A Integrated Activity Plan in 2020, with the aim of increasing the acreage available for leasing. The agency is also expected to rule on ConocoPhillips’ master plan for the Willow project. Finally, the Federal Energy Regulatory Commission should issue its decision on the Alaska LNG Project environmental impact statement in the middle of next year. If no private investors pick it up, the major regulatory milestone is likely to be the unceremonious end of Alaska LNG and the Alaska Gasline Development Corp. given Gov. Mike Dunleavy’s aversion to the state continuing to pursue the project. Between the state and the three major Slope producers, some $800 million was spent on AK LNG on engineering, permitting and acquiring the interests of TransCanada in the project. The state share of spending between the Alaska Stand Alone Pipeline project and AK LNG was at least $450 million since 2013.

2020 Forecast: Slow and steady improvement for economy

The New Year should be another one of incremental growth for Alaska’s long-sluggish economy. Following a year defined by uncertainty in which economists broadly concluded that Gov. Mike Dunleavy’s plan for drastic state budget cuts of more than $1.2 billion would send Alaska back into a recession, the early picture for 2020 looks a bit more stable. Dunleavy has since retreated from his cuts-only plan and instead proposed a flat state budget of about $4.5 billion in unrestricted general fund spending for fiscal year 2021, which starts July 1. While most economists have yet to release their formal projections for 2020, the general sense is that Alaska will continue its slow recovery from three years of recession. Alaska’s banks reported solid earnings and generally declining rates of loan delinquencies in their third quarter 2019 financial reports and bank leaders said barring unforeseen challenges the positive trends should continue. Alaska added approximately 1,100 net jobs year-over-year in November, a 0.3 percent increase despite 600 fewer state government jobs last month, according to the state Labor Department. The state job losses were mostly due to budget cuts at the University of Alaska. Statewide, the unemployment rate was 6.1 percent in November, which was a slight sequential decrease from October and a 0.2 percent decrease from November 2018. Gov. Mike Dunleavy, who has made “Alaska is open for business” a mantra of his tenure in office, has also touted personal income growth in the state over the past year. While it’s unclear at this point exactly what impact the loss of several hundred generally high-paying oil industry jobs associated with BP’s sale of its Alaska assets to Hilcorp Energy will mean for the broader economy, other companies working on the North Slope such ConocoPhillips and Oil Search are adding workers for exploration drilling and development of several large oil projects. Oil industry employment statewide was up 4.3 percent year-over-year in November, according to Labor statistics. In the Interior, the first round of F-35 fighters are scheduled to arrive at Eielson Air Force Base in April, with additional jets arriving through 2022, Air Force officials have said. Work at Eielson to prepare the base for the 54 jets has already provided a substantial boost to the Fairbanks-area economy and the roughly 3,300 people — Air Force personnel and their families — that will eventually move to the Interior along with the jets will also require significant new home construction. In Anchorage, officials at Ted Stevens Anchorage International Airport have announced upwards of $700 million of potential new developments at the airport, which supports approximately 10 percent of the jobs in the city, according to the Anchorage Economic Development Corp. The development proposals are largely warehouse projects meant to facilitate the airport’s growing international cargo business. Anchorage’s location between Asian manufacturing centers and North American consumers has long made it a convenient place for cargo freighters to refuel, but shippers now appear to be taking greater advantage of unique trade exemptions that allow for cargo to be sorted and swapped between aircraft on international flights without violating federal trade laws. Finally, the economic prospects for Southeast might be the most muddled of any region in the state in the coming year. The region’s booming tourism industry is expected to keep growing; however, it’s unclear what the ramifications of significant long-term reductions in ferry service will be, particularly for smaller communities where the ferries are important for hauling bulk goods and equipment for businesses as well as passengers.

Mustang owners miss first $3.1M loan payment to AIDEA

Small quantities of oil are flowing from the long-delayed Mustang project on the North Slope but its owners are late on their first loan payment to the state. Caracol Petroleum LLC, a primary owner in the Southern Miluveach Unit that holds the Mustang development, missed its first loan payment due in October to the Alaska Industrial Development and Export Authority under a recently restructured financing plan, according to authority spokesman Karsten Rodvik. The loan is structured for a quarterly payment schedule. Rodvik wrote in an email that AIDEA was due to receive a $3.1 million payment from Caracol on Oct. 1 based on a complex financing arrangement the sides agreed to in May, but the payment hasn’t materialized as of Dec. 23. Caracol also incurred an additional $310,000 in late fees and penalties for not curing the missed payment within 30 days, per the agreement, according to Rodvik. “AIDEA and Caracol’s shareholders, the working interest owners in the Southern Miluveach Unit, are continuing to hold discussions with an aim to satisfactorily resolving the status of AIDEA’s loan to Caracol, and the development of the Mustang field,” he wrote. In late May AIDEA sold its majority interest in the holding companies — Mustang Operations Center-1 LLC and Mustang Road LLC — that were set up under the original deals for the project’s processing facilities and the road and pad to Caracol for $64 million plus $6 million in accrued interest, according to authority documents. Caracol owns a 60 percent interest in the state leases that comprise the Southern Miluveach Unit through its original stake in the project and its subsequent purchase of the Mustang holding companies, according to Alaska Division of Oil and Gas records. Anchorage-based Brooks Range Petroleum Corp., which operates the field, began producing oil from Mustang in early November after years of delays brought on by collapsed oil prices and other financing challenges. Majid Jourabchi, CEO of Brooks Range’s parent company Houston-based Thyssen Petroleum, said last month that the company started producing about 620 barrels of oil per day from the North Tarn 1-A well. Alaska Oil and Gas Conservation Commission records show Brooks Range produced an average of 478 barrels of oil over 23 days from the well in November. The Mustang project is adjacent to the southern portion of ConocoPhillips’ large Kuparuk River field and also near the Nanushuk oil project being developed by Oil Search. The field is estimated to hold about 22 million barrels of oil and could peak at production rates of about 12,000 barrels per day when fully developed. Jourabchi and representatives for Caracol or its parent company, Singapore-based Alpha Energy Holdings could not be reached for comment. AIDEA, the state’s development bank, first agreed to invest in Mustang infrastructure in 2012 when the authority’s board approved $20 million to finance the lion’s share of a five-mile gravel road and 19-acre drilling pad needed to start developing the project. At the time Brooks Range leaders said they hoped to have Mustang in production by late 2014. In April 2014, AIDEA committed another $50 million equity investment in the $225 million Mustang oil processing facility. Brooks Range leaders said then that the project would start production in late 2015 and likely peak in 2017. By February 2016 management for the authority and Brooks Range agreed to put Mustang in “warm standby” as oil prices in the $30 per barrel range hampered the ability to secure other financing options. The recent oil production was achieved through a scaled-back development plan that utilized modular early production facilities. Brooks Range officials have said they intend to install larger, permanent facilities that would allow for more production once the project’s economics provide for expansion. Elwood Brehmer can be reached at [email protected]

2020 Forecast: Ferry system front and center; Ambler road decision; and fixes at the Port of Alaska

The decisions made by state and federal officials in 2020 could go a long ways towards reshaping the Alaska’s transportation and logistics networks for decades to come. Those in the state Department of Transportation are currently evaluating ways to overhaul the Alaska Marine Highway System and drastically curtail the ferry system’s reliance on annual state operating funding. In October, DOT officials said they had received a draft report from Anchorage research firm Northern Economics examining various operating structures that could be employed to reduce costs but also enable better long-term planning for the system with an aging fleet of vessels. A final copy of the report was initially expected in December but has yet to be published. The Northern Economics report is the second ferry reform study commissioned by DOT in recent years. Former Gov. Bill Walker’s administration partnered with the Southeast Conference to commission a study conducted by the McDowell Group in 2017 that recommended the system be shifted from a sub-agency of DOT to a public corporation, similar to the Alaska Railroad Corp., with a board of directors comprised of expert stakeholders. The groups concluded the public corporation model could help limit political influences on the system, thereby allowing leadership to maximize operational efficiencies through more effective long-range planning. However, current DOT Commissioner John MacKinnon has said the public corporation concept alone does not lead to adequate operational cost reductions. MacKinnon has hinted at the prospect of turning the ferry system — with 35 ports of call from Bellingham, Wash., across Alaska’s south coast to Dutch Harbor — into several municipal-owned port authorities, although that would likely require significant investments in purpose-built vessels as well to maximize the operational benefits of the model. MacKinnon and other administration officials have pegged the coming year for implementing the first structural reforms recommended by the forthcoming report. Gov. Mike Dunleavy on Dec. 11 proposed a $3 million increase to the AMHS operating budget for fiscal year 2021, which starts July 1, but it would not be enough to substantially improve ferry service levels in many communities. According to budget documents, some coastal communities could be left without ferry service for upwards of six months even with the potential funding boost. A handful of coastal communities are going without service for months at a time under the current $45 million general fund ferry budget. It’s unclear at this point how service levels could be significantly improved even if lawmakers agree to boost ferry funding in the 2021 budget, given DOT officials have laid up half of the vessels in the 12-ferry fleet due to lack of funding for repairs. Additionally, the department has yet to publish a draft of the summer 2020 ferry schedule, which must go out for public comment before it can be finalized and bookings for May-September can begin. The draft ferry schedule for the upcoming summer has been published in late October or early November in recent years. An AMHS spokesman did not respond to questions in time for this story. Fuel taxes Legislative leaders have said they plan to revive debate on an increase to the state’s motor fuel taxes in the upcoming session that starts in January. The Walker administration first proposed raising Alaska’s general gas tax — which at 8 cents per gallon is the lowest in the country — in 2015. The proposal gained some traction at the time but eventually stalled amid broader budget debates. Port of Alaska In Anchorage, municipal and port leaders have agreed to resume the first major construction work at the Port of Alaska since 2010 next spring. The work will be focused on a new, roughly $210 million petroleum and cement terminal. While representatives from companies that use the port have urged the Anchorage Assembly and Mayor Ethan Berkowitz’s administration to hold off on the work until a funding plan for the broader port modernization project is finalized, municipal officials have stressed that building the fuel and cement dock in a new location is the first needed step in a series of challenging logistics to rebuild the port while keeping it operational. Ambler Road The Bureau of Land Management is evaluating a state plan for a new road that could lead to the development of several mines hundreds of miles north in Interior Alaska. The final environmental impact statement and a permit decision for the Alaska Industrial Development and Export Authority-sponsored Ambler Road are expected in the first half of next year. The industrial use road would run west from the Dalton Highway north of Fairbanks about 210 miles to a series of mining claims and prospects on the southern flank of the Brooks Range. Using a toll road concept, AIDEA would finance the basic gravel road — with an estimated construction cost between $280 million and $380 million — via revenue bonds that would be repaid by the mining companies that would use it to develop the multiple metal prospects in the 75-mile long mining district near the end of the road. Area village and Tribal governments have objected to the plan, arguing the development activity would disrupt wildlife populations locals depend on for subsistence harvests; however, state officials contend the mines would bring jobs to the economically-depressed region.

2020 Forecast: Time — and savings — have run out for Legislature

The clock has been ticking for five years and time is almost up. The numbers show Alaska lawmakers will be forced to make several hard decisions in 2020 that have been put off as long as possible since oil prices collapsed in late 2014. Barring a seemingly impossible return to $100 per barrel oil, the Legislature and Gov. Mike Dunleavy can no longer rely on savings to fund a large chunk of the state budget. While the governor’s December budget proposal calls for one last large draw of more than $1.5 billion from the roughly $2.1 billion Constitutional Budget Reserve — the state’s last remaining savings account — nonpartisan experts from the Legislative Finance Division and many lawmakers have said draining the CBR to less than about $1.5 billion would hamper the state’s ability to respond to emergencies and challenge day-to-day cash management. Further, Dunleavy has appeared ambivalent towards his budget plan that calls for overall flat funding of state operations at about $4.5 billion in unrestricted general fund appropriations while spending an additional $2 billion to fully fund statutory Permanent Fund dividend payments. Following major pushback on his original plan to cut more than $1.2 billion in spending to balance the state budget and pay larger PFDs, the governor has opted to push the major fiscal decisions to the Legislature and Alaskans at-large. A couple big shifts did occur over those years that lawmakers spent more than $14 billion in state savings to delay the generational policy calls. Legislators took a big step towards shrinking the state’s multibillion-dollar budget deficits in 2018 when they agreed to institute an annual, endowment-style draw on the $65 billion Permanent Fund to pay for government services and PFDs, but at the same time punted on a new dividend formula and in doing so prolonged the issue. The idea of reforming the PFD formula to ultimately pay out smaller dividends was once considered political suicide for obvious reasons, but it is now a policy demanded by the majorities in the House and Senate and will be the dominant topic during the 2020 session (or sessions). On top of that, traditionally fiscal conservative Republicans in Senate leadership positions are pushing to examine potential new tax revenues — such as increased motor fuel taxes and an education head tax — ideas that historically have been laughed out of the Legislature. Dunleavy, who started his term by wholly rejecting new taxes and smaller PFDs, has said he is open to discussing all of the options for closing the state’s $1.5 billion budget gap, but he has maintained that any changes to the PFD should be preceded by a public advisory vote to gauge Alaskans’ appetite for such a historic policy change. Underlying all of the 2020 happenings in Alaska politics — at least initially — will be the attempt to recall Dunleavy from office. The recall backers’ appeal to the Division of Elections rejection of their petition application is scheduled for Jan. 10 in Anchorage Superior Court. The lawsuit is headed for the Alaska Supreme Court regardless of how Judge Eric Aarseth rules on the matter, but if he rules in favor of the recall backers they would be allowed to start gathering the more than 70,000 signatures needed to reach the ballot. If allowed, the recall vote would be held 90 to 120 days after the Supreme Court issues its ruling and the petition is certified — including up to 30 days to certify the signatures — or at the same time as the statewide primary or general election if the election schedules align, according to Division of Elections materials. It should be noted that Aarseth and the Supreme Court justices will be evaluating the validity of the 200-word statement detailing the grounds for the recall effort and if any of the four counts levied against Dunleavy in the statement rise to the level of incompetence, lack of fitness for office or neglect of duties. While it’s unknown whether Dunleavy will have to face voters again ahead of schedule, the entire House and half the Senate will be up for election to add another factor to the calculus of legislators faced with the reckoning of long postponed choices.

Costly Southcentral power line outage repaired

(Editor's note: This story has been updated to include comments from Homer Electric Association and the latest figures of costs incurred to utilities.) A power line that links the majority of Alaskans to low cost hydropower is back in service after a four-month outage that cost impacted ratepayers more than $11 million. Chugach Electric Association announced Dec. 19 that the roughly 55-mile segment of electric transmission line on the Kenai Peninsula between Soldotna and Cooper Landing was re-energized and began sending power north earlier in the day. It had been out of service since mid-August when high winds and drought conditions caused a then-resurgent Swan Lake wildfire to burn through the power line corridor and damage a handful of wooden power poles and guy wire supports. Dubbed the “SQ line” for its route between Soldotna and a substation at Quartz Creek, the 115-kilovolt line links utilities in Anchorage, the Mat-Su, Fairbanks and Seward to the Bradley Lake hydroelectric project located across Kachemak Bay from Homer. With the SQ line down, the utilities were forced to substitute the normal supply of Bradley Lake hydropower with higher cost power generated from natural gas. The SQ line outage collectively cost Southcentral and Interior ratepayers roughly $11.8 million due to the more expensive power source, Matanuska Electric Association CEO Tony Izzo said Dec. 20. "I'm just happy that it's back on and we're taking all the (Bradley Lake) power that we can," Izzo said. Bradley Lake supplies up to 10 percent of the electricity needed by Alaska’s Railbelt utilities. At 4 cents per kilowatt-hour, the hydroelectric dam can produce power for about half the current cost of natural gas-fired generation and is some of the lowest-cost power in the state, according to the Alaska Energy Authority, which owns Bradley Lake. Customers of Chugach Electric Association paid an extra $2.7 million in generation fuel costs during the four-month outage, according to the statement from the Anchorage-area utility. Chugach expects it will fully recover the added fuel cost through slightly higher rates by the end of the first quarter of next year. Bruce Shelley, the member relations director for Homer Electric Association, which owns the SQ line, wrote via email that the Kenai Peninsula utility replaced eight poles along with several insulators and guy wires. A spokesman for HEA said Dec. 9, when the repairs were beginning in earnest, that the utility had identified seven poles that needed to be replaced before the line could be re-energized. At the time, the work was expected to take at least two weeks if crews didn’t discover any other damage. Discussion in public meetings among other utilities was that as many as 14 poles could have been compromised by the fire. However, the initial estimates were based on observations from helicopter flyovers and HEA's contractor found there to be less fire damage than was originally thought, according to Shelley. HEA officials said in early December that the work to repair the line had been slow going for a host of reasons and crews couldn’t just rush into the area as soon as the fire was largely suppressed in early September. Localized hot spots and ash pits continued to smolder and posed a danger to electric crews working in the area long after fire crews and September rains doused most of the flames. The portion of the line that was damaged is in a portion of the Kenai National Wildlife Refuge west of Cooper Landing near Jean Lake that is a challenging mix of wetlands and mountainous terrain. HEA officials also told their counterparts at other utilities in early December public meetings that windstorms around Thanksgiving caused significant power outages on the Kenai Peninsula that diverted crews’ attention away from the SQ line. While HEA built and owns the SQ line, it is on the northern edge of the utility’s service area and does not provide power to HEA customers. The whole situation spurred talks about the Alaska Energy Authority purchasing the SQ line from HEA, according to leaders of the utility and state-owned authority. AEA Executive Director Curtis Thayer said the authority purchasing the SQ line — it also owns the state-funded Alaska Intertie transmission line between Willow and Healy — could be the first step towards investing in upgrades to it. Thayer initially said he hopes to conclude those discussions with HEA leaders by late January. Utility cooperation agreement The SQ line is one of several transmission segments between Bradley Lake and Fairbanks without any backup, or redundancy, and capacity-constrained transmission lines have long made maximizing the use of Bradley Lake’s cheap power a challenge that was elevated by the Swan Lake fire damage. Utility leaders and Regulatory Commission of Alaska officials have for years discussed and debated the need to invest in upgrading the Railbelt electric transmission system, but finding equitable ways for the utilities to pay for the costly projects is a hurdle that has yet to be cleared. To that end, it was announced Dec. 19 that the leaders of the six Railbelt utilities have signed a memorandum of understanding to work towards forming a Railbelt Reliability Council, or RRC, as a means to set operating and capital projects standards across the region and increase economics-driven power generation dispatch across the region. The RRC would operate as a standalone, not-for-profit organization governed by a 13-member board with members from each utility, stakeholders and the organization's CEO, according to the MOU. Several prior attempts to form a similar organization following the RCA's initial demand in 2015 for increased operational alignment between the Railbelt utilities have floundered for a host of reasons. It remains to be seen if the latest agreement will lead to the substantive reforms in the Railbelt that the RCA has called for. However, stakeholders note that bills pending in the Legislature with bipartisan support to in-part give the RCA increased authority over Railbelt utility operations could be the impetus for solidifying action following the latest conceptual agreement. Elwood Brehmer can be reached at [email protected]  

Former Walker advisor buys bankrupt Furie for $15M

It appears Furie Operating Alaska LLC will have a new but familiar owner to Alaska. Hex LLC won a Dec. 5 bankruptcy auction to purchase the small Cook Inlet natural gas producer for $15 million, according to court filings. Hex LLC submitted its initial filings for a business license with the state Commerce Department Nov. 23 and is owned by former Gov. Bill Walker’s oil and gas advisor John Hendrix, according to those filings. Hendrix was general manager of Apache Corp.’s operations in Cook Inlet prior to working in the Walker administration. Houston-based Apache left Alaska in 2016 as the company prioritized its global operations during the bottom of the downturn in oil prices. Texas-based Furie filed for Chapter 11 bankruptcy protection Aug. 9 in federal Bankruptcy Court for the District of Delaware. According to the company’s bankruptcy petition, Furie owed lenders approximately $440 million when it filed for Chapter 11 protection and was also owed roughly $105 million in refundable tax credits from the State of Alaska. Hendrix did not return calls seeking comment in time for this story. Furie operates the Kitchen Lights Unit in central Cook Inlet and currently has contracts to supply Homer Electric Association and Enstar Natural Gas. Furie also signed a contract with Chugach Electric Association in 2017 to supply the Anchorage electric utility with firm gas shipments beginning in 2023. The company installed the Julius R platform in the Kitchen Lights field in 2015, which at the time was the first new development platform the Inlet in several decades. Furie officials said in 2017 they planned to work on developing oil prospects in the Kitchen Lights gas field, but those plans were largely scuttled because of the state’s delay in repaying millions of dollars in oil and gas tax credits the company earned for its previous work, according to the company’s filings with the state Division of Oil and Gas. In late 2017, former Natural Resources Commissioner Andy Mack issued a default notice to Furie for allegedly not conducting the work the company claimed it would in prior development plans. Furie’s work in 2018 was sufficient to resolve the default, according to Oil and Gas records. The financial challenges were nearly continuous for the company, which had net gas sales of $25.4 million and absorbed a net loss of $58.5 million in 2017, according to the bankruptcy filings. The situation worsened in 2018 when the company sold $42.8 million of natural gas but took a loss of nearly $152 million. Furie lost $21.4 million in the first quarter of 2019, when a freeze-up in a gas production pipeline kept the company from supplying HEA and Enstar with gas for more than a month. Once gas deliveries resumed, Furie was only able to supply Enstar with less-than-contracted amounts for several months as well. The utilities purchased gas from other area producers and drew on reserves stored in the Cook Inlet Natural Gas Storage Alaska facility commonly known as CINGSA. Alaska Pipeline Co., a sister company to Enstar under joint owner SEMCO Energy Inc., filed a letter with the bankruptcy court Dec. 17 claiming the company’s rights to secure assurances that Hex LLC can meet the terms of Furie’s gas contract. The letter states that APC is in discussions with Hex to obtain the assurances it needs that Hex can perform under the contract. ^ Elwood Brehmer can be reached at [email protected]

Armstrong-led company spends big, snags 1M acres in NPR-A

The State of Alaska’s annual North Slope oil and gas lease sale held Dec. 11 was quieter than recent years but that was partly offset by a spike in industry interest for lands in the federal National Petroleum Reserve-Alaska. The state’s lease sales for near shore Beaufort Sea acreage and broader onshore North Slope areas together garnered 69 bids from four groups totaling about $7.8 million in bonus bids, according to Division of Oil and Gas Director Tom Stokes. The NPR-A lease sale put on by the Bureau of Land Management also held Dec. 11 was dominated by North Slope Exploration LLC, a company formed by noted North Slope explorer Bill Armstrong, of Denver, according to state business records. North Slope Exploration spent roughly $10.5 million to win 85 lease tracts in the central portion of the reserve that is available for leasing. The company’s continuous chunk of lease tracts totaling nearly 1 million acres butts up to the northeast portion of the reserve that is unavailable for leasing in favor of wildlife habitat protection under the current NPR-A Integrated Activity Plan. Overall, BLM received winning bids totaling $11.2 million on 92 tracts covering just more than 1 million acres in the eastern and central portions of the NPR-A, according to BLM Associate State Director Ted Murphy. Other than 2016, when companies spent $18.8 million on leases, it is the largest collective bid amount for an NPR-A lease sale since 2008. Armstrong, through his namesake company Armstrong Oil and Gas, led the discovery of the shallow, conventional Nanushuk oil formation in partnership with Spanish major Repsol six years ago before selling his stake in the Pikka Unit prospect to Oil Search for $850 million in a deal announced in late 2017. The Nanushuk discovery has since sparked a boom in exploration on the North Slope with Oil Search Alaska and ConocoPhillips declaring finds with potential of more than 100,000 barrels per day each. Armstrong wrote via email that his company needs to conduct seismic surveys over the large area it just acquired before conducting any exploration drilling. His team has several ideas about new potential plays in the area as well as the potential for a continuation of the Nanushuk formation west of the current discoveries, according to Armstrong. He noted that any oil find would need to be very large to be commercially viable in such an isolated area without any industry infrastructure. BLM is currently going through the environmental impact statement process to amend the NPR-A land-use plan with the aim of opening more acreage in the 23 million-acre reserve for oil and gas leasing. North Slope bidding on state lands was led by Oil Search Alaska, which is developing the large Nanushuk oil project in the Pikka Unit. Oil Search won nearly 40 least tracts primarily on the eastern portion of the Slope south of the Point Thomson gas field. The company spent as much as $276 per acre to secure the leases it sought. Great Bear Petroleum Ventures II LLC, a subsidiary of the Anchorage-based independent Great Bear Petroleum, also won 17 leases mostly in the central portion of the state-owned North Slope acreage. Individuals Samuel Cade and Dan Donkel jointly won six leases in the state waters of Beaufort Sea and independent Narwhal LLC won seven Beaufort Sea leases. Last year’s Beaufort Sea and North Slope oil and gas lease netted the state more than $28.1 million and other recent sale totals were in the $15 million to $20 million range. Stokes said that part of the reason this year’s sale was smaller is likely that most of the prospective acreage is already under lease. Stokes also noted that exploration activity including seismic surveys as well as drilling has ramped up across the Slope over the past few years. BLM’s Murphy added that half of the $11.2 million in bid revenue from the federal sale goes to the State of Alaska. Australian independent Emerald House LLC won four leases in the eastern part of the reserve and ConocoPhillips, which already has large lease holdings and several oil projects there bid on and won three leases near its current acreage. Before the Dec. 11 bid opening, companies held 215 leases covering about 1.5 million acres in the NPR-A, according to Murphy. Elwood Brehmer can be reached at [email protected]

Armstrong-led company spends big, snags 1M acres in NPR-A

The State of Alaska’s annual North Slope oil and gas lease sale held Wednesday morning was quieter than recent years but that was partly offset by a spike in industry interest for lands in the federal National Petroleum Reserve-Alaska. The state’s lease sales for near shore Beaufort Sea acreage and broader onshore North Slope areas together garnered 69 bids from four groups totaling about $7.8 million in bonus bids, according to Division of Oil and Gas Director Tom Stokes. North Slope bidding on state lands was dominated by Oil Search Alaska, which is developing the large Nanushuk oil project in the Pikka Unit. Oil Search won nearly 40 least tracts primarily on the eastern portion of the Slope south of the Point Thomson gas field. The company spent as much as $276 per acre to secure the leases it sought. The NPR-A lease sale put on by the Bureau of Land Management Wednesday morning was dominated by North Slope Exploration LLC, a company formed by noted North Slope explorer Bill Armstrong, of Denver, according to state business records. Armstrong, through his namesake company Armstrong Oil and Gas, led the discovery of the shallow, conventional Nanushuk oil formation in partnership with Spanish major Repsol six years ago before selling his stake in the Pikka Unit prospect to Oil Search for $850 million in a deal announced in late 2017. The Nanushuk discovery has since sparked a boom in exploration on the North Slope with Oil Search and ConocoPhillips declaring finds with potential of more than 100,000 barrels per day each. Armstrong wrote via email that his company needs to conduct seismic surveys over the large area it just acquired before conducting any exploration drilling. His team has several ideas about new potential plays in the area as well as the potential for a continuation of the Nanushuk formation west of the current discoveries, according to Armstrong. He noted that any oil find would need to be very large to be commercially viable in such an isolated area without any industry infrastructure. ConocoPhillips' Willow oil project in the eastern NPR-A is largely a Nanushuk-sourced prospect, according to the company. Overall, BLM received winning bids totaling $11.2 million on 92 tracts covering just more than 1 million acres in the eastern and central portions of the NPR-A, according to BLM Associate State Director Ted Murphy. Other than 2016, when companies spent $18.8 million on leases, it is the largest collective bid amount for an NPR-A lease sale since 2008. Murphy noted that half of the $11.2 million in bid revenue from the federal sale goes to the State of Alaska. North Slope Exploration spent roughly $10.5 million to win 85 lease tracts in the central portion of the reserve that is available for leasing. The company’s continuous chunk of lease tracts totaling nearly 1 million acres butts up to the northeast portion of the reserve that is unavailable for leasing in favor of wildlife habitat protection under the current NPR-A Integrated Activity Plan. BLM is currently going through the environmental impact statement process to amend the NPR-A land-use plan with the aim of opening more acreage in the 23 million-acre reserve for oil and gas leasing. Great Bear Petroleum Ventures II LLC, a subsidiary of the Anchorage-based independent Great Bear Petroleum, also won 17 leases mostly in the central portion of the state-owned North Slope acreage. Individuals Samuel Cade and Dan Donkel jointly won six leases in the state waters of Beaufort Sea and independent Narwhal LLC won seven Beaufort Sea leases. Last year’s Beaufort Sea and North Slope oil and gas lease netted the state more than $28.1 million and other recent sale totals were in the $15 million to $20 million range. Stokes said that part of the reason this year’s sale was smaller is likely that most of the prospective acreage is already under lease. He also noted that exploration activity including seismic surveys as well as drilling has ramped up across the Slope over the past few years. Australian independent Emerald House LLC won four leases in the eastern part of the reserve and ConocoPhillips, which already has large lease holdings and several oil projects there bid on and won three leases near its current acreage. Before the Wednesday bid opening, companies held 215 leases covering about 1.5 million acres in the reserve, according to Murphy. Elwood Brehmer can be reached at [email protected]

Dunleavy tries new tack on 2021 budget

Gov. Mike Dunleavy is approaching the state budget from a completely different angle this year. Rather than again proposing to cut more than $1 billion from state operations spending to help support full, statutory Permanent Fund dividend payments, the administration is proposing an ostensibly flat fiscal year 2021 operating budget of $4.5 billion in unrestricted general fund spending with a very large 2020 supplemental appropriation of more than $1 billion. The supplemental fills gaps in Medicaid and wildfire response funding and would also provide for a second round of PFD payments this fiscal year in addition to the $1,606 each eligible Alaskan received this fall. After major pushback from the public and majorities in the Legislature to his cuts-driven plan last budget cycle, the governor is asking Alaskans and their lawmakers to decide what they want their state government to be. The 2021 budget stays within the 5.25 percent of market draw on the $65 billion Permanent Fund by pulling more than $1.5 billion from the Constitutional Budget Reserve, the state’s last remaining savings account. As proposed, the plan would leave approximately $540 million in the CBR at the end of next fiscal year. It appropriates just more than $2 billion for PFDs. Finance experts and many legislators have said the state should leave at least $1 billion in savings for responding to emergencies, such as natural disasters, and allow for easier day-to-day cash management. Dunleavy acknowledged such a large draw from saving is not feasible in the long-term, but again said he wants finding alternative budgeting solutions to be a collaborative process. “We have to have the Legislature decide what they want to look at going forward in terms of underwriting this budget,” he said in an interview. He stressed that formula programs are adding more than $100 million per year to the state budget and without facing those ever-increasing obligations the state will not be able to balance its finances over the long-term. “Quite frankly the state, the Legislature and the people have to decide, do they want a smaller government footprint or do the majority of Alaskans and this Legislature want to look at some other way to pay for government? That’s the discussion that has to take place this year and the Legislature has to be front and center on that because they are the appropriating body,” Dunleavy said. The budget does not cut any state programs or services, he said. The governor emphasized that his budget for the 2021 fiscal year, which starts July 1, is built on “fiscal discipline, honoring the law, truthful budgeting and keeping commitments.” The budget proposal absorbs roughly $110 million in formula-driven increases to keep overall spending in line with current rates, according to Dunleavy. It increases spending in the four agencies focused on public safety: the proposed budgets for the departments of Corrections, Law, Public Safety and the Court System are all up between 3 percent and 17 percent over the current year, according to information provided by the governor's office. “That’s just the cost of doing business if we want a safer Alaska,” said Dunleavy’s Senior Policy Advisor Brett Huber. To offset that, the budget plan would cut spending slightly in the departments of Natural Resources and Commerce, according to Huber, who also said some funding priorities have been shifted in those agencies to allow them to focus on permitting development projects in a timely manner and growing Alaska’s economy. Dunleavy said state agencies have also been able to wring efficiencies out of back office functions such as IT by eliminating redundancies, for instance, which will save the state “millions of dollars” per year. State funding in the capital budget, which for several years has been just enough to capture federal matching funds, is reduced about 8 percent to $135 million. When designated revenues such as agency fees and federal funding are added in, the capital budget totals about $1.3 billion, according to the governor’s office. The 2020 supplemental budget is being released now instead of during the legislative session — as has been historical practice — to give Alaskans a better picture of the state’s overall budget situation, Huber said. The supplemental would draw an additional $815 million from the Permanent Fund’s Earnings Reserve Account to make another PFD payment of about $1,400 per eligible Alaskan. That would fulfill the fiscal year 2020 statutory formula PFD calculation, which has been one of the administration’s top priorities. The second PFD payment would go beyond the $2.9 billion Permanent Fund spending recommendation in Senate Bill 26 for 2020, but the governor said he is comfortable with doing that in the short-term to make good on the full PFD obligation called for in law. “The dollars still exist within the ERA that were not distributed. They’re still in the ERA and continue to make (investment) money,” Dunleavy said. “I understand that if there’s too great a draw over a long period of time that it certainly has a negative impact, but that’s a discussion we have to have on changing the law.” The supplemental also calls for another $120 million in Medicaid spending after the Legislature and governor combined to cut the Medicaid budget by about $150 million last year. “We believed that we could get farther faster through Medicaid reform than we could,” Huber said. The administration originally proposed cutting state Medicaid spending by more than $225 million, but revised that estimate down to about $100 million during the middle of last session. Huber said the additional $120 million is carried into the 2021 budget plan as well. The supplemental also includes $95 million to backfill wildfire suppression accounts following the unprecedented 2019 wildfire season. Finally it funds an additional $6 million for the Alaska Psychiatric Institute and $5 million for the Pioneer Homes under the administration’s plan. The governor’s plan will undoubtedly be revised by the Legislature, which starts its regular session in Juneau Jan. 21. Elwood Brehmer can be reached at [email protected]

Revenue forecast drops $200M on lower oil prices, production

Alaska’s fiscal situation looks yet a little bleaker based on the latest annual state revenue forecast. The Department of Revenue projects the State of Alaska’s traditional unrestricted general fund income will be $2.1 billion in the current 2020 fiscal year, according to the Fall 2019 Revenue Sources Book published Friday afternoon by the department. That estimate is down about $200 million from the department’s March update to last fall’s revenue forecast. Unrestricted general fund revenue for fiscal year 2021, which starts July 1, is now pegged at roughly $2 billion and is also a decrease of about $200 million from the March projections. Oil taxes and royalties will account for nearly three-quarters of traditional unrestricted general fund revenue to the state for the next couple years, Revenue officials project. Those figures do not include more stable investment revenue from the $65 billion Permanent Fund, which the state started appropriating to support government services last year. Permanent Fund revenue for dividends and government should be $2.9 billion this year and $3.1 billion in 2021 — in line with previous estimates. It all amounts to a little less financial wiggle room for Gov. Mike Dunleavy’s administration, which is set to release its fiscal 2021 budget proposal next week. Prior revenue estimates had the state facing roughly a $1 billion deficit in 2021 based on current spending levels if Permanent Fund dividends were to be paid based on the historic statutory formula, which has been one of the administration’s top priorities. The drop in likely revenue to the state is attributed to expected declines in both North Slope oil production and the price of Alaska North Slope crude over the next year-plus, according to the report. Acting Revenue Commissioner Mike Barnhill wrote in a letter to Dunleavy accompanying the Revenue Sources Book that Alaska crude is expected to average $63.54 per barrel in 2020 and $59 per barrel in 2021. That is a downward revision of about $2.50 per barrel for 2020 from the previous price forecast and $7 per barrel less for 2021. North Slope oil production is expected to average 492,063 barrels per day this year, down from 496,900 barrels per day in 2019. Next fiscal year, about 490,500 barrels per day are expected to flow through the Trans-Alaska Pipeline System, or TAPS. Those estimates are down 7 percent and 4 percent for fiscal 2020 and 2021, respectively. North Slope production is now forecast to bottom out at 434,000 barrels per day in 2024 before several large prospects currently in the works start to reverse the decline trend. Production accounting Division of Oil and Gas officials who prepare the oil forecast for Revenue said that while they still expect a near-term production decline, it is not as steep as the forecast indicates. Petroleum Reservoir Engineer Pascal Maduabuchi said in an interview that roughly 10,000 barrels per day of natural gas liquids that are produced from the Prudhoe Bay Unit are being sold to the owners of the adjacent Kuparuk River Unit for reinjection back into the ground to help enhance production from Kuparuk. The natural gas liquids, or NGLs, technically count as North Slope production because the state collects royalties on them and the could be sent down TAPS, but since they are used for enhanced oil recovery instead of going to market they are not taxed, which has led Revenue officials to decide to not count them in their official forecasts, according to state Petroleum Geologist Steve Moothart. “Essentially, what they did in this year’s numbers, the fall 2019 numbers, is take our forecast of total production and subtract 10,000 barrels per day from that but it wasn’t done that way in the spring or last fall’s 2018 forecast,” Moothart explained. Maduabuchi said the NGL reinjection project — which includes adding some dry natural gas to the liquids that then act as a thinning solvent to the Kuparuk River oil and makes it easier to extract from the reservoir — was stopped several years ago and restarted in about October 2018. It all means that the gross production forecast for this year is actually closer to 502,000 barrels per day and the forecast for 2021 is about 500,000 barrels per day. Moothart noted that the NGL project ultimately leads to net positive production from Kuparuk. State officials are also able to track the barrels on which a royalty has been charged, he added, so royalties on those barrels are not charged twice. “New fields offer tremendous potential to increase production later in the 2020s but these developments are still contingent on final investment decisions and commitment of billions of dollars of new investments on the part of oil and gas producers,” Barnhill wrote to Dunleavy. Through Dec. 5, fiscal year-to-date North Slope oil production averaged 466,524 barrels per day and the average price for the period was $63.73 per barrel. However, North Slope production generally peaks increases during the winter and early spring. Alaska North Slope crude sold for $65.96 per barrel as of Thursday, according to the Revenue Department. Elwood Brehmer can be reached at [email protected]

Bradley Lake power line outage tops $10M in cost to Railbelt ratepayers

The Swan Lake fire is still costing the majority of Alaskans through the continued outage of a power line that links the state’s population centers to low-cost energy produced on the Kenai Peninsula. According to Chugach Electric Association spokeswoman Julie Hasquet, members are collectively paying between $30,000 and $50,000 per day in additional power costs — mainly burning more costly natural gas at its power plants — as a result of the transmission line between Soldotna and Cooper Landing being out of service. North Anchorage residents and businesses are paying about $13,000 more per day due to the outage, Municipal Light and Power spokeswoman Julie Harris wrote in an email. For Matanuska Electric Association members, the added fuel cost totals about $12,000 per day, said CEO Tony Izzo. Farther north, Interior electric utility Golden Valley Electric Association officials informed their ratepayers Dec. 2 that the cooperative’s fuel and power purchase charge would be increased 19.8 percent through February to cover the cost of replacing the hydropower currently unavailable due to the line outage with more expensive generation fuels. The rate hike equates to about an $11 per month increase to average residential customer bills, according to the utility. Izzo said that as of Dec. 6, the added costs to Southcentral and Interior electricity consumers because of the transmission outage totaled roughly $10.4 million since the Swan Lake fire damaged power poles in mid-August. Dubbed the “SQ line” for its route between Soldotna and a substation at Quartz Creek, the 115-kilovolt line links utilities in Anchorage, the Mat-Su, Fairbanks and Seward to the Bradley Lake hydroelectric project located across Kachemak Bay from Homer. Since its startup in 1991, Bradley Lake has supplied up to 10 percent of the electricity needed by Alaska’s Railbelt utilities. At 4 cents per kilowatt-hour, the hydroelectric dam can produce power for about half the current cost of natural gas-fired generation and is some of the lowest-cost power in the state, according to the Alaska Energy Authority, which owns Bradley Lake. However, capacity-constrained transmission lines between Bradley Lake and most Railbelt utilities have made maximizing the use of the project’s cheap and clean power a challenge that has simply been elevated by the Swan Lake fire damage. The SQ line is one of several transmission segments between Bradley Lake and Fairbanks without any backup, or redundancy. Utility leaders and Regulatory Commission of Alaska officials have long discussed and debated the need to invest in upgrading the Railbelt electric transmission system, but finding equitable ways for the utilities to pay for the costly projects is a hurdle that has yet to be cleared. While a second 115-kilovolt SQ line would de-constrain one section of the Railbelt transmission system, a 2017 study commissioned by AEA recommended against the project for its high costs, though a specific price was not cited. At the center of the immediate problem are a handful of burned and damaged poles that support the three-wire SQ line along the challenging terrain near Jean Lake east of Cooper Landing and near the Sterling Highway corridor. Delayed repairs Managers from the other Railbelt electric utilities expressed frustration during a Dec. 6 Bradley Project Management Committee meeting over the time it has taken Homer Electric Association, or HEA, to prepare for the SQ line repairs and the lack of information available at the time. HEA owns the SQ line; it was built in the late 1960s. HEA officials who called into the meeting held at AEA’s Anchorage office initially said they did not know exactly how many poles needed to be repaired and they did not know if a crew was working on the line at the time. AEA officials and other utility representatives said they believe 14 poles need to be replaced at an estimated cost of about $2 million. Chugach Electric CEO Lee Thibert asked for daily updates from HEA. “This is an urgent matter for the northern utilities,” Thibert said. Jim Butler, Homer Electric Association’s incident management advisor, said Dec. 9 that the Kenai Peninsula utility has identified seven poles that need to be replaced before the SQ line can be turned back on. AEA Executive Director Curtis Thayer said in a subsequent interview that he understands there to be 14 poles that eventually need to be addressed, but only a subset need immediate replacement. The work to repair the line has been slow going for a host of reasons, according to Butler, who said crews couldn’t just rush into the area after the fire was largely suppressed in early September. “The determination that the fire was quote-unquote out was sort of an initial step. We were advised by the (Kenai) Wildlife Refuge that the area that was impacted by the fire, particularly high fire intensity in the area of where the SQ line runs from mile 62 of the Sterling Highway east. There were significant ash pits and hazard trees in the area,” he said. “So that safety concern based on the advice of fire managers was something that we had to factor into timing and scheduling.” The damaged section of the line runs through the Kenai National Wildlife Refuge. After taking time to evaluate the area, which is a mix of wetlands and mountainous terrain, recent windstorms in Southcentral forced HEA to divert maintenance crews to other outages and likely made more burned trees unstable, Butler noted. HEA was mobilizing equipment and crews to the area Dec. 9, according to Butler, who said it would likely take two or three weeks to restore power to the line if no other issues arise. Another problem has been that the wetlands in the area are not frozen; work is typically done there in January or February when the ground is solid but the current conditions don’t afford that. “We’ve been trying to be very practical about how to get in and unwind the odd and unique debris in an area that still has hot ground and make sure that everybody’s safe when they’re doing it,” Butler said. Rising water Adding another layer to the situation is the fact that the unusually warm fall weather on the Kenai Peninsula has meant that more rain that normal has fallen in the Bradley Lake watershed and raised the lake level past a key threshold. Each Railbelt utility is normally apportioned a specific share of Bradley Lake power, but when that power can’t be transferred north — such as now — it is used by HEA. The Bradley Lake operating agreements signed by the utilities call for HEA to repay the other utilities for using their share of Bradley Lake power when the lake is below “imminent spill” level, which is set at 1,175 feet. However, when the lake level is above 1,175 feet, the power can be used by any utility that can access it without the repayment obligation, according to Matanuska Electric Association officials. The true spill level is 1,180 feet. HEA representatives said at the Dec. 6 committee meeting that the lake has been at about 1,179 feet for some time. That was before the most recent rainstorm. They stressed that HEA has not intentionally slowed the work to capture more Bradley Lake power for its members, a message echoed by Butler. “It’s an important piece of infrastructure; that’s not lost on anybody, but it’s also important that we approach this methodically and don’t end up getting somebody injured because I don’t think anybody wants that,” Butler said in an interview. Potential sale AEA’s Thayer said Dec. 10 that the situation has spurred discussions about the state-owned authority purchasing the SQ line. HEA General Manager Brad Janorschke wrote via email that folks from his utility have talked to AEA about such a deal and they are continuing those discussions. Officials from the state authority were meeting with HEA representatives that day to discuss the possible sale, which is in the preliminary stages, according to Thayer. AEA already owns the 170-mile Alaska Intertie between Willow and Healy that connects Golden Valley with the rest of the Railbelt electric grid. He said the value of the line and the corresponding price are obvious issues the sides still need to resolve, but he estimated it would be less than $25 million. The SQ line could potentially be upgraded to help the northern utilities access their full share of Bradley Lake power exactly when it is most beneficial to them under AEA’s ownership, he added. “The line belongs to Homer, it’s in their service territory but it doesn’t serve one (HEA) customer,” Thayer said. Representatives from the other Railbelt utilities said they support AEA buying the SQ line in concept, with final support being contingent on the details of the transaction. Thayer said AEA could ask the Legislature for an appropriation or it could turn to its sister authority, the Alaska Industrial Development and Export Authority, for help bonding for the money to make the purchase if the Railbelt utilities agree with that course of action. If it is paid for with bonds the utilities would pay tariffs for transferring power across the SQ line to repay the debt. AEA and AIDEA share a board of directors. Thayer said he hopes to have the issue settled sometime in January whether AEA ultimately buys the SQ line or not. ^ Elwood Brehmer can be reached at [email protected]

Revenue forecast down on lower oil prices, production

Alaska’s fiscal situation looks yet a little bleaker based on the latest annual state revenue forecast. The Department of Revenue projects the State of Alaska’s traditional unrestricted general fund income will be $2.1 billion in the current 2020 fiscal year, according to the Fall 2019 Revenue Sources Book published Friday afternoon by the department. That estimate is down about $200 million from the department’s March update to last fall’s revenue forecast. Unrestricted general fund revenue for fiscal year 2021, which starts July 1, is now pegged at roughly $2 billion and is also a decrease of about $200 million from the March projections. Oil taxes and royalties will account for nearly three-quarters of traditional unrestricted general fund revenue to the state for the next couple years, Revenue officials project. Those figures do not include more stable investment revenue from the $65 billion Permanent Fund, which the state started appropriating to support government services last year. Permanent Fund revenue for dividends and government should be $2.9 billion this year and $3.1 billion in 2021 — in line with previous estimates. It all amounts to a little less financial wiggle room for Gov. Michael J. Dunleavy’s administration, which is set to release its fiscal 2021 budget proposal next week. Prior revenue estimates had the state facing roughly a $1 billion deficit in 2021 based on current spending levels if Permanent Fund dividends were to be paid based on the historic statutory formula, which has been one of the administration’s top priorities. The drop in likely revenue to the state is attributed to declines in both North Slope oil production and the price of Alaska North Slope crude over the next year-plus, according to the report. Acting Revenue Commissioner Michael Barnhill wrote in a letter to Dunleavy accompanying the Revenue Sources Book that Alaska crude is expected to average $63.54 per barrel in 2020 and $59 per barrel in 2021. That is a downward revision of about $2.50 per barrel for 2020 from the previous price forecast and $7 per barrel less for 2021. North Slope oil production is expected to average 492,063 barrels per day this year, down from 496,900 barrels per day in 2019. Next fiscal year, about 490,500 barrels per day are expected to flow through the Trans-Alaska Pipeline System, or TAPS. Those estimates are down 7 percent and 4 percent for fiscal 2020 and 2021, respectively. North Slope production is now forecast to bottom out at 434,000 barrels per day in 2024 before several large prospects currently in the works start to reverse the decline trend. “New fields offer tremendous potential to increase production later in the 2020’s but these developments are still contingent on final investment decisions and commitment of billions of dollars of new investments on the part of oil and gas producers,” Barnhill wrote to Dunleavy. Through Thursday, fiscal year-to-date North Slope oil production averaged 466,524 barrels per day and the average price for the period was $63.73 per barrel. However, North Slope production generally increases during the winter and early spring. Alaska North Slope crude sold for $65.96 per barrel as of Thursday, according to the Revenue Department.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Possibilities, costs “enormous” for A2A rail

The backers of a new rail line to link Alaska to Canada and Lower 48 markets insist it would generate upwards of $5 billion of freight revenue through the state. Alaska-Alberta Railway Development Corp. founder Sean McCoshen told attendees of the Resource Development Council for Alaska’s annual conference that the 1,500-mile stretch of new railroad would provide trans-Pacific shippers an alternative to existing bottlenecked ports and rails lines along the West Coast. Oft-referred to as the A2A rail line, McCoshen said just-in-time shippers would benefit from the fact that Southcentral Alaska ports are about four days closer to East Asia by vessel than ports in the Lower 48 and British Columbia despite the longer distance by train. “Our own economic model looks at steady state revenue from export commodities in Canada of almost $5 billion per year. We must complete this project to show shippers we can bring a variety of commodities to and from Alaska’s Pacific ports competitively with the slower, more energy-intensive rail and pipeline routes that exist or are under construction in Canada,” McCoshen said. For comparison, the Alaska Railroad typically generates about $110 million in passenger and freight revenue per year. The project would start by constructing rail from the north end of the Alaska Railroad’s tracks near North Pole and continue south and east past Tok and Tetlin to the Canadian border for about 200 miles of new track in the state. That section would link to 1,300 miles of track built in Canada, starting roughly near Fort McMurray in northeast Alberta. It’s about a $13 billion endeavor, according to company estimates. Canadian rail lines currently get as close to Alaska as Whitehorse in the Yukon. “The possibilities are enormous but so is the project,” McCoshen said. Former Lt. Gov. Mead Treadwell is also working on the project as A2A’s chief operating officer. The idea of a freight rail line to connect Alaska to the rest of the continent has been analyzed several times but has never made it far past the conceptual stage. The project is being driven in large part by a need for new export routes for Alberta’s heavy oil production. Studies analyzing the feasibility of a conceptual rail line linking Alaska and Canada have looked at shipping 1 million barrels of oil per day or more through Alaska but McCoshen stressed in a brief interview that while oil shipments would be a part of the private rail line’s business it would be a general cargo line that “ships everything under the sun.” He noted in his presentation that the Canadian government last year passed a law prohibiting additional tanker traffic out of British Columbia ports and said the lack of new shipping routes and port facilities in the country has stymied growth in other Canadian commodity exports. Importantly, it would open up export routes for many stranded mineral deposits in Northern Canada and Interior Alaska, he said, calling the potential mining benefits “the economic icing on the cake” for the project. In June, the Alaska Railroad signed an agreement with A2A that allows McCoshen’s firm to undertake the environmental and engineering studies for the project while the state-owned railroad corporation would apply for the additional right-of-way from the state. A2A would then rent the track from the Alaska Railroad, he said. A2A is currently waiting on a border crossing permit from the White House and McCoshen thanked Gov. Michael J. Dunleavy for advocating to President Donald Trump for its approval. The Alaska Legislature also passed a resolution in May urging the president to approve the permit. McCoshen added that many, but not all, of the baseline impact studies have been done for the project. “We have a good solid two years of work ahead of us at least before we can get to a final investment decision,” he said. He emphasized the new infrastructure is necessary in a global economy as it would help balance the North American trade deficit with Asia. “This is a 21st century project, not a 19th century project,” McCoshen said. “It is one of several long rail links being pursued around the world and one that will more closely tie the economies of Alaska, Canada and Asia.” Elwood Brehmer can be reached at [email protected]

Gov: Communication key to second year success

Alaskans should expect to see much more of Gov. Michael J. Dunleavy in 2020. Following a turbulent first year in office during which he proposed unprecedented cuts to the state budget, regularly sparred with fellow Republicans in the Legislature and watched an effort to recall him from office materialize, Dunleavy said he will be making more appearances across the state to talk with residents about what they want their state to be. “I could’ve done a much better job at communicating. I’ll be the first to admit that,” Dunleavy said during a Dec. 2 interview with the Journal at his Atwood Building office in Anchorage. “Since I can’t go back in time I will be reaching out and we’ll be going to all the communities, communities that have been affected and meeting with any and every group there is and I fully expect some people not to be happy with what happened with the budget. But what I want to hear from these folks once they get done venting is what they want Alaska to look like. What are we willing to do to get to that point for Alaska to look like that?” The governor and key members of his administration did conduct what they dubbed a “budget roadshow” last spring that consisted of five public events across the state to make the pitch for his budget proposal, which looked to close a $1.6 billion deficit through major spending cuts and diverting what has traditionally been local tax revenue to the state while paying Permanent Fund dividends according to the formula that is still in law. However, those events were disrupted by protesters at times and dismissed by other skeptics because they were coordinated with and sponsored by the national conservative advocacy group Americans for Prosperity. The upcoming legislative session, which starts Jan. 21, will undoubtedly be another contentious one but Dunleavy hopes it can be more constructive — and shorter. Alaska’s regular 90-day session is scheduled to end in late April each year. Lawmakers have gradually extended their work time since 2015 as structural budget deficits that have at times put the state more than 50 percent in the red and correspondingly shrinking reserves have made reaching a yearly spending compromise increasingly difficult. In 2019 the situation hit a new level with special sessions spent debating Dunleavy’s budget plan and subsequent $410 million worth of vetoes that bled into early August, more than a month after the start of the 2020 state fiscal year. Looking back Dunleavy acknowledged the situation left many state programs and private enterprises such as social service providers in limbo. This year, he and members of his administration have been meeting with individual legislators regularly while crafting his latest budget proposal that must be released by Dec. 15 according to state law. He said his administration also has “an idea of what Alaskans are willing to tolerate and what they aren’t,” which should help get the 2020 session off to a more productive start. Last year also started with a nearly month-long leadership vacuum in the state House until a small bloc of Republicans joined with Democrats to form a bipartisan majority coalition primarily aimed at opposing fundamental elements of the governor’s budget plan. Everyone has also had the luxury of hindsight this year to examine the ramifications of some of his budget cuts — the biggest to Medicaid, the University of Alaska and the state ferry system — and lawmakers can start working from there, according to Dunleavy. He said last year’s budget process “was painful for a lot of people” and stressed that he took no enjoyment from the emotional toll it took on many Alaskans. At the same time, he also said it ended up proving the Alaska economy is more resilient than some of his naysayers insisted. “I think one of the successes — and many people may say, ‘come on’ — is making the reductions and having the discussion of what Alaska would look like if we truly reduced $1.6 billion, what would Alaska look like if we reduce $600 million,” Dunleavy said. The Legislature cut General Fund spending by about $200 million, which combined with Dunleavy’s final round of vetoes to reduce the overall state budget by roughly $600 million compared with a year prior. He highlighted that employment and personal income in Alaska are on the upswing this year, counter to the predictions of some economists who said implementing his full suite of budget cuts would send the state back into a prolonged recession. The elephant in the room The elephant in the room during every budget debate last session was the PFD — the state had a revenue surplus without it — and the insistence of Dunleavy and a minority group of legislators in the Senate and House on paying it according to the statutory formula. He wants it to be one of the first topics the Legislature addresses in 2020 because a proposed special session this fall to settle the matter was derailed by the sudden death of former Anchorage Sen. Chris Birch in August and the lengthy process of legislative appointments that followed including Senate Republicans rejecting Dunleavy’s first nominee, Rep. Laddie Shaw. Dunleavy’s first budget appeared to put the PFD above all other spending, as it was the one area of spending that was not cut and instead, by following the formula, was nearly doubled under his plan from the previous year. He emphasized that it was arbitrarily reduced over several years, first by former Gov. Bill Walker by veto in 2016 and then the Legislature in 2017 and 2018, and his aim was to see what programs Alaskans truly value. “I don’t say the PFD is the most important thing. I think it’s important. It’s been a program, if you want to look at it as a program — some of us choose to look at it as a transfer although the courts have changed that dynamic with their (2017) ruling on appropriations — but it’s been around for almost 40 years and it touches more Alaskans than almost any other program we have,” Dunleavy said. “You will have Alaskans that get a PFD that don’t necessarily take the ferry. You’ll have Alaskans that get a PFD that don’t necessarily go to the university. You’ll have Alaskans that get a PFD that may not partake in other state programs, so this is a program that touches about 660,000 Alaskans. The last time there was a major discussion on this in 1999 there was an advisory vote and from the vast majority of Alaskans the message was they prefer to leave the program as it was.” He continued to stress that he wants another advisory vote to precede any changes to the PFD formula, but also said that it needs to be resolved one way or another. “I don’t want to give anyone the impression that it’s the dividend or that’s it and nothing else matters, the state can fall apart,” he added. “My preference is to keep as much money in the hands of people as possible but I know that we have a legislative process. I know that we have to solve this issue or nothing else gets done in the State of Alaska. I’m hoping that we can come up with an agreement, whatever that is, that we can all live with. It may not be something that we’re all excited about but that we can all live with.” Capping spending Lowering the state’s current but ineffectively high constitutional state spending cap has been another priority of the Dunleavy administration and is likely to receive more attention this year, legislative leaders have said. Resolving all of the budget-related issues is likely to get just a little more difficult, as well. Dunleavy said there will likely be a slight downward revision in the state’s revenue forecast based on oil prices that at $63.69 per barrel are currently averaging 3.5 percent below the $66 per barrel price the Revenue Department forecasted for the 2020 fiscal year last spring. An education year One of Alaska’s major policy issues that was sidelined last year because of the prolonged budget drama, according to Dunleavy, was education reform. A teacher and school administrator by trade, he said the administration wants to make 2020 “an education year” and will be introducing several bills to make that happen. His focus is on getting young Alaskans reading at proficient standards by third grade and proficient in algebra by eighth grade. To do that, the administration will submit legislation to establish a pilot program to integrate a pre-kindergarten reading program into K-12 curricula, Dunleavy said. The Department of Education will pay for the new program, which will include reading coaches, advanced training for teachers and parental support, through a $20.7 million, five-year federal grant the department received in early October, according to a statement from the department. The state will start by inviting five or six underperforming schools to participate in the program and hopefully grow it from there, Dunleavy said. After the grant funding is depleted it will be up to the Legislature to decide if the program should continue with state funding. “I think Alaskans will be more apt to want to pay for that because they’ll see the results and the outcomes,” he said, adding similar programs have been successful in Florida and Mississippi. Alaska has long had poor education outcomes. Standardized test results from the 2018-19 school year indicate more than 63 percent of Alaska third-graders were not proficient in English and language arts skills and nearly three-quarters of eighth-graders were not proficient in math. Dunleavy has repeatedly called algebra a “gatekeeper course” that provides students with the math skills necessary for more advanced study in science, engineering and technology fields. He said the Education Department will be making regulatory changes and possibly introduce bills to require that students are proficient in algebra before they leave eighth grade. “If we can get our students reading at grade level by third grade, and kids are proficient in algebra by eighth grade, we just laid the fundamentals for them to be able to do almost anything,” he said. According to Dunleavy, based on initial conversations, the reading concept has support from stakeholders while there has been concern about how small rural schools can focus on algebra when there are often just a handful of students in a given grade. He said he wants to utilize more distance learning classes to remedy those situations and also partner with Alaska Tribes through a formal education compact with the state. He said Tribes can provide a valuable cultural component to education that historically was ignored when Alaska Natives and other indigenous youth were forcibly relocated to boarding schools. “We are probably seeing the results of that inter-generationally, in terms of some trauma that occurred to some folks,” Dunleavy said. “Having the Tribes now oversee in the cases that they wish to oversee education — they’re a part of it. They’re not doing it to their young people, they’re doing it with their young people and supporting their children so I think it’s a different approach for education to be viewed differently in many parts of Alaska.” Editor's note: This story has been amended to provide an updated timeframe for when Gov. Dunleavy's 2021 fiscal year budget proposal will be released. The governor originally indicated it would be Dec. 13; however, a spokesman for the governor's office later said it would the budget would not be released Dec. 13, but it would be before the Dec. 15 deadline. Elwood Brehmer can be reached at [email protected]

State settles Alaska hire suit for $50,000

The State of Alaska has paid $50,000 to settle a lawsuit challenging the validity of its resident hire law following a legal opinion from Attorney General Kevin Clarkson agreeing with the company that brought the suit earlier this year. The lawsuit was filed by the Southeast Alaska general contractor firm SECON in July in state Superior Court alleging that the “Alaska hire” law requiring contractors working on state and locally funded projects to utilize at least 90 percent resident labor under certain economic conditions violates the Privileges and Immunities and Commerce clauses of the U.S. Constitution and the Equal Protection Clause of the Alaska Constitution. Juneau-based SECON is a subsidiary of Colaska Inc., which is part of the larger Colas USA group of construction companies. The company routinely works on Southeast Alaska road projects. Ricky Kirby, a seasonal SECON paving equipment operator from Yakima, Wash., was also named as a plaintiff in the suit. On Oct. 3 Clarkson issued a formal opinion at the behest of Gov. Michael J. Dunleavy indicating he also believes that laws intended to economically benefit Alaska residents at the expense of nonresidents violates the Privileges and Immunities Clause of the U.S. Constitution. Similarly, provisions in the current law could at times put Alaskans from one region of the state ahead of others when being considered for certain work, meaning it violates the Alaska Constitution’s Equal Rights, Opportunities, and Protection Clause, according to Clarkson. The $50,000 settlement, dated Nov. 8, ends the lawsuit in which SECON was seeking to have $158,670 of fines issued by the state Labor Department covering 18 Alaska hire violations since 2017 vacated or repaid. According to SECON’s complaint, the union contractor is managed by Alaskans and has an 85 percent resident workforce but is periodically forced to hire Outside laborers such as Kirby to work on its projects in the state. As it stands, state law requires that staffing for state or locally funded public works projects be conducted with a 90 percent Alaska resident hire requirement by trade when a given project is in a region of the state deemed to be a Zone of Underemployment by the Labor Department commissioner. A region of the state can be considered a Zone of Underemployment if the unemployment rate for the area averaged 10 percent more than the national unemployment rate over the prior 12-month period. The entirety of Alaska can also be deemed a Zone of Underemployment if the criteria are met statewide. Labor Commissioner Tamika Ledbetter found all of Alaska to be a Zone of Underemployment in the most recent employment preference determination issued by the department June 13. The determination was effective through June 2021 for 21 trades until Clarkson’s opinion, which recommended the state stop enforcing the law. Nonresident workers accounted for 17.9 percent of the state’s construction labor force in 2017, according the state Labor Department. A common lack of economic opportunities and the subsistence lifestyle prevalent in rural Alaska, and the state’s highly seasonal industries such as fishing and tourism have historically combined to give the state a significantly higher unemployment rate than the rest of the country. While settling the case means the true constitutionality of the Alaska hire law remains unsettled, some state lawmakers are unhappy with the Dunleavy administration’s decision to stop enforcing a law that otherwise remains remains on the books. Republican Senate President Cathy Giessel sent a letter to Clarkson Oct. 22 insisting it is his duty as the Alaska’s top lawyer to defend the state’s laws until they have been thrown out in court. Clarkson responded Oct. 29 writing that the administration wants Alaskans to work on projects in the state, but also stressing that he took an oath to defend the state and federal constitutions first. Senate Labor and Commerce Committee chair Lora Reinbold, R-Eagle River, said in a brief interview that she had not yet discussed with members of her committee whether they should look into the Alaska hire situation. Reinbold, who is a supporter of many of the administration’s conservative policies, withheld an opinion on Clarkson’s position, saying she needed to research it further leading up to the legislative session that starts Jan. 21. The House Labor and Commerce Committee is currently without a leader because of changes in committee assignments, but Labor and Commerce member Rep. Zack Fields, D-Anchorage, was blunt in his assessment of the situation, saying the issue is one he hopes the Legislature examines closely. “When you have a law that’s been passed that hadn’t even previously been challenged, it’s pretty outrageous for an administration to unilaterally not enforce it,” Fields said. “It fundamentally challenges the balance of powers between the executive, legislative and the judiciary.” The development director for Laborers International Union of North America Local 341, Fields said the decision to not enforce a statute that is still on the books leaves impacted businesses in an untenable situation because the next governor could, and likely would, revert the state’s policy back to enforcing Alaska hire requirements. “The downsides for the State of Alaska and workers are obvious, but I think it is a very fair point that there are a lot of downsides for businesses, too, who are just trying to make reasonable investment decisions, recognizing that they have a graying workforce and that’s particularly true for the construction and oil and gas industries,” he said. For his part, Dunleavy said in an interview that his administration is working on alternative ways to encourage companies to hire more Alaskans on projects in the state. “We’re having discussions about how we can incentivize Alaska hire, how we can make that work without running afoul of the Commerce Clause issue,” Dunleavy said. “We really believe in Alaska hire. We’re doing everything we can with our economic development team to bring jobs up here, industries up here that have jobs.” The governor said he needed to talk further with Clarkson about whether the administration should submit legislation to repeal the current Alaska hire statutes. Elwood Brehmer can be reached at [email protected]

Pages

Subscribe to RSS - Elwood Brehmer