Elwood Brehmer

Sullivan: deregulation will be a relief to Alaska economy

U.S. Sen. Dan Sullivan continues his push to purvey positivity to Alaskans, which he says is largely a result of federal policy changes over the past two years. He acknowledged Alaska is still facing the challenges of a lingering recession— possibly coming out of it this year — crime and substance abuse during an Election Day speech at the Alaska Miners Association convention, but stressed there are positives on the horizon for the economy. “There’s a lot of things where I think, just around the corner, if we make good choices today, to be blunt and continue the trajectory on, I think we’re looking at the possibility of a real jobs and economic boom coming to our state,” Sullivan said. He contended the corporate tax cuts Congress passed last December have helped U.S. businesses be more competitive and make job-creating investments. A point he makes regularly, Sullivan noted the second and third quarter GDP growth of 4.2 percent and 3.5 percent, respectively, which he said simply didn’t occur after the Great Recession during the Obama administration. “What really made this country great was consistent 3.5, 4 percent, 5 percent, 6 percent GDP growth, which was normal — Democrat, Republican, doesn’t matter — that’s what we used to do for 200 years,” Sullivan stressed. The job creation that has driven national unemployment as low as it’s been in 50 years, according to Sullivan, at 3.7 percent in September should be headed to Alaska, he said. To the crowd of miners he specifically discussed his efforts and those of Congress in concert with the Trump administration to roll back environmental regulations that he says were often intended to stymie resource industries. Sullivan cited the repeal of the Army Corps of Engineers 2015 wetlands jurisdiction update known as the Waters of the U.S., or WOTUS, rule. Proponents argued it simply clarified what waters the Corps of Engineers and the Environmental Protection Agency have jurisdictional authority over. Republicans and some Democrats said it would have drastically increased the scope of the agencies’ authority and would have led to Clean Water Act permits for development and agriculture in many places they are currently aren’t required. The Republican majority in Congress has used the Congressional Review Act to block or rescind primarily environmental regulations from the Obama administration 16 times in the past two years, according to Sullivan. He recalled a phone conversation he had with President Donald Trump early in his presidency in which Sullivan outlined his Regulations Endanger Democracy, or RED Tape Act, legislation that would require federal agencies to repeal an old regulation each time another is promulgated. “(Trump) said, ‘You know, one in, one out, I’m actually more interested in one in, two out,’” Sullivan said of the call. “And if you actually look at what (the administration) has done, I think they’re actually around one in, nine out.” He highlighted that the administration has also incorporated portions of his Rebuild America Now Act — legislation to reform the landmark 1969 National Environmental Policy Act that established the comprehensive environmental impact statement review for large development projects — into its executive actions. His bill, which he said he will be pushing again in the next Congress, would put one agency in charge and place a “two-year shot clock” on NEPA project reviews, according to Sullivan. Deputy Interior Secretary David Bernhardt said during a trip to Alaska in March that he handed down a directive for Interior agency staff to limit EIS reviews to one-year. Partially as a result of that, BLM is expected to hold an oil and gas lease sale for the Arctic National Wildlife Refuge coastal plain sometime in 2019, Sullivan added. “This isn’t cutting corners; this isn’t trying to pollute the environment. This is just common sense,” he said. “All of these things are completely common sense. If you look at the things other industrialized democracies — Canada, Australia — do permitting mines. These are what they do; things we need to do.” In other forums Sullivan has been questioned Canadian environmental standards related to mining. He has urged British Columbia officials review the province’s environmental requirements for mines, particularly as they relate to active or potential mines in the several large salmon-bearing rivers that flow from the province and through Southeast Alaska. An issue that is starting gain bipartisan traction in Congress, according to Sullivan, is that of China’s dominance in the rare earth metals sector, and what can be done to reverse the trend. China is the primary producer of rare earth elements used in technological devices and by the Department of Defense in advanced weapons systems. “It just makes sense” to produce such critical minerals in the U.S., he said. The 2019 National Defense Authorization Act passed last summer includes provisions discouraging the Defense Department from purchasing products or devices containing rare earths sourced from a short list of countries including China. Finally, Sullivan said before votes were tallied that he does not usually comment on state policy initiatives, but emphasized how large of a threat he feels Ballot Measure 1, the anadromous fish habitat initiative is to development in Alaska. “We have challenges, but I am so optimistic about the future, assuming that Ballot Measure 1 gets defeated today,” he said. The measure was defeated soundly by a nearly 2-1 margin. Elwood Brehmer can be reached at [email protected]

Mining exploration on the rebound at new, old prospects

A recent resurgence in oil exploration in Alaska has been a topic of much discussion for the potential revenue it could eventually generate for state coffers, but there is ample exploration activity in the state’s mining sector as well. At existing mines, Teck Resources Ltd., which operates the Red Dog zinc mine near Kotzebue in Northwest Alaska, has been exploring the Aktigiruq prospect about seven miles north of the mine facilities. Teck CEO Don Lindsay has said it could end up being “one of the best undeveloped zinc deposits in the world” if initial drilling results are proven up. Red Dog is already one of the largest zinc-producing mines on Earth. Earlier this year Kinross Gold Corp. announced it would start work on a $100 million expansion to the Fort Knox gold mine just northeast of Fairbanks that is expected to keep the mine open for another 10 years through 2030. The Gilmore project, as it is known, could yield up to another 1.5 million ounces of gold for the open-pit mine that opened in 1996, according to a feasibility study Kinross conducted on the prospect. Production from Gilmore could start in early 2020, the company estimates. Geologist Bonnie Broman told a gathering at the Alaska Miners Association in Anchorage Nov. 6 that the newly formed private Alaska exploration firm Valhalla Metals Inc. has acquired 230 mining claims covering 36,000 acres in the Ambler mining district farther north of Fairbanks and west of the Dalton Highway. Valhalla’s claims include the Sun copper and zinc prospect that the company plans to advance in the coming years. The easternmost deposit in the Ambler district, the Sun prospect was first discovered in 1974 by Sunshine Mining Co. and has changed hands frequently since. Valhalla is the 10th company to control the claims since Sunshine made the initial discovery, according to Broman. The Sun prospect was regularly drilled in the years immediately following its discovery, but the work mostly stopped in the 1980s and 1990s following the passage of the Alaska National Interest Lands Conservation Act in 1980, as did much of the mining exploration activity going on in the state at the time, Broman said. The area was most recently explored from 2007-12 by Canadian Andover Mining Corp., which went bankrupt in 2014. Overall, more than 19,100 meters of drilling has been done at Sun since it was first discovered. “This area has had quite a bit of work done to-date. There’s quite a lot of known prospectivity in the region,” Broman said. The Sun deposit sits east of the Arctic and Bornite multi-metal prospects currently being advanced by Trilogy Metals. Trilogy plans to begin permitting Arctic early next year but development of the remote Ambler prospects is dependent upon construction of the roughly 211-mile Ambler industrial access road. The Alaska Industrial Development and Export Authority is leading development of the industrial road to access the mining district. The Bureau of Land Management is in the midst of writing an environmental impact statement for the road and the first draft of that document is expected in March 2019, with a final EIS following late next year, based on the current schedule. AIDEA officials believe the access the road would provide could spark further exploration activity in the region, as well. Specifically to Sun, Broman said mineralization has been intersected over a 3.5 kilometer strike. So far it’s estimated the deposit holds 10.7 million metric tonnes of indicated and inferred resources of 4.2 percent zinc, 1.5 percent copper and 1.4 percent lead. It also has prospectivity for silver and small amounts of gold, she added. Broman said unlike the Arctic and Bornite prospects, Sun would likely be an underground mine and it’s not uncommon for mineralization in similar sulfide deposits to continue to depths of 1,000 meters. “There is potential to add resources at Sun by drilling the down dip portion,” she said, as it has not been explored at depth. Valhalla expects to continue exploration drilling at Sun in the coming years and will also be looking for new deposits elsewhere in its claims area, she said. Icy Cape progress Along Alaska’s south coast the Alaska Mental Health Trust Land Office continues to advance its unique heavy industrial minerals prospect in the beach sediments of Icy Cape. About 75 miles northwest of Yakutat, the roughly 30-mile long, 50,000-acre Mental Health Trust property is approximately half covered by sediments containing heavy industrial minerals, according to Trust Land Office Minerals and Energy Chief Karsten Eden. The Trust Land Office manages roughly 1 million acres of land across Alaska for real estate and resource development purposes, the proceeds of which go to fund the Alaska Mental Health Trust Authority’s work to benefit Alaskans with mental health and addiction challenges. “It’s a totally different kind of geology and it’s a totally different kind of exploration, but it’s exciting,” Eden said during a presentation at the AMA convention Nov. 6. The eastern portion of the large property contains sediments from the glaciers of Icy Bay, while the river deposits on the coastal plain influence the area to the west. All of the sediments contain heavy minerals, according to Eden. The heavy minerals are often used in industrial applications in which hard, abrasive materials are required, such as sandpaper and sandblasting. The sediments also contain ilmenite, which is highly magnetic and is a common industrial mineral often used as white pigment feedstock in paints and plastics, he said. The Trust Land Office has been investigating the prospect for four years; drilling started in 2017 and continued last summer. During the 2018 work season the TLO spent roughly $3 million, had a crew of 24 working at the Icy Cape camp and built a 60-foot by 40-foot sample processing facility — a shed — to further evaluate the drilling samples. Eden said the office has had to use sonic drilling to bore through the sediments. “The drilling conditions are really challenging. Those are abrasive sands,” he commented. The multiple sources mean the sediments are separated into two distinct layers, which provide different mineral grain sizes, an important benefit to the project, according to Eden. “Particle size is very important because it has an impact on recovery,” he said. “Out there we have mineable and recoverable particle sizes including platinum group minerals. It’s a poly-mineralic and poly-metallic deposit. It’s very, very interesting. If developed, the Trust property would be the only source for some heavy minerals such as garnets on the West Coast, Land Office officials have said. There is currently a global shortage of garnets, another abrasive, as India, the world’s longtime primary supplier has stopped exporting mineral sands altogether in an effort to halt illegal private exports, Eden added. The Trust Land Office plans to continue exploring the area in the coming years, he said. Elwood Brehmer can be reached at [email protected]

Permanent Fund Corp. nets 2.13% return in first quarter

Alaska Permanent Fund Corp. managers encountered challenges in the first quarter of the 2019 fiscal year, generating a 2.13 percent return during the first period they are being relied upon to provide revenue for government services. The Permanent Fund ended the quarter Sept. 30 with a balance of more than $63.9 billion, according to Alaska Permanent Fund Corp. financial statements. CEO Angela Rodell said in a formal statement that the less-than-desirable quarterly return highlights the significance of having of a well-diversified investment portfolio and “meaningful allocations to private market assets.” “As the market becomes increasingly volatile, it is more important than ever to remember we invest with a 10-, 25-, 50-year or longer time horizon. Our APFC team continues to be focused on building real financial wealth and resources for the State of Alaska,” Rodell said. APFC leaders expect financial markets to remain volatile through the rest of the fiscal year, according to a corporation release. Fund investments generated $846 million in statutory net income, according to an APFC report, which is transferred to the fund’s Earnings Reserve Account and can be appropriated by the Alaska Legislature for inflation-proofing the fund principal, Permanent Fund Dividends or government expenses. The Permanent Fund’s $63.9 billion total balance was $931 million less than the nearly $64.9 billion at the start of the quarter despite the net income growth largely because — for the first time — money was appropriated from the Earnings Reserve Account to help fund state government operations. The Legislature approved a 5.25 percent of market value, or POMV, draw from the fund in May; however, it was for the fiscal year 2019 state budget and not actually made until after the new budget cycle began on July 1. About $1 billion of the roughly $2.7 billion POMV draw went to pay annual PFDs, which were distributed in October, and the remaining $1.7 billion will help fund government services. According to the APFC, about $1.4 billion of the overall draw was distributed prior to Sept. 30 and the remaining $1.3 billion will be transferred to the General Fund over the rest of fiscal 2019. The Earnings Reserve Account held approximately $17 billion as of Sept. 30. The 2.13 percent quarterly return was down from a full-year 2018 investment return of 10.74 percent, which netted $5.1 billion of growth in the Permanent Fund. Still, the relatively slow start to 2019 for fund managers was better than a comparable 2.06 percent passive index benchmark return during the quarter. Over the past five years the APFC Board of Trustees has set a strategic return objective of 6.52 percent, which managers have bested with a five-year return average of 8.32 percent. The fund’s $3.9 billion real estate portfolio was the lone asset class to return negative results with a negative 2.28 percent return during the first quarter. APFC managers achieved a 6.99 percent return on real estate investments in 2018. APFC spokeswoman Paulyn Swanson said via email that real estate valuations, done quarterly, “caused the slight decline on the quarter, but that the investment team expects future quarterly valuations to reverse this decline because the underlying property fundamentals are strong.” Public equities, or stocks, which comprise roughly 40 percent of the fund’s investments, earned a 3.18 percent return for the quarter. Stocks that performed better during the period are “viewed as relatively expensive by the fund’s active and quasi-passive managers and are under owned in the public equities allocation,” an APFC release states. On the flipside, the fund’s $4.7 billion private equity portfolio performed the best of all of its asset classes during the quarter with a 6.38 percent return. Elwood Brehmer can be reached at [email protected]

Alaska Air Group ready for results from Virgin acquisition

Alaska Air Group Inc. had a solid third quarter netting $217 million, but company executives said during an Oct. 25 earnings call that they are not satisfied with the results. CEO Brad Tilden said the company has completed about 90 percent of its work to integrate Virgin America into Alaska Airlines since it closed on the purchase of the West Coast competitor nearly two years ago and has done so as fast as any other merger in the industry. Air Group leaders are now ready for that work to start paying off in the form of higher revenue and profit margins. “The performance of our core business remains strong and our brand and products are gaining increasing traction in California,” Tilden said. Seattle-based Alaska Air Group is the parent company to Alaska Airlines and regional carrier Horizon Air. The $217 million profit was down from $259 million for the same period in 2017. It translated into earnings of $1.75 per share. Air Group paid a dividend of 32 cents per share during the quarter and has repurchased about 582,000 shares of common stock for $37 million so far in 2018. Air Group stock opened trading Oct. 31 at $63.16 per share. The $217 million came on the back of $2.2 billion in operating revenue, which was up 5 percent year-over-year on 4.8 percent capacity growth. That equated to flat per-unit revenue for the quarter, the best result in five quarters for the metric that had been trending in the wrong direction, according to Chief Commercial Officer Andrew Harrison. “This is only the beginning, and we expect our unit revenue momentum to continue as we execute on a number of substantive initiatives to ensure our recent trajectory continues into the fourth quarter and beyond,” Harrison commented during the Oct. 25 call. The company expects to capture $130 million in synergies next year as Virgin America aircraft and employees are fully blended into Alaska operations, Tilden said. Flight attendants are being trained to work on both Alaska’s fleet of Boeing 737s and the fleet of former Virgin America Airbus A320 series aircraft that Alaska now operates; he said they would start working in both types of aircraft next February. Harrison added that Alaska is working through IT issues for paid upgrades on Airbus flights and will be reconfiguring the Airbus cabins to increase first class capacity by 50 percent. “We expect to see significant revenue increases from the front cabin in 2019,” Harrison said. And while Alaska Airlines’ popular Club 49 loyalty program mostly insulates Alaskans from baggage fees, the airline recently announced its fees for non-mileage plan members would go up $5 to $30 for the first checked bag and $15 to $40 for the second bag, bringing them in line with fees charged by other major carriers, according to Tilden. Additionally, Tilden said the company would begin what he called “the difficult but we believe necessary step” of cutting some management positions next year, but he did not elaborate as to which positions or how many employees would be let go. “This will save overhead but more importantly it will improve the speed of decision-making and the flow of information through our organization,” he said. Higher fuel costs have been a major contributor to the decreased margins, according to Tilden, who said the industry as a whole has not yet adjusted to them. Fuel can be upwards of one-third of an airlines’ overall operating expenses and despite significant hedging efforts, Air Group’s fuel costs were up 39 percent year-over-year to $513 million in the third quarter. In response, Air Group plans to slow its growth in 2019 and executives are comfortable with the company’s position in that regard, Tilden said. By the end of 2018 the company will have paid down $800 million, or roughly 40 percent of the debt it took on to acquire Virgin America, he added. Alaska Air Group had a debt-to-capitalization ratio of 49 percent at the end of the third quarter, compared to 59 percent when it bought the airline in December 2016. The company also held $1.4 billion in cash on Sept. 30. “We feel confident we’re on the road to producing better returns in the quarters ahead as we work together as a single team to demonstrate the true power of our combined company,” Tilden said. ^ Elwood Brehmer can be reached at [email protected]

Interior gas officials agree to explore Siemens’ plan

Utility officials have signed a one-year agreement with Siemens Government Technologies to further investigate the company’s plan to get more and cheaper natural gas to Interior Alaska. The Interior Gas Utility board of directors voted 4-2 on Oct. 23 to enter into a memorandum of understanding with Siemens. Company representatives have said for more than a year that they, leading a consortium, can put together an LNG supply chain that is competitive with the Interior Energy Project plan IGU and the Alaska Industrial Development and Export Authority have already agreed to. The Siemens team also contends its “turnkey” project would relieve IGU from much of the work it would have to do for the Interior Energy Project; all the utility leaders would have to do is sign a liquefaction services agreement, or LSA, and wait for the Alaska Railroad to deliver LNG to the utility’s storage tank in south Fairbanks. The agreement prohibits IGU from negotiating or soliciting potentially competing gas supply plans other than the Interior Energy Project plan IGU is currently developing. However, either party can terminate the MOU with 30 days notice. It also calls for Siemens and IGU to finalize an LNG supply contract term sheet by the end of the year and for Siemens to make a fixed-price LNG supply offer to the utility within five months of the term sheet being completed, which would be May on the current schedule. “It’s really just an agreement to collaborate; that was the way that I thought about it,” IGU attorney Robin Brena said before the vote. Siemens is working with the Knik Tribe and Knikatnu Inc. to put together its 20-year LNG supply chain from Southcentral. At the heart of the plan is a pair of Siemens’ modular “LNGo” gas liquefaction units that can produce up to 30,000 gallons of LNG per day. The plan is to initially install two LNGo units at a proposed industrial park on Knikatnu land near Alaska Railroad Corp. tracks in Houston. The fuel would travel by rail to IGU’s 5.25 million-gallon LNG storage tank currently under construction in south Fairbanks for regasification and distribution to residents and businesses. Once gas demand grew to where more than four of the LNGo units were needed, the company would look at installing a single, larger LNG facility, according to Siemens officials. Siemens Energy and Infrastructure Director Kelly Laurel and other Siemens officials have acknowledged that the company hopes to parlay work with IGU into more gas supply projects in the state, notably at Interior military bases. A crucial element of any Interior LNG plan, Laurel said Oct. 23 that Siemens has agreed upon terms with a Cook Inlet producer for feedstock natural gas. She would not name the producer, but said the company and potential gas contract terms could be disclosed to those doing due diligence to validate the LSA, but that would be done under confidentiality as well. Siemens has consistently stated a belief it can get feedstock gas for $5 per thousand cubic feet, or mcf, or less, which would be significantly cheaper than pricing much larger Southcentral utilities have been able to secure in recent years on much higher volume supply contracts. IGU currently has a short, three-year gas supply contract with Hilcorp Energy for $7.72 per mcf. AIDEA officials participated in negotiating that contract and generally consider it a win given it is for a small base load of roughly 1 billion cubic feet, or bcf, per year with expected, but unsure, demand growth once liquefaction capacity is added in some form. The Siemens-led group is also investigating the prospect of developing potential gas reserves in the Houston area, which would bring the feedstock price down to $4 per mcf, according to the company’s project documents. Gary Wilken, a former AIDEA director who was recently appointed to the IGU board, voted against signing the MOU on a belief it will unnecessarily drag out the Interior Energy Project that AIDEA and the Fairbanks utilities have been working on since 2013. “From the beginning this project has been dancing on the head of a pin,” Wilken commented during the meeting. “I’m very concerned that we are doing nothing but extending this project and creating continued uncertainty that will hurt us financially and it’ll hurt us with the very customers that we are trying to elicit support (from).” AIDEA and IGU have estimated their plan, with its state financing support, would result in an initial $17.30 per mcf burner tip price to consumers in 2020. That price could drop to the $15 per mcf IEP goal by 2022 more customers are brought online. Using IGU’s contract price, Siemens would get LNG to the Fairbanks storage tank for $17.98 per mcf, according to the company — plus $5 to get it all the way to customers. Wilken has long said he is open to alternatives — several of which AIDEA has evaluated — to the current plan of adding LNG capacity to the small Titan LNG plant that is now IGU’s, but he’s skeptical of the Siemens plan largely because of the company’s unwillingness or inability to provide firm pricing on key elements of the project. IGU vice chair Jack Wilbur joined Wilken in voting “no,” saying he doesn’t have any confidence Siemens will have a firm offer for the utility to consider by next May. Board chair Pamela Throop said the MOU is needed to finalize the details of the plan and without it the alternative plan would die now. “I’m happy to give them the time to do what they need to do to put together a proposal. I think we owe that to this community,” Throop said. IGU director Steve Haagenson said he was in favor of the MOU because IGU has ostensibly been bound to AIDEA’s LNG development plan for years and needs to be able to evolve with new information. As for the current plan, IGU General Manager Dan Britton said he expects the utility to have completed engineering and design on the Titan expansion plan by mid-May as well. The utility should have prices on project components at that point, according to Britton, but a final construction price will still need to be penciled out. Expanding the Titan plant to meet expected natural gas demand growth in the Fairbanks area is currently estimated to cost $46 million. Additionally, the AIDEA board of directors would have to approve of IGU formally contracting with Siemens or any other LNG provider because the Titan expansion plans were part of the $331 million package in which AIDEA sold Fairbanks Natural Gas to IGU and agreed to finance gas supply and distribution infrastructure build out with Interior Energy Project grants, loans and bonds the Legislature approved in 2013. ^ Elwood Brehmer can be reached at [email protected]

Unions, companies, labor officials mull worker shortage with major projects on horizon

How quickly things can change. Alaska, still inching its way out of a three-year recession that cost the state more than 10,000 jobs, could soon be a facing a labor shortage in some of its trademark industries, according to state workforce development officials. “We’ve got this sort of perfect storm of challenges where we have a downturn in our economy; we have an aging workforce, including oil and gas workers; we have stagnant wages in Alaska and there’s a boom going on in the Lower 48 pulling a lot of our workers (away),” state Department of Labor and Workforce Development Commissioner Heidi Drygas said in an interview. Most of the estimated 10,100 jobs the state has lost since 2015 were in the tightly connected construction and oil and industries, which together lost about 6,900 workers, according to state figures. At the same time, workers in those industries are at a premium in the Lower 48, where the shale oil boom continues and has helped spur a generally robust economy. Most oil companies in Alaska contracted some during the three-year price downturn and some delayed projects. Others, however, focused on exploration on the belief the price would eventually rebound. Armstrong Energy and Repsol combined to make the large Nanushuk formation oil discovery on the central North Slope, which ConocoPhillips has parlayed into multiple other prospects. The four recent discoveries made by those companies — two smaller prospects and the Nanushuk and Willow projects with potential for more than 100,000 barrels per day each — along with a couple other developments that have been in the works for years are expected to be the drivers of North Slope labor demand Drygas and others are concerned the Alaska workforce might not be able to meet. ConocoPhillips expects to need up to 700 construction workers per winter for its $1.5 billion Greater Mooses Tooth-2 oil project in the National Petroleum Reserve-Alaska from late 2019 through early 2021. Initial work laying gravel will begin at GMT-2 this winter. Hilcorp Energy also received federal regulatory approval Oct. 24 for its long-anticipated Liberty manmade island oil project, which will offer another 200 or more construction jobs per winter during the coming years. But those two are just the start. ConocoPhillips submitted a master development plan for its major Willow prospect in the NPR-A to the Bureau of Land Management last summer. While the company is still in the early planning stages on Willow, ConocoPhillips Alaska officials estimate it will generate “thousands of construction jobs” and hundreds of long-term operations positions once it is online — likely in the mid-2020s based on the company’s current schedule. The Nanushuk project, now led by Australian-based Oil Search after its acquisition of an operator stake in the Armstrong-Repsol discovery last fall, is expected to need a construction force of nearly 1,500 workers. Oil Search Alaska President Keiran Wulff said the company expects to make a final investment decision sometime in 2020. Additionally, Donlin Gold is slowly compiling the remaining permits it needs to build the world-scale open-pit gold mine it has planned in the Kuskokwim drainage. That project, with a 315-mile natural gas pipeline, two port developments, and a road to go along with all the on-site infrastructure, is expected to generate upwards of 3,000 construction positions. Finally, the far more controversial Pebble mine could add another 2,000 construction jobs to the state in the coming years if it is ever approved. Drygas said she is already hearing from some union hall leaders that they are starting to run out of skilled laborers. Doyon Associated President Warren Christian said Oct. 26 during the Labor Department’s Rising to the Challenge: Preparing Alaska’s Workforce forum that his pipeline development company was pretty much at full capacity last winter and already has at least as much work lined up on the North Slope for the next several years. Donlin spokesman Kurt Parkan and others who spoke at the event emphasized that finding workers with soft skills, such as the ability to pass a drug test and show up on time, can be the biggest obstacle to filling open jobs. Drygas said the state wants to encourage young people to look at careers in the trades, saying the “college for all” mantra espoused by many today is a “pervasive” problem in recruiting them. “We’re about to ramp up on some pretty significant projects in Alaska. We have all this work going on on the North Slope; we have a boom in military construction in the Interior and other Interior build out projects. We have an expansion of mining at Fort Knox and Kensington; Donlin Gold looks like it’s going to come online and they’re all happening at the same time,” she said. “It’s going to be challenging but it’s a pretty incredible opportunity too.” State economist Karinne Wiebold said strictly by the numbers, those jobs will be filled, but that could require recruiting Outside workers, something Drygas is constantly trying to avoid. Wiebold noted that Alaska’s construction sector has historically been comprised of upwards of 20 percent nonresident workers and in the oil and gas sector the figure rises to nearly 30 percent Outsiders. How many Alaskans left those industries to find similar work in the Lower 48 is largely an unknown and would be a very difficult figure to calculate, according to Wiebold. “It’s definite that some folks have left and it’s definite that some folks are still in Alaska but working in different industries,” she said. That forecast doesn’t even include the $43 billion Alaska LNG Project and the nearly 12,000 construction jobs it could add to the state. It’s largely understood that AK LNG would necessitate bringing in significant Outside labor help. State budget cuts have also contributed to the worry of a future worker shortage. Drygas said the Labor Department budget, which was one of the hardest hit in the Legislature’s effort to reduce the state’s multibillion-dollar deficits, was reduced 38 percent in the first couple years of Gov. Bill Walker’s administration. And many of those cut funds were meant for training programs, according to Drygas. She said those training programs, such as the Alaska Construction Academies, can be expanded on relatively short notice, adding that the University of Alaska has already cut tuition on its career and technical education, or CTE, courses by 25 percent in hopes of attracting more students. Fairbanks Central Labor Council President Doug Tansy said his union hall, part of the AFL-CIO, put all of its available laborers to work this year by April, largely due to the roughly $500 million worth of military construction projects being done at Interior installations. Tansy added, however, that about 60 of the union’s Alaska workers are on jobs in Seattle and Portland because they can simply make more money Outside which Drygas and Christian reiterated. They said wages for trade jobs are currently about 20 percent more in the Lower 48 than they are in Alaska. “Pretty much anyone who works in the Lower 48 in the pipeline industry has a job,” Christian said, and it’s expected to stay that way for at least another five years. Tansy said the 2008 global recession, which mostly missed Alaska, led to less CTE training down south and has now “created a wildfire of opportunity” in a rejuvenated economy. He sees the same scenario playing out in Alaska, just a few years later. A state capital budget plan — in addition to addressing deferred maintenance and basic infrastructure needs — could also spur Alaskans to return to the construction trades, Drygas stressed. “If there was an infusion of money for projects right now we can ramp up fairly quickly but what it’s going to take is everyone singing from the same sheet of music and that is we have to invest in this; we’ve got to invest in Alaska’s infrastructure and we’ve got to invest in training programs and training opportunities,” she added. Drygas reiterated that her message to the next governor’s administration would be to “invest in Alaska’s future” through a somewhat larger capital budget and workforce training programs. “We have to invest in young Alaskans and in training — ensuring that we have Alaskans first in line to work in these jobs,” she said. Elwood Brehmer can be reached at [email protected]

CP nets $1.8B in Q3 with $427M in Alaska; greenlights GMT-2

ConocoPhillips continued its increasingly strong earnings trend by reporting a third quarter profit of more than $1.8 billion on Oct. 25. In Alaska, the state’s largest producer by volume netted $427 million during the quarter, bringing its year-to-date earnings in the state to more than $1.3 billion. The $1.8 billion profit was on the back of $10.1 billion in revenue, the largest such figures ConocoPhillips has realized in several years, more than quadrupling its net income of $420 million in the third quarter of 2017. So far in 2018 the Houston-based company has netted nearly $4.4 billion on $28.3 billion in revenue compared to the $855 million loss it absorbed in 2017 on $32.5 billion of revenue it generated last year. The improved financials can largely be attributed to higher oil prices — ConocoPhillips’ crude sold for an average of $51.96 per barrel in 2017 versus $69.74 per barrel year-to-date in 2018 — but CEO Ryan Lance said improved internal operations have also contributed to the better returns. “We’re delivering another year of strong performance by successfully executing our disciplined, returns-focused plan. We’ve accomplished many strategic, financial and operational milestones this year, ahead of our original schedule,” Lance said in a prepared statement. “Our strategy is designed to generate superior returns through cycles by maintaining discipline, focusing on free cash flow and allocating this cash according to clear, shareholder-friendly priorities. This is what the market can expect from us again in 2019.” In October the company announced the start of production from its roughly $1 billion Greater Mooses Tooth-1 project in the National Petroleum Reserve-Alaska, which marks the first oil production on federal acreage within the reserve boundary. It also got a favorable permitting decision from the Bureau of Land Management and sanctioned the similar, but slightly larger, $1.5 billion GMT-2 project in the NPR-A. Lowman said via email the company would be laying gravel for the GMT-2 road and pad this coming winter; the project is expected to come online in late 2021 and produce up to 40,000 barrels of oil per day at its peak. The quarterly profit translated into earnings of $1.59 per share compared to quarterly earnings of 34 cents per share year-over-year. ConocoPhillips stock sold for $68.48 per share near the end of the trading day OCt. 25 after the positive results, up from an Oct. 24 closing price of $65.69 per share. The company ended the quarter holding roughly $4.8 billion in cash and short-term investments. Its third quarter dividend was increased by 7 percent to 30.5 cents per share. ConocoPhillips also repurchased $900 million worth of common shares in the third quarter, bringing its 2018 share repurchase total to $2.1 billion, according to an earnings release. BP and ExxonMobil, the other large producers in the state, were set to issue their third quarter earnings reports Oct. 30 and Nov. 2, respectively. Specifically to Alaska, the company had pre-tax net income of $535 million in the third quarter. It estimated its tax and royalty payments to the state during the period at $321 million, according to Alaska spokeswoman Natalie Lowman. ConocoPhillips also spent $190 million of its $1.6 billion overall quarterly capital budget in the state, which brought its Alaska investment total to just more than $1 billion so far in 2018, Lowman noted. Year-to-date the company has made roughly $5.1 billion of capital investments worldwide, making Alaska about 20 percent of the company’s overall capital budget, which is on par with recent years. ConocoPhillips produced an average of 152,000 barrels of oil per day during the quarter, compared with 154,000 barrels per day for the same period in 2017. The company’s total production in Alaska — including natural gas and gas liquids — averaged 165,000 barrels of oil equivalent per day, which was about 13 percent of its global production for the quarter. Comparatively, Alaska accounted for 23 percent of ConocoPhillips net earnings for the period. Elwood Brehmer can be reached at [email protected]

Ruling on state’s motion to dismiss tax credit lawsuit expected in Nov.

A lawsuit challenging the Gov. Bill Walker administration’s plan to sell bonds to expedite repayment of nearly $1 billion in oil and gas tax credits appears to be back on track at least procedurally, but where that track will lead is still unknown. Joseph Geldhof, an attorney for former University of Alaska regent Eric Forrer who brought the suit in May filed an 81-page brief with Superior Court Judge Jude Pate Oct. 8, rebutting the state’s arguments and reasserting multiple ways in which Forrer believes the bonding plan is unconstitutional. Geldhof drafted the hefty response to a June motion to dismiss in barely a week; Pate ordered him to file the response by Oct. 8 during oral arguments held Oct. 1. In it, Geldhof again stressed that state attorneys have derailed the case and prevented an orderly resolution by erroneously contending Forrer has failed to state a claim upon which relief can be granted. Geldhof has also repeatedly highlighted in court documents and interviews that state attorneys have not filed a response to Forrer’s original or amended complaint. He notes in the lengthy brief that the bond plan, as laid out in House Bill 331 that the Legislature passed in May, violates Sections 6, 7, 8, 10, and 11 of Article IX of the Alaska Constitution. Relief can be granted in the public interest lawsuit by finding HB 331 unconstitutional and thereby preventing an unlawful bond sale that has the potential to damage the state’s credibility in financial markets, according to Geldhof. The lawsuit alleges the bond sale would commit the state to debt beyond the restrictions the Alaska Constitution puts on the Legislature’s ability to incur financial liabilities. Administration officials contend the plan is legal because the 10-year bonds would be “subject to appropriation” by the Legislature, which the bond buyers would be aware of, and therefore would not legally bind the state to make the annual debt payments. They would be sold by the Alaska Tax Credit Certificate Bond Corp., which would be established solely for the purpose of managing the bond money. The state Constitution generally limits the Legislature to bonding for debt through general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. Under HB 331, the companies and banks holding refundable tax credit certificates would take a up to a 10 percent discount on the amount they are owed to get the money right away and thus insulate the state from borrowing costs. Geldhof wrote that the bonds are indeed state debt under the Alaska Constitution as issuance of the bonds would impact the State of Alaska’s credit rating and its ability to take on additional debt. He argued further that HB 331 “establishes an obligation involving borrowed money where there is a promise to pay bondholders in the future” and also contains legal provisions that would bind the state to repay bond holders regardless of whether the Legislature makes funds available to pay them or not. “The state appears to believe any and all of the constitutional claims made by Forrer are floating free from any factual context,” Geldhof wrote Oct. 8. “The state seemingly believes application of the magic ‘subject to appropriation’ language to Forrer’s Article IX, Section 8 claim eliminates any requirement for the court to engage in analysis of Forrer’s other constitutional claims.” For their part, state attorneys in a 12-page brief filed Oct. 12 that “(b)ills passed by the Alaska Legislature are presumed to be constitutional” and although Article IX, Section 8 restricts the sale of bonds backed by the state’s credit, it does not preclude a public corporation from issuing bonds backed by legislation that “explicitly provides that the bonds do not constitute a general obligation of the state, are not state debt, and payment by the Legislature of any debt service on the bonds is subject to legislative discretion.” Assistant Attorney General Bill Milks continued to write that the state wants a prompt resolution to the case as it has prevented a bond sale — originally planned for August — because the looming litigation makes the bonds unmarketable, a point state attorneys noted in the Oct. 1 hearing. Despite Geldhof’s assertion that five facts in the case preclude dismissing it outright, Milks responded that only the impact of a decision by the Legislature to not appropriate the bond payments on the state’s credit rating and the fact that issuing the bonds would alter the state’s ability to incur additional debt can be weighed for the purposes of the dismissal motion. “The remainder of the plaintiff’s ‘facts’ are actually assertions of law regarding the interpretation of various provisions of the Alaska Constitution and the application of those provisions to the terms of HB 331,” Milks wrote. “They are not facts that this court must accept as true for the purposes of a motion to dismiss; rather they are statements of the legal conclusions that the plaintiff hopes this court will reach.” State attorneys have also leaned heavily on the Alaska Supreme Court’s ruling in the 1995 case Carr-Gottstein Properties v. the State of Alaska in which the court ruled constitutional debt is “an obligation involving borrowed money where there is a promise to pay sums such as rents accruing in the future whether funds are available or not.” They contend the subject to appropriation clause in HB 331 makes it constitutional because it outwardly states the Legislature will determine whether or not those funds are available. Geldhof insists the state is misapplying the Carr-Gottstein ruling because it applied to a lease-purchase agreement to be backed by a direct revenue stream of lease payments and not bonds funded by appropriations of the Legislature. Pate said Oct. 1 that he would likely rule on the motion to dismiss sometime in early November. ^ Elwood Brehmer can be reached at [email protected]

Anchorage startup perfecting revolutionary drone safety system

Alaska has been at the forefront of developing rules and technologies for getting drones in the air and now the leaders of an Anchorage startup believe they have the secret to getting them back on the ground safely. The fundamental technology is basic and nearly obvious: a parachute. However, the seemingly simple solution comes with a daunting hurdle. It can’t ever fail. Indemnis CEO Amber McDonald said the idea for a new breed of unmanned aircraft parachute spawned out of her team’s work in TV and film. McDonald and Indemnis Chief Technology Officer Alan Erickson were first partners in a video production company in 2015. “We were flying for Animal Planet, Discovery Channel, all the reality shows that came up with the film (tax credit) incentive that was going on,” she recalled in an interview. “We were flying drones as a result of that and found that technology failed and they were falling out of the sky.” The biggest challenge in solving the problem is developing a fail-proof solution — or something at least as infallible as any human technology can be. Indemnis is Latin for “without harm.” McDonald noted the Federal Aviation Administration currently doesn’t allow small (less than 55 pounds) commercial unmanned aircraft flights over people for fear the craft could injure or kill someone if it fails without a safety net of its own. There are three paths to commercial drone flights over people, the same avenues the FAA offers for most safety issues that arise. In this case they are: build an unmanned aircraft with provable reliability on-par with a Boeing airliner; build one from light, soft or frangible materials that will break apart or otherwise not harm on impact; or add a risk mitigation system that meets the requirements another way. From there they went through every parachute and recovery system on the market in search of a fix. The unpredictability of how the quad-rotor drones would fall meant the lines fixed to the frame of the small crafts would reliably entangle. If the lines made it out as intended then the parachute was likely to snag on the control surface; it was hopeless if the drone was in a spin, which is almost an inevitability of physics. Then Erickson saw a Bond film in which Pierce Brosnan’s ski jacket unfolds into a rigid bubble that protects him from an avalanche. He thought he could use a rigid parachute to overcome the challenges a falling drone presents, McDonald said. “There’s a very, very large untapped market; you’re talking about probably $10 to $20 billion in safety systems that somebody has to develop and whoever’s first to market is going to be king of that category — not just first to market but first to market with a product that actually works,” she said. The concept of a rigid parachute evolved into Indemnis’ Nexus small unmanned aircraft recovery system, which uses an inflated fabric deployment tube to move the parachute line attachment point out of harm’s way. “We looked at that problem and kind of just ran with it. We knew that we had a technology problem that we needed to overcome and we knew that we had a regulatory problem that we needed to overcome and those are really the two things that Indemnis focuses on — making regulated commercial flight over people possible,” McDonald said. It helped that a successful film or TV show needs a host of behind-the-scenes technical experts to pull it together; it meant McDonald didn’t have to go far to find talent for her new company. “It all happened very, very fast. We spent a lot of time together as we do working in the same industry and ultimately it formulated that six of us came together — we had the materials person; we had the software embedded systems person. I did all of the business stuff. Alan’s our tech guy. He’s our current CTO and then we had a web guy and a machinist, Mitch, who is a state-of-the-art machinist. He has parts on the Hubble telescope,” she added. Indemnis has a total team of 18, making it far from a normal startup, McDonald noted. The wealth of knowledge and ability that comes with such a large group has enabled Indemnis to succeed so far. Technical challenges The key to the Nexus is the Dyneema polyethylene fabric the deployment tube is made of. It is a product of DSM Co., a Netherlands-based scientific product development firm. And the key to the Dyneema is its remarkable strength. “Upon deployment (the Dyneema tube) will inflate, throw that parachute — guard the parachute lines as it rises up — and throw that parachute at 90 miles per hour in 30 milliseconds away from drone and all potential control surfaces or areas of entanglement and it stays inflated, like a piece of steel, to 30 psi, like the same as your car tire,” McDonald described. Dyneema is more commonly used for large ship anchor lines and medical supplies but it’s most widespread application is for ballistic armor, according to McDonald, as it is twice as strong as Kevlar and 15 times stronger than steel. The biggest challenge the Dyneema presents is its low melting point, which makes bonding it problematic. Ultrasonic and high heat welding will destroy the fibers of the material. However, the Indemnis team developed a radio frequency welding process — now patented — that allows the fabric to be joined to itself and form the inflatable tube without sacrificing strength. “If we tried to inflate nylon to 30 psi instantaneously it would blow to shreds. There’s no other material on the planet that you can dump that much energy into that will stay together,” McDonald proclaimed. The Nexus parachute is also made of Dyneema, but more for its light weight than its remarkable strength; it’s about half the weight of the lightest comparable nylon, she said. The tube is currently inflated via Indemnis’ own 10,000-psi micro air tank that is easily refilled for testing but would be difficult to manufacture consistently. The company is in the final stages of testing a gold gas generator inflation system for the marketable product. And while the ability to consistently deploy the parachute was a major breakthrough, it was just the start. The parachute must also reliably deploy at a moment’s notice, either at the behest of the drone pilot, or on its own. Another in-house development, the Nexus contains a sensor fusion chip that combines “gyroscopes, accelerometers, barometers, filters, a bunch of different sensors” that will detect a multitude of trigger points to automatically activate the parachute, McDonald explained. It’s easily attached to a drone with a quick compression clamp and a single cord. “It’s a completely isolated system, so if something happens to the drone — it decides to go wonky and fly away or your GPS goes crazy — you can also manually deploy it because it doesn’t connect with the avionics in any way. It pulls power from the drone in the very beginning when you turn it on but aside from that it’s an isolated system,” she said. The system is scalable to all sizes of small unmanned aircraft systems, which for FAA purposes are those less than 55 pounds. The Nexus that Indemnis has focused its work on is about 18 ounces, according to McDonald. The company spent its first two years in the dark without much of a website, developing and testing its product until unveiling the Nexus to those in the industry in May 2017. “Basically, it was a blank site that said if you knew what we were up to you’d know we were about to change the world,” McDonald said with a smirk. “That was our tagline.” That time allowed Indemnis to compile what the company believes is the largest set of unmanned aircraft crash dynamics available. The Indemnis crew is flying drones and testing its product every day the weather allows. Next steps When FAA officials became familiar with the Nexus they asked Indemnis to allow them to use some of the company’s internal testing standards to help write risk mitigation regulation. The also invited Indemnis to be part of an American Society for Testing and Materials, or ASTM, committee along with Amazon (and its plans for automated package delivery) and other major unmanned aircraft industry players to help draft the minimum standards by which a parachute system can be used in small commercial drone operations. “We have logs, engineering data and said, ‘Here’s the failures we overcame to get here. Here’s how we defined the problem,’” McDonald said of her company’s collaboration with the FAA. Those standards were published Sept. 1 after roughly 18 months of work. “There is now an ASTM standard, consensus, standard, and we’re pretty excited about that — that we were the technical leads on that,” she added. Alaska has helped lead development of the U.S. unmanned aircraft industry largely because of its vast open areas where tests can be flown without risk to people or other aircraft. ConocoPhillips and BP were the first companies to get special FAA approval for commercial flights over water and land for Arctic offshore and North Slope surveying missions in 2013 and 2014, respectively. The University of Alaska Fairbanks is also one of six FAA unmanned aircraft test sites across the country through its Alaska Center for Unmanned Aircraft Systems Integration. The activity has also spawned other drone technology-focused startups in the state as well. FAA officials did not respond to questions about the agency’s work with Indemnis in time for this story, but a Sept. 19 ASTM news release quoting Erickson states that ASTM standard F3322 lays out the design, fabrication and test requirements for an installable parachute recovery system, or PRS. The standard applies to single-rotor, multi-rotor, hybrid or fixed-wing small, unmanned aircraft, according to ASTM. “The standard includes a rigorous design and testing matrix due to the simple fact that a PRS may be the only failsafe in a critical system failure,” Erickson said in the ASTM release. “When applied correctly, a PRS will enable industry growth in a way that provides civil aviation authorities and civilian populations with a high level of confidence in (small unmanned aircraft systems).” Indemnis is now trying to secure its market while further refining its product with the major regulatory hurdle largely overcome. McDonald said during an early October interview that Indemnis would soon be sending a crew to Ohio State University to test the Nexus system on cadavers. She acknowledged that the Nexus is not for every drone hobbyist out there. A single unit is likely to cost between $5,000 and $12,000 when it hits the market. “The reality is people are not buying the technical product; they’re buying the ability to fly over people safely,” she said. “You’re buying it because you want to be able to safely operate your business. It’s a business tool.” Indemnis leaders have multiple manufacturers lined up to make other parts for the Nexus and hope to be able to start selling it in the next six months. Current plans are for the first 15,000 units to be produced out of the company’s small South Anchorage shop. After that, the company will reevaluate its position with hopes to stay in Alaska, according to McDonald. Until then, Indemnis will have to rely on investor funding for a little while longer. The roughly $4 million the company has raised mostly from individual Alaskans is one of the aspects of the journey that she is most proud of, McDonald said. She described Indemnis’ investors as coming primarily from the oil and gas industry — engineers and others “who understand the basic physics problem that we’re solving” and people the Indemnis crew is incredibly grateful for. Indemnis is also wrapping up an investment campaign through the crowdfunding site Republic at the end of October. “We’re always looking for high net-worth individuals. We’re always looking for credible investors to join us on this journey,” she said with a smile. Elwood Brehmer can be reached at [email protected]

Regulators air draft plan to increase well bonding amounts

State regulators heard mixed reaction from oil industry representatives about proposed increases to bonding requirements for drilling new wells. The Alaska Oil and Gas Conservation Commission held a public hearing Oct. 16 in Anchorage on the draft regulations, which would demand up to a $30 million bond be posted to drill and operate the largest oil fields. The AOGCC oversees the technical down hole oil and gas drilling and resource issues for the state. AOGCC Chair Hollis French said the added bonding expense would update state regulations to better reflect today’s costs to plug and abandon a well. French referenced a 1991 Legislative Budget and Audit report that said the State of Alaska should update its minimum well bonding requirements. At the time the bonding requirements were $100,000 for one well and a minimum of $200,000 for multiple wells and a “statewide blanket bond,” he said, bonding levels that remain today. The 1991 report concluded that an operator with a $200,000 bond then likely wouldn’t be able to cover plugging and abandonment costs, according to French. The three-member commission held a work session in June 2017 to discuss updating the requirements. The resulting 23-tier bond schedule would require at least $500,000 for the first 2 permitted wellheads with the minimum amount increasing to $1.7 million for up to 10 wells. A $15 million bond would be required for up to 999 wells and $30 million for more than 3,500 wells. Alaska’s largest Prudhoe Bay and Kuparuk River fields have each contain more than 1,100 well bores. Alaska Oil and Gas Association Regulatory and Legal Manager Peter Caltagirone said the bonding rate changes would be unprecedented; he noted they amount to a 150 percent increase for drilling two wells, a 50-fold increase for 100 wells and a 6,500 percent increase for 500 wells. The proposed regulations also don’t consider other agreements operations might have with DNR, he said, and do not require the state to release the bond when a well is plugged and abandoned, as state regulations currently do. “The proposed changes discourage new investment at a time when Alaska could use some new investment,” Caltagirone said, adding they would require new producers to comply immediately. AOGA is open to updating the bonding requirements in some form, according to Caltagirone, but the industry group would like to see more communication amongst regulatory agencies. Commissioner Cathy Foerster retorted that the commission is only interested in meaningful cost comparisons, such as how the proposed schedule compares to actual current plugging and abandonment costs. ConocoPhillips Drilling Engineer Randall Kanady testified that the company, which operates the large Kuparuk and Alpine oil fields and is developing other large projects, believes the overall tiered approach is “sensible” but would like to see it simplified. He suggested the minimum bonds but broken into three tiers to generally match the operators — explorers, small producers and major producers — with a $1.25 million bond covering up to 19 wells; $6 million for up to 200 wells; and $12 million for additional wells. Kanady noted the $12 million bond would be a 60-fold increase over current requirements. The Audubon Society, The Wilderness Society and Cook Inletkeeper submitted joint testimony largely commending the commission for its plan. They cited a 2016 Bureau of Land Management report that stated the agency was spending $40 million to plug, abandon and clean up 18 wells in the National Petroleum Reserve-Alaska on the North Slope, or more than $2 million per well. These so-called “legacy” wells were drilled and abandoned by the U.S. Navy and U.S. Geological Service between 1944 and 1974, with BLM inheriting responsibility for cleaning up the wells in 1982, according to its website. The conservation groups praised the tiered bonding schedule instead of a “blanket” fee, noting the per well costs decrease as the number of wells grows. “These changes greatly improve the likelihood that state government will not have to pay the high costs of problematic well operations or abandonment throughout Alaska, including in remote parts of the state where it is very expensive to conduct industrial activities such as plugging and abandoning wells,” they wrote to the AOGCC. Several members of the public similarly approved of the plan. However, Kenai Peninsula resident Jim White testified that such costly requirements prevent individual Alaskans from participating in the state’s oil and gas industry. White said he holds subsurface mineral rights to 4,600 acres on the Peninsula. Elwood Brehmer can be reached at [email protected]

AGDC navigates trade friction, touts Alaska-hire agreements

State gasline officials celebrated progress ensuring Alaskans will have first crack at filling the thousands of jobs that could be available to build the $43 billion Alaska LNG Project while at the same time trying to navigate the no man’s land of the U.S.-China trade dispute. The Alaska Gasline Development Corp. announced a framework deal with three construction trade groups Oct. 13 that are expected to lead to project labor agreements for building the three major components of the LNG export plan. The agreement with the Southcentral Alaska Building and Trades, Fairbanks Build and Trades, and the Alaska Petroleum Joint Craft councils sets the groundwork for negotiating project labor agreements, or PLAs, with the large engineering, procurement and construction firms that will manage the project through the construction phase. It sets the terms for work rotation schedules, employment and safety training requirements. Wage schedules for the project will be set based on current rates for public construction contracts when the work begins, according to AGDC. Gov. Bill Walker said in a formal statement that the state’s leading role in the project gives Alaskans control over the megaproject and puts them “in the driver’s seat for filling the thousands of jobs that this project will create.” The trade councils are affiliated with the Alaska AFL-CIO, which has endorsed Walker in the upcoming election for governor. “An Alaskans-first agreement guarantees qualified Alaska residents will be first in line to construct and operate the major components of this gasline,” Alaska AFL-CIO President Vince Beltrami said. AGDC estimates the project will generate upwards of 18,000 new jobs in the state over about six years of construction if it is sanctioned. Nearly 12,000 of those jobs will be directly dedicated to the project itself: 1,300 heavy equipment operators; 1,500 pipefitters and welders; 2,300 general laborers; and 3,500 truck drivers to move countless types of materials, modules and construction equipment — not to mention the 807 miles of steel pipe. Hundreds more electricians, carpenters, ironworkers and engineers will also be needed, as well as 1,600 people to feed, house and otherwise support those swinging hammers and welding pipe, according to AGDC. Trade talk Meanwhile, corporation President Keith Meyer emphasized the ongoing viability of the project in the face of a 10 percent tariff instituted last month by China on U.S. LNG imports during an Oct. 11 board of directors meeting. China originally contemplated a 25 percent tariff on U.S. LNG imports. Nationalized Chinese oil and gas giant Sinopec is a tentative anchor customer for the project after it signed a nonbinding agreement with AGDC to purchase up to 75 percent of Alaska LNG’s expected 20 million tons per year of production capacity in November 2017. That joint development agreement also detailed the prospect of the Bank of China and China Investment Corp. correspondingly financing up to 75 percent of project development costs with a mix of debt and equity. The Chinese consortium and AGDC signed a supplemental agreement Sept. 29 to collectively reaffirm their desire to reach a firm deal by the end of this year, Meyer noted. He said the “trade friction” between Washington and Beijing is creating uncertainty that LNG project developers in other countries see as an opportunity to fill growing Chinese demand for natural gas imports. “This project looks beyond that momentary friction,” Meyer said in an interview, adding that a contingent from the Chinese embassy was recently in Anchorage to discuss Alaska LNG and broader trade opportunities with state officials. “Their message is cooperation not conflict, and we feel that way as well,” he said. Negotiations are progressing; the companies are awaiting government approval on certain deal terms and Sinopec has signed confidentiality agreements with the producer companies in Alaska that provides access to the upstream gas resource data, according to Meyer. He also stressed that the project’s stable gas pricing — AGDC has estimated it can get LNG to Asian ports for $7 to $8 per million British thermal units — is still a very strong selling point for utility customers wanting an alternative to the price volatility of traditional oil-linked LNG contract terms. FERC homework On the regulatory side, AGDC Vice President of Program Management Frank Richards said he expects the corporation to set a schedule to respond to the latest series of questions and comments from the Federal Energy Regulatory Commission in the next few weeks. On Oct. 2, FERC, which is writing the Alaska LNG environmental impact statement, or EIS, sent AGDC 193 questions and comments, the sixth such data request the agency has issued for the project. Richards said that some of FERC’s requests will have to wait until data can be gathered during the 2019 summer field season and others won’t be needed until the final EIS is being drafted. AGDC has been on a tight budget since taking control of the project in January 2017 and Meyer acknowledged that funding has to some extent impacted the corporation’s ability to answer FERC quickly. “If we had more money to spend we could turn (responses) quicker, but I think we’re turning it adequately,” he said. AGDC has chosen not to request additional funding from the state Legislature over the last two budget cycles while the state was in the midst of multibillion-dollar budget deficits. Instead, since early 2017 the corporation has relied on $102 million left over from prior year gasline appropriations to pull together the $43 billion endeavor. The corporation had $48.6 million remaining as of August and is forecasted to have $12.1 million left at the end of the 2019 state fiscal year in June, according to Finance Manager Philip Sullivan. He said AGDC is under-spending its budget in all areas; actual spending was $247,000 below its operating budget plan for the first two months of fiscal 2019. Its full-year operating budget was approved at $10.3 million. A contributing factor to that is AGDC currently has 20 full-time in-house employees, but it budgeted for 26 employees, Sullivan added. Richards and Meyer also noted that despite the tight funding for advancing the EIS, FERC recently moved the Alaska LNG EIS schedule up a month; the draft EIS is now expected in February 2019, with a final draft coming the following November. Meyer said additional funding would most help with “keeping an aggressive construction schedule on track,” as the industry consensus is that the current global LNG oversupply will evaporate closer to 2022 than the 2024-25 timeframe discussed a couple years ago. Most of the growing demand is coming from China, he said. “Now everybody’s trying to be that project to fill that (supply) gap,” Meyer added. While AGDC has not directly asked for additional funding, the corporation requested authority from the Legislature last session to accept third-party investments. However, the Legislature rejected that request in its final state operating budget. If AGDC could get an injection of more than $100 million, the corporation would be able to complete advanced engineering and schedule long lead time items, such as pipe for the gasline from steel mills that are already busy with orders in the global natural gas boom, Meyer said. That funding would be rewarded with an equity share of the project. “The more money we have the more aggressive we can be,” he said. Elwood Brehmer can be reached at [email protected]

Salmon stakeholders split over ballot initiative

Opinions on the salmon habitat initiative officially dubbed Ballot Measure 1 are about as diverse as Alaska’s fisheries. About the only thing uniform in the environmental policy debate is the resource development industry’s collective opposition to it. Nearly, but not all, of the 12 Alaska Native regional corporations oppose it; Bristol Bay Native Corp. has maintained a neutral position on the voter initiative for most of 2018 after CEO Jason Metrokin originally said the company was against it. Commonly known as the Stand for Salmon initiative, Ballot Measure 1 is seen by many as a way to stop the controversial Pebble mine in Western Alaska, which BBNC has long and vigorously opposed. The initiative seeks to overhaul Title 16, the Department of Fish and Game’s statutory directive on how to evaluate development projects in salmon habitat. Current law directs the Fish and Game commissioner to issue a development permit as long as a project provides “proper protection of fish and game.” The sponsors contend that is far too vague and an update is needed to just define what “proper protection” means. The initiative would, among other things, establish two tiers of development permits that could be issued by the Department of Fish and Game. “Minor” habitat permits could be issued quickly and generally for projects deemed to have an insignificant impact on salmon waters. “Major” permits would be required for larger projects such as mines, dams and anything determined to potentially have a significant impact on salmon-bearing water. Mitigation measures would be acceptable as long as they are implemented on the impacted stream or wetland area. A series of public notices and comment periods would also be added to the salmon habitat permit adjudication process; it is currently one of the few public resource-use permits issued by the State of Alaska that does not provide an avenue for public input. Additionally, the project sponsor would have to prove that impacted waters are not salmon habitat during any stage of the fish life cycle if the waters are connected to proven salmon habitat in any way but not yet listed in the state’s Anadromous Waters Catalog. The sponsors insist it is not aimed to stop development projects; rather, they argue would set high but transparent permitting standards that are necessary to protect salmon resources that are already being stressed by multiple factors. While Alaska Native corporations are mostly against Ballot Measure 1 and are actively fighting it as members of Stand for Alaska–Vote No on 1, many of their shareholders feel differently. Stand for Salmon, one of the nonprofits leading the advocacy for the initiative, lists 21 Alaska Tribes, Tribal consortiums and other Alaska Native organizations such as the Yukon-Kuskokwim Health Corp. and the Bristol Bay Native Association as supporters on its website. A separate list identifies roughly 200 Alaska businesses and organizations — many fishing-focused, many not — as supporters as well. Conversely, Stand for Alaska touts a coalition of more than 500 businesses and trade groups in opposition to Ballot Measure 1. The list of those opposed includes the Pacific Seafood Processors Association, which represents some of the largest companies in Alaska’s fishing industry, although some of them focus on species other than salmon. PSPA officials declined to go into much detail about their position on Ballot Measure 1, but noted the group has long been against natural resource management via voter initiative and highlighted its opposition Pebble mine. United Fishermen of Alaska, the largest trade organization in the state representing a broad spectrum of fishing industry and marine-related members, voted to remain neutral on Ballot Measure 1, according to UFA Executive Director Frances Leach. Leach said in an interview that the complexity of the initiative led to the middle-ground vote at the group’s fall meeting. “We would like to see natural resource groups work together to foster a collaborative approach to preserving our Alaska water resources and habitat,” Leach said, adding that if the initiative is voted down on Nov. 6, UFA wants the Legislature to take up the issue of updating the state’s salmon habitat protections again. UFA sent a letter to legislative leaders in March 2017 urging them to make changes to Title 16, which hasn’t been revised since statehood — a primary reason many cite for supporting Ballot Measure 1. UFA’s letter followed a letter from the state Board of Fisheries to House Speaker Rep. Bryce Edgmon and Senate President Sen. Pete Kelly in January 2017, urging them to revise Title 16. The board specifically requested changes that would allow for public participation in habitat permitting and enforceable standards for the Department of Fish and Game to evaluate development proposals against. The board’s letter spurred House Fisheries Committee Chair and Kodiak Rep. Louise Stutes to introduce House Bill 199 — which the initiative largely mirrors the original version — in early 2017. However, HB 199 did not move out of Stutes’ committee after more than a year of discussion and revision. Other than Israel Payton of Wasilla, Board of Fisheries members were generally reluctant to discuss their thoughts on Ballot Measure 1. Payton said in an interview that he would certainly prefer the issue of further protecting salmon habitat be handled through the legislative process, but said he would be voting for the initiative. “Of course, everyone on the board is pro-fish; I think everyone is kind of pro-development as well,” said Payton, who noted he has worked at North Slope oil fields and now is in real estate development. Payton said he finds a provision in the initiative that would put the onus on project proponents to prove the waters they propose to impact are not salmon habitat as particularly beneficial. ADFG Habitat Division officials estimate roughly half of the state’s anadromous fish habitat has been identified and therefore receives additional permitting protections under Title 16. “At the end of the day I have to believe some stronger habitat protections have to be a good thing,” Payton said. Board member John Jensen, who was chairman when the Title 16 letter was written to the Legislature and owns a boat rental business in Petersburg, said he will be voting “no” on Nov. 6. Jensen, who is also a board member for the Southeast Alaska Power Agency, said he doesn’t believe there is enough science supporting the provisions in Ballot Measure 1. “I think we should take better care of our fish streams but naming every stream and creek a salmon stream is problematic,” he said. Jensen added that he believes the initiative was generated from anti-Pebble sentiment, but it could add roadblocks for developing and maintaining Southeast’s power grid. Robert Ruffner and board chair Reed Morisky both withheld how they will be voting on Ballot Measure 1. Ruffner, a former leader of the nonprofit Kenai Watershed Forum said he, too, would prefer the Legislature deal with fish habitat issues, but acknowledged legislators have been dealing with more pressing budget issues in recent years. He said he does not want his position to be used by either side of the Ballot Measure 1 debate. “It’s really important that we protect our habitat by some mechanism and unfortunately the initiative process brings out rhetoric on both sides,” Ruffner added. Morisky, a fishing guide from Fairbanks, said “everything in that letter is still how I feel about it,” but like Ruffner said revealing how he feels about the initiative would detract from the more important debate. Morisky noted that he is a lifetime member of Trout Unlimited, which strongly supports the initiative, but also has spent time working on the North Slope. He will continue to advocate for a legislative solution. “I might not know until I get in there behind the curtain,” he said on how he will vote on Ballot Measure 1. Elwood Brehmer can be reached at [email protected]

Steep drop in state workers’ comp rates to save $35M

Come 2019, Alaska workers’ compensation insurance rates are expected to fall the most in 40 years, according to state managers. Gov. Bill Walker’s office announced Oct. 4 that workers’ compensation insurance premiums should decrease an average of 17.5 percent statewide starting in January and worker’s compensation voluntary loss costs similarly could drop 14.8 percent. The proposed rate decreases for 2019 follow a 5.4 percent average rate decrease this year from 2017 and workers’ compensation premiums are down roughly 25 percent since 2015, according to the governor’s office. Workers’ Compensation Director Marie Marx said the reductions should save employers an estimated $35 million or so statewide. State officials are attributing the favorable trend to fewer claims and medical cost reductions. “These proposed rate reductions are welcome news for Alaska businesses — lower workers’ compensation costs reduce the burden on the small businesses that strengthen our economy,” Walker said in a formal statement. “Thank you to the Alaska state Legislature and the Department of Labor and Workforce Development for their work on payment reform, contributing to significant rate reductions for 2019.” The rates are proposed by the National Council on Compensation Insurance and subsequently reviewed and approved by the state Division of Insurance. Marx said employers of oil and gas pipeline workers would see some of the most significant reductions at more than 26 percent versus current rates, while rates could drop for clerical workers — typically with fewer on-the-job dangers — in the 9 percent range if the proposals are approved. Automobile technicians should see rate reductions of about 13 percent, for example, she added. Following approval by the Legislature in 2014, the Alaska Workers’ Compensation Board approved new practices and fee structures for paying medical providers for procedures paid for through workers’ compensation insurance in October 2015. The fee structure changes put provider reimbursement rates more in-line with general group health insurance rates, according to Marx. It replaced a system of paying medical service providers at the 90th percentile of “usual and customary” fees in a given region. Alaska was the 33rd state to adopt the new payment system, Marx said at the time. At the time, Alaska also had the highest workers’ compensation rates in the nation, state officials said. “Alaska has some of the highest medical, if not the highest, medical costs in the country and workers’ compensation was right at the top and we’re bringing it down with the reform over a number of years,” Marx said in an interview. Alaska Chamber CEO Curtis Thayer noted that the reimbursement rate revisions were based on Medicaid guidelines. He said that it’s correct rates are going down — a very good thing — but stressed the credit should go to employers and their workers for not needing to file as many claims as in years past. “It’s just the fact that our employers are providing a safer working environment,” Thayer said. Reforming the state’s workers’ compensation program has been a major policy initiative of the Alaska Chamber for several years. Last session the Legislature also took on other aspects of the workers’ compensation system when it passed the governor’s House Bill 79, which Walker signed in August. Among other things, the legislation clarified who is an independent contractor and who needs to be covered by workers’ compensation insurance and eased the process for obtaining workers’ compensation exemptions, reporting data and making payments. Thayer said HB 79 “brought Alaska into the 21st century” but did nothing to address premiums. He said the Chamber will continue advocating for caps on legal fees for workers’ compensation cases and other changes, such as treatment guidelines. “There’s a lot of work that’s been done but a lot of work that still needs to be done,” Thayer said. ^ Elwood Brehmer can be reached at [email protected]

Permitting to start on Ambler copper prospect early next year

More than 60 years after it was initially prospected, Trilogy Metals is almost ready to apply for the major environmental permits it will need for the first project in one of Alaska’s premier areas with mining potential. Trilogy Metals Inc. CEO Rick Van Nieuwenhuyse said Oct. 4 that the company has started pre-permitting work with the U.S. Army Corps of Engineers for its Arctic copper, zinc and precious metals prospect in advance of an environmental impact statement that should be initiated in the first half of 2019. The Clean Water Act Section 404 wetlands fill permit from the Corps — large enough to trigger an EIS — is likely the only federal permit the mine will need, Van Nieuwenhuyse said, noting the Environmental Protection Agency has oversight of the water and air quality permits issued by the State of Alaska. The Arctic prospect is roughly in the middle of the extensive Ambler mining district. Stretching for about 75 miles along the southern flank of the Brooks Range, there are more than 30 known metal deposits in the district, but its remoteness has precluded significant development. The Alaska Industrial Development and Export Authority is leading development of a 211-mile industrial road to access the mining district. The Bureau of Land Management is writing a separate EIS for the road and the first draft of that document is expected in March 2019, with a final EIS following late next year, based on the current schedule. “This project is in the middle of nowhere and this road has been studied, discussed, many, many, many times,” Van Nieuwenhuyse said. The road project, which is separate from Trilogy’s mine work, has drawn stiff opposition from residents of the area and environmental groups who are worried the project will disrupt caribou migrations, which Van Nieuwenhuyse acknowledges is the most significant subsistence food source in the region. The proposed mines have also drawn scrutiny for potential impacts to salmon and whitefish runs in the Kobuk River drainage. The National Park Service is also preparing an environmental and economic analysis that is also expected to be finished next spring. AIDEA estimates constructing the most basic single-lane gravel road would cost between $305 and $346 million. It would be financed by the authority with bonds that would be paid back through tolls paid by Trilogy Metals and any other companies that would develop one of the other prospects in the Ambler mining district. The plan is very similar to the Red Dog mine-DeLong Mountain Transportation System — also an AIDEA-owned and financed mine access road —in far Northwest Alaska that development proponents have cited as a model for other isolated resource prospects in the road-scarce state. At its core, the Arctic prospect is about as good as undeveloped metal deposits come these days, according to Van Nieuwenhuyse. With just more than 43 million metric tons of probable reserves averaging 2.3 percent copper, 3.2 percent zinc and smaller amounts of lead, gold and silver, it’s “about 10 times the average grade being mined in open pit copper mines today,” he said. “It’s not a huge mine, but it produces metal above its weight class because of the grade — 160 million pounds of copper annually, 200 million pounds of zinc, 33 million pounds of lead, over 3 million ounces of silver and 30,000 ounces of gold.” Those numbers are based on a short, 12-year mine life. According a pre-feasibility study released in February, Arctic would generate costs of $911 million to build and operate over that time but with roughly $450 million in annual free cash flow would have just a 2-year payback. “We don’t need higher metal prices to make this thing work,” Van Nieuwenhuyse said. “We just need a road.” The mill and other facilities at Arctic could also be used for Trilogy’s other, larger but less explored Bornite copper and cobalt prospect about 20 miles to the southwest or other undeveloped prospects in the area, he added. The company currently estimates Bornite contains upwards of 6 billion pounds of copper, a figure that could grow this coming winter when the results from this year’s drilling campaign. The last two years of exploration at Bornite have been funded by $10 million annual payments from the Australian mining company South 32, which, after a third payment, will have the option of investing another $150 million in the project and forming a 50-50 joint venture with Trilogy, according to Van Nieuwenhuyse. Trilogy has spent $122 million exploring its Alaska prospects overall. The company also has a partnership with NANA Regional Corp., the Northwest Alaska Native regional corporation, which owns land at Bornite. NANA can receive up to a 2.5 percent royalty on the ore concentrates produced from Trilogy’s mines under the partnership, according to a company presentation. Another open-pit prospect, Bornite holds about 125 million metric tons of reserves with about 1 percent copper, but there is potential for an underground mine with 58 million tons of 3 percent copper, he noted. Bornite was also discovered in the 1950s by a prospector well known in mining circles named Riney Berg, according to Van Nieuwenhuyse, who offered a brief anecdote about his work. “He was out there looking for uranium; he had worked at the Kennecott mine so he knew what copper minerals looked like, found some on the surface, did some trenching and got the Kennecott guys all excited. They eventually wrote him a check for $6 million,” he said, noting the value of that much money roughly 60 years ago. “Riney, being a good prospector, spent it all on prospecting. There’s probably a dozen different prospects in Northern Alaska that have his name on it.” Trilogy is also finishing up an study to see if ore sorting systems used by recycling companies can be applied in mining Arctic. The process uses sensors similar to magnetic resonance technology that “recognize what rocks have copper, silver, lead and what rocks don’t,” Van Nieuwenhuyse said. “If we could just mine the stuff we want we could get 3 percent copper, not 2 percent,” he said. The sorting process is proven to work, it’s just not proven to be economic yet, he added. Elwood Brehmer can be reached at [email protected]

Oil Search planning two new wells into southern Pikka Unit

A company new to Alaska developing one of the state’s largest oil prospects is planning to further delineate the field by drilling two more wells this coming winter into what has become the hottest play on the North Slope. Australian-based Oil Search applied with the state Division of Oil and Gas Sept. 28 to drill two well and sidetrack combinations into the shallow, conventional Nanushuk formation from the southern portion of the Pikka Unit on the central North Slope in February, according to the company’s plan of exploration for the unit. The wells will be the first drilled into the southern half of Pikka and “are critical to the delineation of this area and have the potential to have significant impact on the subsurface basis of design” for future field infrastructure according to the document signed by Oil Search Alaska President Keiran Wulff. Oil Search took over as operator of Pikka and the associated Nanushuk project in March. The wells were originally scheduled to be drilled by Armstrong Energy last winter, but the change in control of the field brought logistical challenges that delayed the work. A final environmental impact statement is expected later this year for the Nanushuk project at Pikka, which is expected to produce up to 120,000 barrels per day at peak production. Oil Search agreed to buy a 25.5 percent stake and the operating role in the Pikka Unit from Armstrong Energy and Denver-based GMT Exploration Co., a silent partner in the unit, in October 2017 for $400 million. The deal also included a 37.5 percent share of Armstrong’s prospective “Horseshoe” leases to the south. Oil Search can fully buy Armstrong and GMT out of Pikka for another $450 million by July 2019, an option Wulff has said the company is “highly likely” to exercise. The Pikka B and C wells Oil Search intends to drill will reach depths of 6,513 feet and 4,923 feet, respectively. The company plans to drill the wells concurrently with two drilling rigs and will build ice roads and mobilize from the equipment from the Mustang development pad in the nearby Southern Miluveach Unit. Oil Search is currently in the preliminary front-end engineering and design, or pre-FEED, stage of developing the Nanushuk project and the results from the B and C wells will inform the company’s work during the FEED phase of the project, according to the plan of exploration. First oil is expected in the early 2020s and full development of the field will entail 146 wells and cost up to $5 billion to bring online. Armstrong Energy drilled a well-sidetrack combination roughly 20 miles south of Pikka into the Nanushuk formation in early 2017. CEO Bill Armstrong said at the time that he believed the positive results from that work indicated a long, continuous play that could hold twice as much oil as originally estimated. While official estimates are more conservative, Armstrong has consistently said he believes more than 1 billion barrels can be produced from the Pikka Unit. ConocoPhillips also drilled two successful exploration wells into the Nanushuk south of Pikka last winter. A separate Nanushuk play is also the basis for the company’s large Willow prospect to the west in the National Petroleum Reserve-Alaska. Further, a consortium of small exploration companies led by Australian-based 88 Energy is planning to drill a Nanushuk exploration well this winter just to the east of ConocoPhillips wells south of Pikka. Elwood Brehmer can be reached at [email protected]

NPR-A oil flow means major money for Slope communities

A federal grant program aimed at helping North Slope communities offset the impacts of oil development is about to become flush with money. ConocoPhillips’ Oct. 9 announcement that oil began to flow from its Greater Mooses Tooth-1 project in the 23 million-acre National Petroleum Reserve-Alaska also marked the start of consistent revenue to the NPR-A Impact Mitigation Grant Program. Written into federal statute, the money it disperses is the State of Alaska’s 50 percent share of oil royalties, drilling lease rentals and bonus bids from the reserve; the North Slope communities of Anaktuvuk Pass, Atqasuk, Nuiqsut, Wainwright and Utqiagvik as well as the North Slope Borough are eligible for it. While based on higher-than-current oil prices, the GMT-1 project, expected to peak at roughly 30,000 barrels per day, was estimated to generate more than $1 billion in royalty revenue over its life in the project’s final environmental impact statement; half of that would go to the mitigation grant program. The federal royalty in the reserve is 16.67 percent of the wellhead value of the oil. Arctic Slope Regional Corp. also holds subsurface rights to a majority of the oil-bearing leases, but the project is the first of three progressively larger oil developments ConocoPhillips is working on. About eight miles further into the reserve from GMT-1, Greater Mooses Tooth-2 — largely expected to be sanctioned by the company this winter — is expected to peak at upwards of 38,000 barrels per day. ConocoPhillips Alaska officials have said it could produce oil in 2021 if it’s greenlit soon. Department of Natural Resources Commissioner Andy Mack said the largest influx of grant revenue would come from the $4 billion to $6 billion Willow project, not only because it is pegged to peak at upwards of 100,000 barrels per day but also because the Bureau of Land Management controls the mineral rights there. The North Slope Borough is projecting there will be about $17 million available to fund grants in fiscal year 2019, according to NSB Deputy Finance Director Fadil Limani. He said that’s a purposefully conservative estimate that does not include production from GMT-1 or the annual fall NPR-A lease sale. Revenue generated from the lease sales is generally unpredictable. BLM netted $18 million in the December 2016 NPR-A sale but that fell to just $1.1 million — all from ConocoPhillips — last year despite the agency opening all available tracts to leasing and strong indications that there is a lot more oil in the reserve than previously thought. ConocoPhillips discovered the Willow prospect, which is largely a Nanushuk oil play, at a time when the most current U.S. Geological Survey mean estimate for recoverable oil in the reserve was less than 900 million barrels. “Now we’re suddenly looking at another area that has billions of barrels of oil,” Mack said in an interview. The USGS subsequently updated its mean NPR-A oil projection to more than 8.8 billion barrels for the reserve and adjacent state lands late last December. If remotely accurate, most of that oil is expected to come from the geologically related Nanushuk and Torok formations that are driving what ConocoPhillips Alaska leaders are calling a “renaissance” on the Slope. BLM allocates funding for the grant program to the state twice per year. That money is then appropriated by the Legislature to the communities, which submit grant proposals to the state Department of Commerce Community and Economic Development. The amount of money available for the grants has varied widely since 2002 mostly due to lease sale results. It peaked at $25 million in 2004 when 30 projects were funded; however, most years it has been in the $2 million to $5 million range. Commerce Commissioner Mike Navarre said during a joint House and Senate Resources committee meeting in September that $13.5 million had been deposited in the state’s account for the program so far in fiscal year 2019. An annual report to the Legislature on the grant program issued in January listed 16 applications totaling $11.6 million for the current fiscal year 2019, but Navarre said his department could make a mid-year supplemental budget request if more money is available than first thought and more proposals are submitted. “It’s fairly broad funding in order to make sure that the communities that are affected (by development in the NPR-A) — their concerns and the impacts are addressed,” he told legislators. The current year projects recommended for funding are for community and youth center upgrades in several of the villages, a new John Deere loader tractor for Utqiagvik and a youth program in Wainwright, among others. The borough requested funds for fish, wildlife, water and air quality studies as well as $3.5 million for a winter trail network. Any additional money not consumed by the grants is split between state uses with 25 percent of what’s left going to the Permanent Fund, 5 percent to the Public School Trust Fund and the remainder going to rural power programs, and, lastly the General Fund for public infrastructure appropriations, according to the Commerce Department report. According to department officials, to date no funds have been left over for state purposes in the history of the program. Whether or not that trend will continue to hold true when more money is available is unknown. North Slope officials are also aware of the fact there is rarely enough money to go around statewide. “There’s going to be other municipalities, other regions, legislatures in the state that are certainly going to want to see opportunities for these resources but, as expressed in the federal statute, the intent of these resources is to be reserved for the impacted communities these (oil) resources are being extracted from,” Limani said, adding the North Slope Borough “absolutely” expects to use all of the money available for the program. The borough’s longer term projections are for $40 million to $50 million per year to be available for grants, noting that the estimates could well be “on the lower end of the spectrum” if Willow comes online as expected in the mid-2020s, he said. The borough has yet to closely examine the large but early-stage project. Regardless of exactly how much money is available in a given year, the North Slope Borough and the eligible communities within it will reliably find uses for it, according to Limani. He emphasized borough Mayor Harry Brower Jr.’s focus on community assistance and development, highlighting the fact that unemployment rates in the villages can be close to 40 percent in some cases. The borough usually has a capital budget of about $80 million per year but gets somewhere in the neighborhood of $400 million worth of project requests from its communities, according to Limani. “A lot of the infrastructure out there is dilapidated, it’s aged, so (Brower) wants to make resources available for that. While we focus on development of oil and gas resources, it does have impacts on the social side, too,” Limani said. “I think that’s another area he wanted to use resources to make sure that we’re monitoring — knowing the drug and alcohol epidemic that’s facing the state as a whole and especially the North Slope communities. “The mayor’s very sensitive to that; wants to deploy resources to be able to address that.” Longer term, borough officials are likely to look at transportation infrastructure, namely road development, which Gov. Bill Walker supports, and possibly getting natural gas from NPR-A oil developments to nearby communities as well as dealing with the impact of climate change. Limani said money should eventually be made available to deal with coastal erosion in communities that might not be directly eligible for the grants but are within the borough boundaries. And none of that addresses the omnipresent concern about the ability for residents to continue traditional harvests amid oil projects. “Subsistence is the pillar of the culture, so when you’re looking at all this one of the key components is make sure the development doesn’t impact the subsistence way of living,” he said. Money talks Mack noted that North Slope officials generally support offshore developments such as Hilcorp Energy’s proposed manmade island Liberty oil project, which sits just beyond the state waters boundary. As a result, the state would be eligible for 27 percent of royalties derived from Liberty, but the borough cannot levy its property tax on the offshore infrastructure as it does for other onshroe developments. The North Slope Borough’s oil and gas property tax is its primary revenue stream. “They’re a little uncomfortable because (Liberty) is placed outside their jurisdiction and even though the state gets 27 percent of the rents, royalties and bonus bids, the borough doesn’t enjoy some of the property tax that it is accustomed to and in many cases is used to mitigate impacts,” Mack said. Borough and state officials have started having high-level conversations about the grant funds given the newfound abundance of oil in the NPR-A, according to Mack. “We have to grapple with the issue that there is a bundle of great news and along with that great news comes great expectations and also at some point we have to talk about money. And right now, with respect to royalty in the NPR-A, the state is not a recipient of a significant amount of that. So at some level we’re hoping that we can work with the North Slope Borough,” he said. The state can levy its oil production tax on NPR-A projects, but that tax revenue will likely be relatively minimal for years given the multi-layered deductions companies are able to apply to new projects. Mack stressed that Walker and Lt. Gov. Byron Mallott both grew up in small Alaska communities and thus understand the realities and challenges of living outside the state’s urban centers. “We want a program that is sustainable, that allows for the communities to mitigate impacts and adapt to the change but honestly, we want a fair shake just like everybody else does,” he said, adding there is ample time to find an amenable solution. “We’re not demanding anything; we’re all similarly situated.” Resources Committee chair Sen. Cathy Giessel, R-Anchorage, noted during the September hearing that Rep. Don Young has a proposal in Congress to split Arctic National Wildlife Refuge oil and gas revenue 50-50 between the state and the feds, with 3 percent of the state’s share then going to Alaska Native corporations. She speculated whether or not some sort of similar plan could work for the NPR-A. In an interview, Giessel said more available money will always lead to more competing uses for it, adding any changes to how the NPR-A funds are distributed “would be up to Congress to thread that needle.” However, she also contended that resource development, at its core, is about improving people’s lives, which the NPR-A Impact Mitigation Grant Program is intended to do. “I just want to make sure it all balances out,” Giessel said. Elwood Brehmer can be reached at [email protected]

Eklutna hydro power a piece of puzzle as Chugach, ML&P refine sale

Officials are on the clock to hash out the all-important details of the $1 billion sale of Anchorage Municipal Light and Power to Chugach Electric Association in time for the necessary approvals. Nearly two-thirds of Anchorage voters consented in April to a proposal from Mayor Ethan Berkowitz’s administration to sell the municipality-owned electric utility to the neighboring Chugach cooperative, but that vote was just the start of the real work in a deal Municipal Attorney Becky Windt Pearson called “immensely complicated.” The resolution voters approved requires the Anchorage Assembly and Chugach board of directors to subsequently approve the final terms of the sale by Dec. 31. That ostensibly sets a much sooner deadline for final negotiations, as both bodies will need time to review and debate the purchase and sale. Windt Pearson said the negotiating teams have committed to getting an asset purchase agreement done by Oct. 24 in advance of Assembly public meetings and work sessions expected in November, adding that about half of the transaction documents have been negotiated. “We started with a very rudimentary set of terms and we’ve been working towards something that is more nuanced and we’re really pleased with how far we’ve come,” she said. The Assembly is tentatively scheduled to vote on the sale Dec. 4. The utility consolidation is also subject to approval by the Regulatory Commission of Alaska, which could require changes to the structure of the deal. As it stands now, the all-in price for ML&P has gone down slightly from $1.024 billion to $1.009 billion, mostly because of lower-than-expected costs to execute the deal. Chugach has also committed to municipal requests to not lay off any ML&P employees or raise customer rates because of the sale, Anchorage officials said. CEO Lee Thibert said Chugach would find similar senior-level positions for those currently in leadership positions at ML&P. Ekluta hydro shift The biggest change to the original proposal is a shift away from Chugach making 30 years of unsecured payments totaling $170 million. Instead, the utility has agreed to a 35-year power purchase contract from the 39-megawatt Eklutna hydroelectric plant, which Anchorage will remain a partial owner of. How much power Chugach buys from the Eklutna facility will depend on whether or not Matanuska Electric Association agrees to increase its stake in the hydro plant through a separate but related deal with Anchorage, according to Windt Pearson. Currently, the municipality holds a 53.3 percent stake in Eklutna hydro, Chugach is a 30 percent owner and MEA owns the remaining 16.7 percent. Anchorage officials have put forth an offer for MEA to own up to 35.7 percent of the plant or remain a 16.7 percent owner and buy more power from it, according to the power purchase term sheet. If that happens, Chugach would have rights to the remaining 64.3 percent of Eklutna power. If MEA declines, Chugach would simply buy more power from Anchorage, which would remain the majority Eklutna owner. In the event MEA accepts, Chugach’s power purchase payments would start at about $2.5 million per year and gradually increase to more than $3.5 million in year 35, the term sheet states. Without greater participation from MEA, Chugach would start by paying $3.9 million for more power in year one and end with a $5.4 million payment by the end of the power purchase agreement. Windt Pearson said the municipality will keep title to Eklutna either way and the power purchase arrangement puts Anchorage in a better position than the originally contemplated payments that amounted to a 30-year unsecured loan. “(Eklutna) is our asset. If there’s a default under the agreement we keep it and can do something else with it,” she said. MEA spokeswoman Julie Estey said the utility officials are in preliminary conversations with their municipal counterparts to discuss a possible Eklutna deal. Municipal Manager Bill Falsey described the Eklutna proposal as the “correctly shaped puzzle piece to fit the hole” of the less desirable direct payment option. “It’s clean, so rather than retaining a single generation unit at (ML&P’s plant) 2A, with this we could retain the entirety of the MOA share of the Eklutna plant,” Falsey said. Chugach will also be responsible for operating and maintaining the Eklutna hydro infrastructure, which could be a significant point given major changes are likely coming to the Eklutna River watershed over the next decade. A 1991 agreement in which the U.S. Department of Energy sold the Eklutna hydro plant to the utilities included a mandate for the plant’s owners to start studying options to restore fish and wildlife habitat in the Eklutna River in the coming years. Eklutna Lake, with its large earthen dam, also provides the vast majority of Anchorage’s water supply in addition to fueling the hydro plant with water diverted away from the Eklutna River. Environmental studies on how to mitigate the impacts of the dam and power plant must start by 2022; the work must be done by 2032, but the Assembly has urged the utilities to start the process sooner. “Some form of restoration is going to happen,” Anchorage Assembly member Forrest Dunbar said at the work session. If the only option is to shut down the hydro plant, Chugach will continue to make the power purchase payments, according to the agreement term sheet. Clearing debt, PILT Windt Pearson said defeasance costs on the $542 million of ML&P debt Chugach agreed to pay off at closing will be $13.3 million less than originally calculated and the annual payment-in-lieu-of-taxes, or PILT, that Chugach will pay the city for the assets it acquires also won’t be quite as much as once thought based on ML&P’s latest electric rate case determination by the RCA. The debt retirement will account for the vast majority of $767.8 million in cash Chugach will pay the municipality at closing. The PILT, which will replace ML&P’s municipal utility service area, or MUSA, payments, will also be paid over 50 years versus the 30-year term originally contemplated. MUSA payments are a substitute for property taxes on publicly owned utilities and are accounted for in ML&P’s customer rates. Recent MUSA payments have been in the $6 million per year range for ML&P. “There will still be the question at the end of that (50 years) as to how that revenue source is replaced but we have a longer time to consider how to do that, what kind of structure to put in place,” Windt Pearson said. The PILT has also been structured to prevent legacy ML&P customers from bearing the brunt of paying for the transaction, she added. Because it is a calculation based on the assets located in the ML&P service territory, primarily Midtown and Downtown Anchorage, there were concerns that if it continued to be calculated based on actual asset investment it could create a disincentive for Chugach to make future investments in the area. As a result, the same payments will be due regardless of what Chugach does there, Windt Pearson said. That structure will remain until 2033 — while former ML&P customers are getting the benefit of the utility’s ownership stake in the Beluga River natural gas field — at which point the PILT will shift to all Chugach customers, she said further. The Beluga River field is expected to produce feedstock natural gas through 2033. Financing With the major points worked out, Chugach’s Thibert said the utility has retained three financial advisors to help it secure the necessary cash to close the deal. Thibert said that while near-term interest rates are gradually rising, rates on 10-year terms have been flat. “I think the market looks very good right now for co-op financing. The yield curve has been very flat, so that’s encouraging,” he said. “We’ve been talking to financiers out there; there is interest in the market. We feel that this will get plenty of subscriptions once we put this thing out for bid.” Chugach is ready to finish the deal, he added. “We put a lot of time and energy into it and we still have some more work to do but we feel very good about where we’re at. We think it’s been a good process and we look forward to a successful transaction,” Thibert said.   (Editor's note: This story has been updated to correctly note the owners of the Eklutna hyroelectric facility are required to study ways to mitigate its evironmental impacts, but are not immediately required implement mitigation based on the 1991 agreement.) Elwood Brehmer can be reached at [email protected]

Judge orders briefings in suit challenging tax credit bonds

Parties to a lawsuit challenging the constitutionality of the state’s plan to use bonds to pay off oil tax credits are going backward to move forward after the first oral arguments in the case were heard Oct. 1. Alaska Superior Court Judge Jude Pate ordered former University of Alaska regent Eric Forrer and his attorney Joe Geldhof to submit a brief by Oct. 8 opposing the state’s motion to dismiss the suit on grounds it failed to state a claim upon which relief can be granted. State attorneys will then have until Oct. 12 to respond. During the informal, conversational arguments that lasted about 90 minutes, Geldhof said that he and Forrer had not responded to the June 25 dismissal request because he read it as a motion for summary judgment. “It went extensively into the merits of the state’s arguments and beyond what I, at least, thought was a dismissal for failing to state a claim,” Geldhof told Pate, while noting the state has not answered the original or amended complaints. Both sides have made numerous other filings in the case, including a back-and-forth over Forrer’s request for jury trial to which the state objects. Geldhof has insisted state attorneys have not followed normal briefing procedure in the case, which has greatly slowed its progress. He also contends Walker administration officials, in debates over House Bill 331 in the Legislature, made differing statements over what kind of debt the tax credit bonds would be and how stringent an obligation the tax credits are to pay off in the first place. Assistant Attorney General Margaret Paton-Walsh, in turn, questioned whether Geldhof understands what the state’s motion for dismissal means from a procedural perspective. She said the case raises “purely legal questions. What does the (Alaska) Constitution mean, what does the statute do; does the statute violate the Constitution?” She continued to say that standard procedure would be for Forrer and Geldhof to file an opposition to dismiss and a cross motion for summary judgment. The plaintiffs would generally move for an injunction to block the state from implementing the law, Paton-Walsh said, adding that in this case the suit itself is a de-facto injunction because its mere existence prevents the state from offering bonds to investors. The state filed the motion to dismiss in order to move the case quickly, she said. Geldhof said he believes it’s premature for rulings on his request for a jury trial because there are still outstanding issues of fact surrounding the specifics of the bonds that could be answered through the state answering the complaint, discovery or other ways. For his part, Pate dismissed motions from both sides regarding a jury trial and fact discovery without prejudice, meaning they could be filed again at a later time. He also agreed with the state’s position that the lawsuit is a pretty straightforward one. “I’m not interested in the factual arguments. I’m interested in the law, the language of the statute, the Constitution, that’s it,” Pate said. However, he did not indicate how he might rule on the constitutionality of HB 331. The lawsuit alleges the bond sale would commit the state to debt beyond the restrictions the Alaska Constitution puts on the Legislature’s ability to incur financial liabilities. Administration officials contend the plan is legal because the 10-year bonds would be “subject to appropriation” by the Legislature, which the bond buyers would be aware of, and therefore would not legally bind the state to make the annual debt payments. They would be sold by the Alaska Tax Credit Certificate Bond Corp., which would be established solely for the purpose of managing the bond money. The state Constitution generally limits the Legislature to bonding for debt through general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold. State corporations can also sell revenue bonds, but those are usually linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole. Geldhof called the entity — run by a small group of Revenue Department employees including Commissioner Sheldon Fisher and with no income other than the Legislature’s annual appropriations to pay the bond debt — a “shell corporation” that is part of an elaborate constitutional workaround. State attorneys contend the plan is legal because it does not bind the state to pay the bonds, just the corporation, because paying the debt would be “subject to appropriation” by the Legislature and that risk is “baked into the price of the bonds” via a higher interest rate,” Paton-Walsh said. The constitutional sideboards on borrowing are there to prevent the state from exposure to bankruptcy, which she said HB 331 does through the subject to appropriation stipulation. “If you sued the State of Alaska on one of these bonds we would come in and move to dismiss and say we didn’t issue these bonds; they are not a debt of the state,” she elaborated. Geldhof responded that the state’s position ignores the real-world implications to the state’s overall credit rating of not paying the debt. “If the state defaults on these (bonds), if they don’t make the appropriation, there’s significant and obvious fiscal impacts on the State of Alaska, not just the shell corporation,” he said. “The Legislature, in year two, three, four, essentially has what amounts to a gun to their head if they don’t appropriate this money because the credit rating of the State of Alaska is immediately harmed.” Pate noted that state attorneys cited similar actions in other states that have been deemed constitutional, but asked Paton-Walsh if there was precedent in Alaska. She acknowledged there is not. Pate pushed to refocus the attorneys near the end of the hearing, noting that Forrer needs to rebut the state’s dismissal motion. “Heck yeah he’s stated some great claims,” he told Geldhof, “but can relief be granted under the law? That’s the issue.” Geldhof insisted a finding that HB 331 is unconstitutional would be proper relief in the public interest case and stressed his belief that a ruling to dismiss the case for failure to state a claim would undoubtedly be overturned upon appeal. Pate said he expects to issue a ruling on the matter in early November. Elwood Brehmer can be reached at [email protected]

Trustees keep up push for inflation-proofing Permanent Fund

Those closest to the Permanent Fund are beginning to talk more openly about their wishes for the $65 billion endowment as its management becomes increasingly politicized. Alaska Permanent Fund Corp. staff recommended to the Board of Trustees Sept. 26 that the board approve a resolution urging legislators to fortify protections against gradual degradation of the Fund’s value. The resolution reemphasized two that the seven trustees approved during their 2017 annual meeting. Last year’s resolutions requested legislation to prioritize the amount needed to inflation-proof the corpus of the Fund before the tally of its statutory net income — gains or losses — every year. Permanent Fund Corp. CEO Angela Rodell said the current state law definition of the Fund’s “net income” is not accounting based. “This would subtract inflation-proofing from the statutory net income and allow it to stay back” in the corpus, Rodell explained. Rodell has expressed concern — as several of the trustees did during the meeting — that not making an annual transfer from the Earnings Reserve Account to the corpus puts the Fund’s long-term health in jeopardy. The Earnings Reserve Account is where the Fund’s annual earnings are deposited in most years, and where investment losses are pulled from in rare bad years. It can be spent via a majority vote of the Legislature; the corpus is constitutionally protected from being spent. APFC Trustee and former Natural Resources Commissioner Marty Rutherford said the board needs to remind legislators that they have a responsibility to manage the fund for future Alaskans, not just present-day challenges. For years, the Legislature made the inflation-proofing appropriation without issue. However, legislators declined to approve the transfer in fiscal years 2016-2018 as they debated whether or not to utilize a portion of the Fund’s earnings for government spending. And while they made $942 million inflation-proofing payment to the corpus last year, they rejected Gov. Bill Walker’s proposal to make the retroactive payments and now the precedent to not make they appropriation has been set. “I think what we’re saying is because you haven’t inflation-proofed for three years we want the law to change so that inflation-proofing occurs automatically,” trustee and former Attorney General Craig Richards said. Richards was also elected chairman of the APFC board on Sept. 27. The board ultimately tabled the issue until a later date, which was done at Richards’ request despite his support for the resolution. He asked for a one-day late October work session for the board to draft additional recommendations for the Legislature on how it deals with the Fund. In a brief interview, Richards said he wants the trustees to form a concise message about the need for sticking to sustainable draws from the Permanent Fund, avoiding ad-hoc appropriations from the Earnings Reserve and predictability in how the Fund will be used. “Follow whatever formulas are on the books,” he said. In May, legislators passed legislation establishing an annual 5.25 percent of market value, or POMV, draw from the Fund to pay both Permanent Fund dividends and support government services. The POMV draw will automatically be reduced to 5 percent per year after three years, but several of the trustees noted that changes are likely coming to Senate Bill 26 — the law that established it — in the next legislative session that starts in January. While the Alaska Supreme Court ruled unanimously in August 2017 that the Legislature’s power of appropriation supersedes it’s need to follow other laws it has passed, Permanent Fund managers have consistently stressed a worry that shifting politics will play into how the state spends money from the Earnings Reserve. Not knowing what will be asked of them and how much money will be needed at a given time hampers their ability to protect the Fund’s investments and maximize its earning potential, they contend. ^ Elwood Brehmer can be reached at [email protected]

Karl seeks federal OK to pave way for Chinese charters

Bernie Karl just needs one signature to add tens of millions of dollars to Alaska’s tourism industry. The irrepressible Fairbanks entrepreneur and former owner — it’s now employee-owned — of the popular Chena Hot Springs Resort is waiting on Department of Homeland Security Secretary Kirstjen Nielsen to sign off on a travel visa waiver before he puts a plan into action that will bring a Boeing 787 with about 300 Chinese tourists directly to Fairbanks every week of the year, Karl said. “This is a pilot project only good for the state of Alaska, not good for the United States; it’s only good for Alaska. That’s what we’re asking for,” he said. The special visa would be good for 30 days and require Chinese travelers to have a nontransferable, nonrefundable round-trip ticket. It would also require the tour company consortium to post a $1 million bond with DHS, which, according to Karl, has been taken care of. “We give them a bond so that there’s no doubt these people will be back on the airplane,” he said. “The big deal with Homeland Security is they want to make sure people get back on the plane and we have no problem with that.” The reason it hasn’t been done is it can take up to six months for prospective Chinese tourists just to get an interview through the U.S. embassy for a travel visa. Conversely, Karl noted that it took him a little more than a day to get a visa good for three years for a trip to Russia. Explore Fairbanks CEO Deb Hickok, who, along with Karl, participated in Gov. Bill Walker’s trade mission to China in late May, described the challenges a successful Chinese tour operator she talked to had in getting a visa to the U.S. “He had to provide his marriage license, his diploma; things we’re never asked when we apply to go to China. There is this very real concern with the Department of State for anybody that may defect, so they’re very cautious,” Hickok said. Karl quipped, “They name streets after what we do — one way.” Travelers would be able to obtain the special Alaska visa in five days, he said. Karl is confident the flights would be full and estimates they would have an economic impact of between $35 million and $50 million per year on the state. Alaska visitors from Asia spend an average of $1,442 once in the state, according to the Commerce Department’s 2016 Visitor Statistics report. “They have our money; I want it back. You want to talk about helping our (trade) debt, well this is how you do it,” he said. “You bring their money here and they want to travel and they want to come to Alaska.” Karl and Adriel Butler, owner of Borealis Basecamp, met with Feng Bin, the primary owner of Beijing UTours and leasing agents for Hainan Airlines while on Walker’s trade mission and established a relationship that grew into the charter plans. Beijing UTours averages 1.2 million customers per year, according to Karl. He promptly went to Washington, D.C. after returning from China and asked the Alaska congressional delegation for help navigating DHS. Karl lauded each member of the delegation for their help. While the waiver has not been approved yet, he said Nielsen has had to cancel meetings with Sens. Dan Sullivan and Lisa Murkowski, which included a trip to the Chena Energy Fair with Murkowski in August. Another DHS representative who came in her stead said the waiver shouldn’t be an issue, according to Karl. Spokespersons for Sullivan and Murkowski didn’t respond to questions for this story. Confident he and his partners will get the visa waiver, Karl said more Chinese visitors could be in Alaska in about a month. “All the legwork’s been done,” he said. He highlighted the opportunity the Chinese market presents Alaska’s tourism industry, with its 300 million-strong middle class, which Hickok said is expected to hit 600 million by 2020. Explore Fairbanks signed a business partnership with East West Marketing Crop. while Hickok was on the trade trip. She said aurora viewing is the primary attraction for Chinese visitors to Fairbanks, as is the case with Korean and Japanese tourists, but noted those that come to Alaska during the summer months are obviously here for other reasons. Karl said he pitched the state as “the world’s largest oxygen bar” while in China. “You come to Alaska to get healthy. You come to Alaska to breathe our oxygen. It’s the world’s largest oxygen bar and let me tell you China has problems with breathable oxygen,” he said. Regardless of the outcome of the visa waiver, Hickok noted that Alaska, and Fairbanks in particular, has greatly increased connectivity to East Asia. Alaska Airlines has a new partnership with Hainan Airlines and Delta Airlines, with its international routes, now flies daily to the Interior. She said airport space is hard to come by in Beijing, but the charters could originate from most any major city in China. Karl sees them as the beginning of much more travel between Alaska and China. “It’s just an unbelievable opportunity for the future of Alaska. Our real future is in selling nature, but you get to keep it,” he said. “It’s the damndest thing.” As if potentially bringing roughly 15,000 new visitors to Alaska isn’t enough, Karl added that he’s confident he can use the extra 30,000 pounds of cargo capacity in a 787 to export Alaska seafood through relationships he has with processors. “There’s no problem getting all the king crab and all the salmon I want to go on the plane. It just makes sense that the plane leaves full,” he said. Elwood Brehmer can be reached at [email protected]

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