Tim Bradner

Air Force to assess impact of F-16s move from Eielson

Alaska military officials are doing their best to soothe ruffled feathers in Alaska over the U.S. Air Force announcement that 21 F-16s based at Eielson Air Force Base near Fairbanks will be relocated to Joint Base Elmendorf-Richardson in Anchorage in 2013. The relocation of military personnel and families will adversely affect the Fairbanks-area economy. Air Force Lt. Gen. Stephen Hoog, commander of Air Force and Army units in Alaska, told the Legislature’s Joint Armed Services Committee Jan. 14 that an Air Force team will arrive in March to assess just how many personnel from Eielson will actually move. Hoog said there are 300 to 500 military personnel at Eielson who are directly engaged with the F-16s and assuming a population multiplier of 2.1 to 2.3 when families are included, “we will see an impact,” the general said. The Alaska Air National Guard aerial refueling mission will remain at Eielson and some capital improvements relating to the tankers will continue, such as a planned upgrading of railroad track to the base that are used to transport fuel. However, a planned $45 million remodeling of base housing set for this year has been put on hold by the U.S. Army Corps of Engineers because of the announced move, Hoog said. The Air Guard operates 9 KC-135 tankers from Eielson and performs refueling operations for military aircraft operating in northern areas and the Arctic, as well as other parts of the world. The tanker operation is vital and the Air Guard has been able to be “wheels up” with a loaded KC-135 within one hour of receiving notification of planes needing fuel and their location, said Gen. Thomas Katkus, the Alaska Air Guard Commander, who was with Hoog in the briefing. “We’ve never missed it,” on that record, Katkus said. “There is no shortage of people asking for fuel (in the air). It’s a growth industry.” Hoog said Eielson, meanwhile, will continue to be the main base supporting the annual Red Flag air combat training exercises, where air crews from the U.S. and other nations come to Alaska for training. The F-16s now at Eielson play the “aggressor” role in the training, and that will continue. It also means that for part of the summers, the relocated F-16s will return to Eielson temporarily to participate in the xOctober, and this year will involve about 7,000 people from 73 units from eight nations. Hoog said the Air Force hopes to save money in support of the F-16s at Joint Base Elmendorf-Richardson because of other aircraft based there, such as F-22s. Maintenance and other work can be done for all the aircraft, gaining efficiencies. A member of the legislative committee, Sen. John Coghill, R-North Pole, said, “I appreciate that the Air Force sees continued value for Eielson for training, but I hate to see the pullout (of the F-16s). That is going to be an economic burden for my area, and also the Air Force. The efficiencies you anticipate are, to me, open to question.” Rep. Carl Gatto, R-Palmer, another committee member, asked Hoog that with another round of base closings possible, whether Eielson could be on the chopping block even with the tanker mission. Hoog couldn’t comment on the possible closings, but said, “We will need tankers (for aerial refueling) in Alaska. The current plan is to keep the tanker mission intact. In the Air Force view, the relocation (of the F-16s) is part of the effort to reduce spending by $8.5 billion in 2013.” On other matters, Hoog said improvements at missile defense facilities at Fort Greely and Clear Air Force radar site are continuing. A new power plant at Fort Greely is to be on line soon and Missile Field 2, a second set of launch silos, is to be completed. “This will give us added silos when additional interceptors are purchased,” Hoog said. Fort Greely is operated by the Alaska Army National Guard, which have 200 soldiers employed full-time operating the facility. Also, improvements to the missile radar facilities at Clear, south of Fairbanks, are continuing. The budget for middle defense improvements in Alaska is $350 million this year, he said. About 60 Alaska Air Guard airmen are employed at Clear to provide support. On planned reductions of civilian positions at Air Force and Army installations, Hoog said the goal is to eliminate 222 civilian positions at Eielson and 48 at Eielson, but that he was not informed as to the Army’s plan at Fort Wainwright. As for the Air Force, an early retirement program has been reopened and some people are being moved to other positions. Even after those moves, “It appears that there will still be 40 to 60 people that we cannot place,” Hoog said. One concern for Air Force and Army commanders is any reduction in civilian workers providing support to families of soldiers and airmen deployed overseas, the general said.

Big issues loom, but legislators make progress on budget

JUNEAU — The Legislature passed day 40 in its 2012 session Feb. 24, with 50 days left to go before the required April 15 adjournment. The big issues, mainly oil taxes and school funding, are percolating mostly in the background, but lawmakers are making steady progress on their major responsibility, developing the state budget for the next fiscal year, which begins July 1. House Speaker Mike Chenault said work in the House Finance Committee and its budget subcommittees are on schedule with a proposed state operating budget expected to be before the Finance Committee in the first week of March and for the budget to be passed to the Senate in mid-March. Meanwhile, the Senate Finance Committee is doing its own review of agency budgets, which is awaiting the House-proposed version and is also a developing an initial draft of a state capital budget. That budget is expected to equal the current year capital budget of about $2.8 billion, with approximately $1.8 billion in state funds. Traditionally the House develops the first draft of the operating budget and sends it to the Senate in March. The Senate develops the capital budget and sends its proposal to the House, usually in early April. The differences are worked out in budget conference committees that are appointed as the session nears its end in mid-April. In a briefing by House leaders Feb. 20, Chenault said House members are waiting to see the Senate’s version of proposed changes to the oil and gas production tax. The House passed its proposal, House Bill 110, last year, and in the last two weeks the Senate Resources and Finance committees have been listening to consultants and the Department of Revenue while working on their own proposal. Chenault said he had been told the Senate would unveil its proposal on or about Feb. 24. Consultants Pedro van Meurs and PFC Energy appeared before the Senate committees in several review sessions last week. ConocoPhillips Alaska Inc. and BP Exploration (Alaska) Inc., two North Slope operating companies, also were before the Resources Committee to discuss their views on the current business climate for industry investment. Meanwhile, a bill reinstituting a coastal management act was introduced in the House Feb. 17 by Rep. Alan Austerman, R-Kodiak. The bill as written is very close to the pending citizen-sponsored ballot proposition reinstating the program that will be before voters in the November elections unless the Legislature passes a bill that is substantially similar. Austerman, the House Majority Leader, said he is still assessing the views of fellow majority members in the House. “The discussion is wide open. There are pros and cons being discussed. The legislation speaks for the initiative that reinstates the program dropped last July. The effort behind the initiative shows a lot of support for coastal management,” Austerman said in the House majority briefing. “We will request a hearing for the bill, and the sooner the better.” Despite that, there doesn’t seem to be much stomach in the Legislature for taking on another major controversial issue in the middle of the 90-day session with items like oil taxes and school funding also pending. In comments the previous week, Gov. Sean Parnell said he prefers to let the question go to the ballot in November. “Let the voters decide,” Parnell said. The state coastal management program ended in mid-2011, when the Legislature failed to adopt a bill extending the program beyond a scheduled sunset date. Parnell had proposed an extension of the existing program. Rural legislators had pushed for changes to the program to give coastal communities a stronger voice, which the governor opposed. After a bruising fight in the Legislature in the closing days of the 2011 session, a hard-worked compromise failed and the program ended. If coastal management goes to the ballot and is passed, it will take some time for a new program to be set up and certified by the federal government. The Legislature can make changes to laws enacted by ballot proposition in two years. One advantage of passing a bill in lieu of the ballot proposition is that the Legislature can change it in the following year. One of the more difficult sections in the proposed ballot proposition language is that it would include federal air and water quality permits issued by the Department of Environmental Conservation under a reestablished program. This is a hot-button item for the governor and many of the state’s resource industries because it would greatly complicate the issuance of these permits, which are administered by the state under authority delegated by the U.S. Environmental Protection Agency. The permits are complex enough, and to bring them under coastal management would require an additional level of review and scrutiny that would cause delays, as happened in the 1980s and 1990s before Gov. Frank Murkowski changed the program with a “DEC carve-out,” taking the federal permits out of the program. Another possibility is that coastal districts reestablished under the program could set their own regional air and water quality standards that could conflict with the state’s, and which might not be set up using scientific methodology used by the state and EPA in setting requirements. Such a balkanization of air and water quality standards would be a huge concern for resource industries, state officials said on background. Besides oil taxes, the other contentious question before lawmakers in 2012 is school funding, which is shaping up to be a bruising fight in the final month and a half of the session. The governor’s comments made last week in a briefing for reporters that a bill that passed the Senate increasing school aid was the “ultimate giveaway” to schools has ignited an uproar among educators and Democrats in the Legislature. House Minority Leader Rep. Beth Kerttula, D-Juneau, said, “I was just astonished to hear the governor call this the ‘ultimate giveaway’ in view of what he has proposed for oil taxes.” Democrats have criticized Parnell for “giving away” $2 billion a year in reduced taxes for industry without guarantees that there will be new investment. The Senate bill, however, highlights a deeper difference in the Legislature, and with the governor, over the form of increased education funding. The Senate proposes three years of increases to the formula under which state aid is distributed to school districts, the Base Student Allowance, or BSA. House leaders, and the governor, are wary of increasing the formula because it would lock in the increases as the state approaches a time of leaner budgets as oil production is in decline. “I don’t think we’re that far apart (on the need for additional funding), but the question is how we get there,” Chenault said. Kerttula said there are “discussions” under way on arriving at agreements on funding, “but we appear to be light years away from the governor, in view of his comments,” she said. School districts are pushing for more money because rising energy costs and basic inflation has eaten into budgets, diverting money from classrooms. Layoffs of teachers and staff are pending in several districts around the state. The position of House leaders, so far, and of Parnell is in favor of one-time appropriations to deal with specific issues like energy or other costs rather than increasing the basic formula. However, Austerman said there is a lot of sympathy in the House for increased funding over three years so school districts have the security of knowing what funding they will have. “The questions are really in the dollars,” he said. Supporters of the BSA increase argue this kind of “silo” funding hamstrings school administrators, reducing their flexibility. As to another comment by the governor, that schools should show some improvement in performance before being given more money, Chenault said there has indeed been an improvement in high school graduation rates in several regions. “Some people are saying we should reward only those schools who improve, but does that mean we deny funding to schools that don’t improve?” Chenault asked. “That will just buy us another lawsuit,” like the Moore case involving rural schools, which was just settled. Still, the question remains on how well high schools are preparing students for colleges or technical careers. “Fifty-three percent of incoming freshmen at the University of Alaska have to take remedial courses,” Chenault said. “Thirty percent of the ‘Alaska Scholars’ have to do remedial work.” The Alaska Scholars are university students who graduate in the top 10 percent of their high school graduating class, and who can attend the state university with free tuition. Chenault said the remedial education is costing about $12 million a year, half of that borne by students themselves through tuition.

Parnell not giving up on all-land gasline option

Alaska Gov. Sean Parnell is supporting continued work on a land natural gas pipeline to Canada although he is now urging North Slope producers to support an alternative pipeline to a possible large liquefied natural gas project at a southern Alaska port, a state official told a federal agency conducting an environmental review of the project Feb. 13. “The governor does not want work on the pipeline to Alberta to stop,” Kurtis Gibson, gas pipeline coordinator in the state Department of Natural Resources, told a panel at an environmental scoping meeting in Anchorage conducted by the Federal Energy Regulatory Commission. “Recognizing the dynamics of the market and that conditions change, the governor wants to preserve the option of the pipeline to Alberta but to also investigate the likelihood of a pipeline to tidewater to supply gas as LNG to the overseas market,” Gibson said. The FERC panel concluded its environmental scoping meetings in Alaska for the proposed $40 billion-plus gas pipeline project at the Anchorage meeting. The pipeline is being proposed by TransCanada Corp. and ExxonMobil Corp., with support provided by the state.  Scoping is the first stage in preparation of a Draft Environmental Impact Statement for the project, FERC senior biologist David Swearingen told local residents and state and federal agency officials at the final scoping meeting in Anchorage. Swearingen presided over the meeting. The scoping process itself will close Feb. 27 after which FERC begins work on the draft EIS, he said. The FERC team traveling in Alaska has held meetings in Fairbanks and small communities  near the planned pipeline route to get comments from local people and federal agency staff on environmental issues related to the project. The proposal is for a 1,717-mile pipeline from the North Slope to Alberta with 745 miles of the 48-inch pipeline in Alaska, which is the part regulated by FERC. There is an additional 58-mile line that would bring Point Thomson gas to Prudhoe Bay that is also part of the project, and which would also be reviewed by FERC. TransCanada and ExxonMobil will file an application with FERC for the project this fall under an agreement with the state of Alaska, which is financially supporting the project. The draft EIS is expected to be issued at about that time. The state of Alaska is footing the bill for most of the preliminary work on the project. So far about $250 million has been spent in preliminary engineering, environmental and regulatory work with the state paying about $150 million of that, Gibson said. TransCanada and ExxonMobil held an open season in 2010 and received bids for capacity, but details of the responses remain confidential. The project meanwhile continues to face commercial challenges amid the glut of low-price shale gas in Lower 48 market, TransCanada vice president Tony Palmer has said in previous statements. TransCanada is obligated to continue work toward its application to FERC under the agreement with the state, Palmer said. If TransCanada/ExxonMobil project is changed to a pipeline to southern Alaska for an LNG project, not all of the investment in engineering and planning for the all-land pipeline would be lost. “A portion of the information prepared for the Alberta/Alaska project would apply to a potential LNG project. The specifics would depend on the scope and destination (for a pipeline to southern Alaska) for a potential LNG project,” TransCanada spokesman Shawn Howard said.

Alaska's oil taxes too high, too complex, consultant tells legislators

A consultant retained by Alaska’s Legislature has recommended the state rein in taxes on oil production to attract industry investment but also to dismantle a complex set of exploration and development incentives that gives away too much, with the state paying as much as 80 percent of the cost of new exploration wells, state lawmakers were told in hearings Thursday. The Legislature is reviewing the state tax system with hopes of encouraging new investment to slow or reverse a decline in production from the North Slope. Following several days of joint hearings by the Resources and Finance committees of the state Senate, Pedro van Meurs, a Calgary-based expert on international fiscal systems, suggested the state revise its taxes so the total state take including royalty is no more than 75 percent on existing production and 65 percent on new production. To encourage heavy oil development the Legislature may have to lower total state take to 45 percent, van Meurs said. The current tax system has the state taking over 80 percent at high oil prices, which van Meurs said is too high. There is also a disconnect in the incentives in the tax system, he said. The exploration and development tax credit system now in the law is generous in assisting companies in finding oil, but once discoveries are made the production tax burden becomes very high, and is a big disincentive. “For the large companies who are now producers, there’s no attraction for development any new oil found, so why even explore? They have alternative investment opportunities around the world that are much more attractive,” van Meurs said. On the other hand the tax credit system is attractive to smaller companies who can enjoy the lower up-front cost with the state picking up most of the expense of drilling. Another criticism is that Alaska’s existing tax system is too complex, and discourages companies from considering Alaskan projects. Repsol, for example, told van Meurs it had sought assistance in deciphering the Alaska system from four major accounting firms as well as the state revenue department and was never able to get answers for certain questions, he told the legislators. Repsol went ahead with its Alaska exploration anyway, which is currently under way, but a simplification would make the tax system more transparent, van Meurs said. Van Meurs’ most substantial criticism, however, was on the way crude oil and natural gas are combined for tax purposes when they are produced together, such as would happen on the North Slope if and when commercial gas production begins. If gas has a much lower value than oil, as it does today, the effect of a tax on the combined Barrel of Oil Equivalent, which the current tax imposes, would be to sharply reduce the revenues compared with what they would have been if imposed on the oil and gas separately. “Once you start to produce gas as well as oil you’ll lose billions. If you do a large gas project you could wipe out your revenues. This is the most nonsensical system in the world,” van Meurs said. “Alaska cannot develop its gas resources as long as this is on the books.” Van Meurs suggested that the state simplify its taxes by removing the progressivity formula that sharply escalates tax rates at higher oil prices, leaving a flat 25 percent tax on net profits which is the base tax rate in the current law. He would do away with an array of exploration tax credit but leave a basic 20 percent credit on all industry capital investment. To capture more gains from oil price escalation, he would include a 2.2 percent severance tax on gross revenues. Van Meurs said this basic structure could be adapted with special tax rates for new oil and heavy oil. Natural gas would have its own, separate tax, so that gas production would not dilute oil revenues as would be the case under the current law.

Gas no longer flowing at North Slope well blowout

Gas is no longer flowing on a shallow blowout at Repsol E&P USA's Qugruk 2 exploration well in the Colville River delta on the North Slope, but water is still being released and the well is not yet under control, an Alaska agency said Thursday morning. "We were informed at 6 p.m. last night that the flow of gas has ceased but that the well is still blowing water. We were also told that well control people from Houston will be on the scene soon," said Cathy Foerster, a Commissioner with the Alaska Oil and Gas Conservation Commission. Repsol said the incident occurred at 10:15 a.m. Alaska time Wednesday when the well "kicked" after entering a shallow gas pocket. Drilling was at 2,600 feet when the kick occurred. About 1,200 gallons of drilling fluids were released as of Thursday afternoon, but additional water from the well is still being released. Repsol reported the incident to the AOGCC, the Alaska Department of Environmental Conservation and the North Slope Borough, the regional municipality. "Repsol is leading the response in accordance with an approved spill contingency plan," Gordon Brower, the on-scene coordinator for the North Slope Borough, said in a statement. Repsol has contracted with the O'Briens Group to manage its response to the incident, the state DEC said in a statement. The company is also working with the Wild Well Control Company of Houston to be flown to Prudhoe Bay to assist in controlling the well, Alaska Department of Environmental Conservation said in a statement. Gas blowouts from shallow gas pockets have occurred previously on the North Slope. Methane hydrates are known to exist in the area and are believed to have contributed to previous shallow gas blowouts. Repsol was drilling just below the permafrost layer on the slope, which extends to about the 2,000-foot depth across much of the area. Shallow gas pockets, some of them believed to be created by methane hydrates, exist in many places just below the permafrost.

State issues permits for Healy Clean Coal project restart

The state of Alaska has issued a key permit to allow a mothballed 50-megawatt coal power plant in Interior Alaska to restart, officials with Golden Valley Electric Association, the Interior Alaska electric cooperative, said Feb. 6. Alaska’s Department of Environmental Conservation issued what is essentially a renewal of an air quality permit issued earlier for the Healy Clean Coal Project, which was built in the late 1990s to test experimental new air emissions technology, according to Brian Newton, Golden Valley’s president. Appeals of the permit are expected to be filed by environmental groups that oppose the restart of the Healy coal plant, which is about 90 miles south of Fairbanks, Newton said. “This is a good first step, but we have a long way to go to get the permit finalized,” Newton said. The utility is negotiating with a coalition of environmental groups led by the Sierra Club in hopes of avoiding protracted appeals and lawsuits. The negotiations center on additional modifications Golden Valley could make in the plant to further reduce air emissions. Estimated costs to restart the plant are “something north of $20 million,” Newton said, but if additional modifications requested by the Sierra Club are made, the costs will be much higher. National environmental groups have engaged the issue because it is a test of policy in the Obama administration for coal-fired power plants. There are some new U.S. Environmental Protection Agency rules incorporated in the permit but the main issue is whether the plant will need a completely new air quality permit or whether the existing permit can be renewed, state officials said. The plant has not operated since 1999, but its utilities and other systems have been kept active by Golden Valley and the Alaska Industrial Development and Export Authority, which is still the plant owner. Environmental groups argue that the plant has been shut down so long that a completely new air permit is needed. The state, and Golden Valley, disagree. The state has issued the air permit as a renewal but EPA can still overturn that decision. A new permit will require extensive new analysis and evaluation of the plant systems to see if they are the best available technology. That will all take longer, adding to the delay in getting the plant restarted. There is also sensitivity over the plant because it is at Healy, near Denali National Park and its pristine air shed. State Commissioner of Environmental Conservation Larry Hartig said the new rules are incorporated in the renewed air quality permit and the state has the support of the U.S. Environmental Protection Agency’s Region 10 office in Seattle in its interpretation of the rules. However, there may still be some disagreement from EPA headquarters in Washington, D.C., where the Sierra Club has focused its efforts, Hartig said in an interview. The plant operated for a year to test the emissions systems under an agreement with the U.S. Department of Energy, but closed in 1999 because of a commercial dispute between Golden Valley, which had contracted to purchase the power, and the plant owners, the state-owned Alaska Industrial Development and Export Authority. The U.S. DOE paid for about half the cost of the $300 million plant under a program to test new air emissions control systems. The emissions technology systems, developed by TRW, performed well, DOE said in an evaluation. However, Golden Valley claimed operating costs were too high. A decade of lawsuits and negotiations followed until Golden Valley agreed to purchase the plant from the state authority. The utility and the state have since been working on a plan to restart the facility and renew its permits, including the air quality permit. The state Department of Environmental Conservation issues the air permit under authority delegated by the U.S. Environmental Protection Act under the federal Clean Air Act. Coal-fired power from the plant will be less expensive than power Golden Valley now generates with oil-fired turbines. If the Healy Clean Coal Project comes back on line the utility expects to be able to reduce rates to its Interior Alaska customers by 20 percent, Fairbanks North Star Borough Mayor Luke Hopkins said in an interview.

Alaska Supreme Court hears complex Point Thomson lawsuit

Alaska’s Supreme Court held a hearing Feb. 8 on one aspect of a complex lawsuit over state oil and gas leases at Point Thomson, a large gas and condensate discovery east of Prudhoe Bay on the North Slope. It will be some time before the court renders a decision, however. The court heard arguments over a provision in the Point Thomson Unit agreement that sets standards by which the state, as landowner, can terminate the unit. That action would also lead to termination of the leases, attorneys familiar with the case said on background. ExxonMobil, BP, Chevron and ConocoPhillips, the major leaseowners, filed a lawsuit to challenge the state’s action in 2007 to terminate the unit and the leases. The state terminated the unit on the grounds that the companies had reneged on lease work obligations agreed to in 2001. Gov. Sean Parnell has been working toward a settlement of the case and had hoped to secure one before the Supreme Court hearing. Last September the state reached a settlement agreement with one major leaseowner, ExxonMobil, which is also the unit operator, but other major leaseowners BP, Chevron and ConocoPhillips have yet to agree to the deal. The state high court has agreed to rule on a dispute over interpretation of Section 21 of the unit agreement, one of the issues in the case but an important one, which could be read to require the state to come up with technical data to justify a decision rejecting a plan of development submitted by a unit owners, attorneys familiar with the case said. The companies read Section 21 that way. The state favors an interpretation that the companies must come up with technical data to support a plan they present to the state. “Depending on how this decision comes out, the state could be at a tremendous disadvantage in attempting to reject a plan put forth by leaseowners,” one attorney said. The court’s decision will affect the way the state administers units in all parts of Alaska. Parnell sees resolution of the dispute as key in developing an Alaska natural gas pipeline project because the legal status of the Point Thomson leases, and the 8 trillion cubic feet of gas reserves identified there, must be clearly established. In his State of the State speech to the Legislature Jan. 17 Parnell promised to ramp up the state’s legal efforts in the unit termination if a settlement were not reached by the time of the Supreme Court hearing. “These companies need to agree to resolve the Point Thomson litigation. If no settlement in the state’s interest can be reached with all parties, the state will fight for Alaska’s interests at the Alaska Supreme Court hearing on Feb. 8 in Anchorage,” Parnell said in the speech to the Legislature. Meanwhile, under an interim agreement with the state, reached while the larger settlement is negotiated, the Point Thomson owners the companies agreed to develop a small gas cycling and condensate production project. That project is now under development and is expected to begin producing 10,000 barrels per day of liquid condensates in 2016. In return for agreeing to proceed with that, the state agreed to drop action to terminate two leases of 31 leases now held in the Point Thomson Unit.

Legislature tackles oil taxes, pension debt, school funding and gas pipelines

State lawmakers are grappling with oil taxes, a $10-billion-plus pension liability, a $10 billion-plus budget, school funding and gas pipeline issues as the 2012 legislative session nears the 30-day mark in its scheduled 90-day session. Lawmakers are to adjourn April 15, although they can vote for an extension. On oil taxes, the dominant issue of the session except for the budget, the Senate is to begin work on its proposal Feb. 10 with introduction of a new bill and the start of hearings in the Senate Resources Committee that day, Senate leaders said in a Feb. 7 briefing. The bill that is introduced will be a “placeholder” for language yet to be inserted, Senate Resources co-chair Sen. Joe Paskvan, D-Fairbanks, said in the briefing. It will, however, contain changes in the “progressivity” formula in the state oil and gas production tax taken from Gov. Sean Parnell’s House Bill 110, which passed the state House last year and is now in the Senate, Paskvan said. There will be changes coming to that formula as the committee does its work, as well as other changes to the state oil tax including possible adjustments to exploration and capital investment tax credits. More work will be done in the Senate Finance Committee. On Feb. 10, the Department of Revenue will discuss problems with the current progressivity formula, which Parnell and oil and gas producers argue is at the heart of problems in the current state tax. The Senate committee will continue hearings through the week of Feb. 13. One proposal that will be offered by Sen. Tom Wagoner, R-Kenai, in the Resources committee will be a “tax holiday” for a certain quality of new oil produced in existing fields. The idea is to give existing producers new incentives to tackle economically marginal and technically difficult deposits known to exist in the producing fields, particularly heavy oil. “This would provide a way to get new oil into the trans-Alaska oil pipeline relatively quickly,” Wagoner said. Other incentives are aimed mainly at new exploration, and if discoveries are made it will take several years to get them into production. Meanwhile, oil fiscal consultant Pedro van Meurs is to appear before the Senate Finance Committee Feb. 13 to brief its members on how Alaska’s fiscal system compares with that of other oil producing regions, Sen. Bert Stedman, R-Sitka, said at the Feb. 7 briefing by senate leaders. Senate President Gary Stevens said the oil tax deliberations will consume substantial time in the Resources and Finance Committee, but he hopes to get the Senate’s bill to the House by mid-March, leaving 30 days for House members to consider the legislation. On other matters, Stedman, who as Senate Finance co-chair is in charge of the state capital budget in the Senate, said he and other senators are still sifting through requests for capital budget appropriations from state agencies, institutions and communities. Parnell has told legislators he will allow spending levels at about the same level as in the current year budget. “Our capital budget for this year is about $2.8 billion with roughly $1 billion of that federal, so this gives us an idea of what we have to work with,” Stedman said. “We’re working now to get a better number,” on what an actual capital budget request might be. Sen. Lyman Hoffman, D-Bethel, has responsibility for the operating budget as the other Senate Finance co-chair. In the briefing Hoffman said he has not set budget caps for the various budget subcommittees working with agencies, “but I am still urging restraint with the overall spending and the number of positions.” Hoffman said he has met with his counterpart on the House Finance Committee, Rep. Bill Thomas, R-Haines, to establish timelines. Thomas is co-chair of the House Finance Committee. Traditionally the House takes the lead in developing the operating budget first and then passing it to the Senate, while senators would have been doing homework for considering the House bill when it arrives, Hoffman said. Things work the other way on the capital budget. Traditionally the Senate develops it first and sends it to the House. House Finance members are meanwhile doing their homework on possible capital appropriations under the direction of Rep. Bill Stoltze, R-Chugiak, who also co-chairs the House Finance Committee. Meanwhile, a major issue under discussion among lawmakers is what can be done about a looming deficit in pension obligations to state, municipal and school district retirees. The deficit, now estimated at about $11 billion, is the difference between what the state’s current pension funds are expected to earn from investments and the obligations to retired public employees. The state manages pension funds for municipalities and school districts as well as state workers and problems in financial markets several years ago and mistakes made by the state in managing the funds have resulted in the current estimate of a deficit. Alaska’s deficit is large, but not as large or troublesome as public pension fund deficits in other states, however. Still, Sen. Bert Stedman and other legislators believe the state should use some of a projected budget surplus this year and some other state funds held in reserve accounts to make a large payment into the pension funds, reducing the estimated deficit. There is an existing plan to gradually pay down this deficit with the state helping municipalities and school make payments with a cost of about $600 million at present. Under the agreed plan the state’s responsibilities will increase to $1.2 billion a year or more over the next decade, which could be ruinous, crowding out other state programs, as oil production and state revenues decline, Stedman said. “It’s time to take a hard look at buying down this debt with an infusion of equity,” into the pension funds, Stedman said. Legislators are talking various numbers, from $1 billion to $4 billion, “but $1 billion won’t do it. To have a meaningful impact it will take $2 billion to $4 billion,” Stedman said. “If we don’t tackle this it will put the state in extremely uncomfortable position,” in a few years, he said. Unlike some other states, pension obligations to retirees in Alaska are guaranteed by Alaska’s constitution.  Parnell, however, is cautious about locking up some of the state’s current surplus, estimated at more than $13 billion not including the Alaska Permanent Fund. In comments in a briefing the previous week Parnell said he is concerned about putting reserve funds into the pension funds with the possibility of a downturn in revenues due to declining oil production. Another issue of concern to lawmakers this session is school funding. School districts are putting intense pressure on legislators to increase the Base Student Allowance, the formula under which state funds are distributed to schools, to offset inflation and increases in energy costs. Bills to increase the BSA formula are moving in the Senate are were before the Senate Finance Committee Feb. 8. Another bill, to make changes in the way the state helps school districts pay for school buses, is also moving in the Senate. The House is so far more reserved on school funding, however. House Speaker Mike Chenault, R-Nikiski, has said he is uncomfortable with making changes in state formula funding with possible revenue shortfalls looming and would prefer one-time appropriations similar to grants to schools made last year to offset energy costs. Parnell has voiced similar concerns about increases in school funding. On another matter, the House Resources Committee began work Feb. 6 on a proposal to expand the authority of the Alaska Gasline Development Corp., a state corporation working on a 24-inch gas pipeline from the North Slope to Southcentral Alaska. Hearings on the bill, a new version of HB 9, were to continue Feb. 8. The AGDC was formed through legislation passed two years ago to pursue a smaller gas pipeline, to bring gas from the slope to Interior and Southcentral Alaska, in case a large 48-inch gas pipeline built to Canada through Interior Alaska stalls, which it apparently has. Changes proposed for AGDC would allow it to be a vehicle for the state to become a partner in a larger pipeline if one is built to a southern Alaska port and an liquefied natural gas plant, a proposal Parnell is pushing on North Slope producers as an alternative to the all-land pipeline to Canada. At the Feb. 6 hearings on the proposal members of Resources Committee expressed  concerns over parts of the bill, particularly exemptions from regulation by the Regulatory Commission of Alaska until investors’ debt is repaid, an issued raised by Rep. Bert Gardner, D-Anchorage. Rep. Mike Hawker, R-Anchorage, a cosponsor of the proposal along with House Speaker Mike Chenault, said one reason for the exemption is to avoid duplicate regulation by the RCA of the project. The regulatory commission retains authority to approve contracts to utilities for gas moved through the pipeline, and having authority over the pipeline itself would be duplicative, Hawker told the committee. ADGC president Dan Fauske said the provision is important to secure financing for the project. Any potential that the RCA could change tariffs for gas shipped through the pipeline after it is constructed, at least until investors’ capital is recovered, would scare off financial markets, Fauske said.

Profits drive cost of health care; hospitals hit back

Hospital operators in the state are sharply critical of a state consultant’s report highlighting profit margins at large private hospitals as a factor in driving up costs of medical care in the state. The report, by Seattle-based Milliman Inc., a respected health care actuarial firm, also said physician’s fees in Alaska are significantly higher than in other states, 60 percent above the average in a group of comparison states, mainly because of lack of competition. For commercial, meaning non-government, health care payers, the difference in physicians’ fees is 69 percent, Milliman said. The comparison was for physicians in private practice, not salaried physicians employed by institutions. Data from Washington, Oregon, Montana, Wyoming, Idaho and Hawaii were used in the study. Milliman also made comparisons to national averages. The Seattle-based firm was retained last year by the Alaska Health Care Commission, a state advisory task force that includes health care providers, to do a study comparing Alaska medical care costs with those in other states. Milliman found that hospital fees in Alaska in 2010, on average, were 38 percent higher than the comparison states, and that commercial hospital reimbursement, or payments by non-government employers, averaged 38 percent higher than the comparison states. However, Karen Perdue, director of the Alaska Hospital and Nursing Home Association, a trade group, said these comparisons must be looked at in the context that Alaska costs are on average 30 percent higher than costs in other states. Alaska Regional Hospital, a privately owned hospital in Anchorage, as well as the hospital and nursing home association were critical of Milliman’s methodology in parts of its study, particularly the comparison of hospital profits. They acknowledged that Milliman is a respected firm in the field, however. “Milliman is an excellent firm. We just have questions on their methodology,” said Perdue. On a statewide basis, Milliman said hospital margins, or profits, were 13.4 percent on average in 2010 compared to 5.7 percent in a group of comparison states. Margins for hospitals in urban areas were 16.2 percent on average, while margins of hospital in rural areas were similar to the comparison state average of 5.7 percent, the report said. The urban hospital average is mainly driven up by higher margins at two for-profit hospitals, Alaska Regional Hospital and Mat-Su Regional Medical Center, Milliman said in its report. Alaska Regional’s 2010 margin averaged 29.5 percent and the 2010 margin for Mat-Su Regional averages 25.8 percent, Milliman said. The average margins of nonprofit hospitals in urban areas for 2010 was lower, in comparison. Providence Alaska Medical Center’s margin was 13.7 percent; Fairbanks Memorial Hospital was 5 percent and Bartlett Regional Hospital in Juneau was 7.3 percent and Central Peninsula Hospital in Soldotna was 2.7 percent, according to the Milliman study. Annie Holt, CEO of Alaska Regional, said Milliman’s comparison of margins of the two large private hospitals with nonprofit hospitals was incomplete because it did not account for the fact that the private hospitals pay taxes and that there are differences in the way private and nonprofit hospitals allocate costs and do other accounting. “It’s not an accurate portrayal. Milliman presented this as an apples-to-apples comparison, but there are important differences,” Holt said in an interview. When the accounting differences are adjusted for and local and state taxes are included, so that a more complete comparison can be made, Alaska Regional’s margin for 2010 would be 12.5 percent, Holt said. Alaska Regional paid $3 million in state and local taxes in 2011, she said. In written comments made to the health care commission by the hospital and nursing home association said the consulting firm “did not take into account taxes paid by taxpaying entities. According to financial experts at HCA (Alaska Regional’s owner) the absence of this consideration overstates Alaska Regional’s reported margin by 58 percent.” There are other problems in the comparisons, some resulting from Milliman’s reliance on data required to be reported to the federal Centers for Medicare and Medicaid by hospitals: “Alaska Regional is more fully depreciated, which makes a difference in the profit statement. Losses on certain items cannot be deducted as they can for nonprofits. Shares-service platforms such as information technology support, supply chain and accounts receivable are not necessarily in the Alaska (Medicare) cost report and therefore comparisons may not be fully vetted by the Milliman approach,” in relying on data reported to Medicare, the association said in its comments. Although it is a nonprofit organization, Providence said it does pays taxes to the city of Anchorage. “We do not pay property taxes for our hospital facility, however, we pay taxes on all of the property in which we rent space to tenants. In 2010, Providence paid the city of Anchorage approximately $2.7 million in property taxes,” Bruce Lamoureux, chief executive for Providence Health and Services Alaska, said in written comments. “Additionally, our margin – the amount of money left over after we pay our bills – is substantially less than the average attributed to Alaska’s metropolitan hospitals in the Alaska Health Care Pricing Analysis (Milliman) report. “All of our excess revenue after expenses supports local facilities, technologies, community benefit and programs that aim to improve access and keep health care close to home,” he added. “We offer services available nowhere else in the state – often at a loss – to keep Alaskans close to home for care.” An example is Providence’s new Senior Care Center that provides primary care to elders on Medicare, which operates at a loss, he said. Deborah Erickson, executive director of the health care commission, said the Milliman study was not intended to be a financial analysis of the hospitals or of other providers, but only a broad look at many factors that affect medical costs in Alaska including health care utilitization rates, professional compensation and providers’ staffing ratios. However, “if the hospitals are challenging Milliman’s data we ask them to bring their own information to us,” Erickson said. “So far they haven’t done that.” Milliman’s study was focused on a range of factors that affect the cost of health care and health insurance. The hospital data did not include facilities operated by the military or the large tribal health associations, but some of the other data sets, such as for professional compensation, did include government health care workers. However, physicians in private practice were excluded in the professional compensation comparison and were compared separately. Edward Jhu, health care actuarial at Milliman who co-authored the study for the health care commission said his team focused on data reported to Medicare as well as other sources of information Milliman has access to, some of which are proprietary. Jhu said he wouldn’t comment on the criticisms of the hospitals or of using data filed with the Centers for Medicare and Medicaid, but said that hospitals are required to report data on operating margins for all patients including senior citizens on Medicare as well as care provided to other patients. “Alaska is not really unique in suffering high health care costs,” Jhu said in an interview. “But Alaska has geographic factors and a small population, which means costs will be higher than in other states.” Erickson said another key conclusion of the Milliman report was that hospital utilization rates in urban areas were about on par with hospitals in the comparison states. However, low volumes in rural hospitals contribute to high costs in those facilities, she said. Perdue, of the hospital association, said her group has questions about other parts of the Milliman study, particularly a conclusion that compensation for health care professional workers is about on par with the comparison states. “That doesn’t square with our members’ experience, or with data we see from other sources,” Perdue said.  For example, the Milliman study leaves out benefits for health care workers, which are higher in Alaska than the other states, she said. There are also questions about the utilitization rates, which Milliman said were about on par with the comparison states. Perdue said relying on Medicare data for this category can be misleading since many senior citizens go out of state for more complex medical procedures. “The subset of utilitization for Medicare-eligible may be on par, but that may not be the case for the population at large,” she said.

First FERC hearings on Watana hydro project planned

JUNEAU — Federal regulatory proceedings for the planned $5 billion-plus Watana hydro project on the Susitna River north of Anchorage are getting under way. The Federal Energy Regulatory Commission will conduct  “scoping meetings”  in March for the hydro project, which is being developed by the Alaska Energy Authority, a state agency. The meetings, planned for March 27 through March 30 in Anchorage, Wasilla, Talkeetna, Fairbanks and Glennallen, are the first step in a required federal Environmental Impact Statement for the project, AEA officials told a state legislative committee in Juneau Jan. 26. The Federal Energy Regulatory Commission is the lead federal agency on the EIS, and will be the agency conducting the hearings. Following the scoping meetings, the next step would be preparation of a draft EIS document followed by a final EIS and Record of Decision if the project is approved. On a separate regulatory track, FERC must also issue a federal certificate, a form of permit, for the project. AEA filed a Preliminary Application Document with FERC on Dec. 29 and anticipates filing a full application by the end of 2012, Wayne Dyok, Watana project manager for the Alaska Energy Authority, told the Energy Committee of the state House in the briefing.  An initial estimate of the project cost is $5 billon but Dyok said he expects to receive an updated cost estimate soon. The project would involve a 700-foot-high concrete dam at a location about 185 miles up the Susitna River from its mouth at Cook Inlet. It would create a lake 39 miles long by two miles at its widest, Dyok said. If it is built at the scale currently planned, it would have a capacity of 600 megawatts and generate 2.5 million megawatt hours of power annually, which would meet about half of the electricity requirement expected in the future for communities in Interior and Southcentral Alaska now connected to the regional power grid, Dyok said. On the current schedule, construction would get under way in 2017, project spokeswoman Emily Ford said. At its peak about 1,000 would be employed in construction but the average would be about 800 according to current estimates, Ford said. On its present schedule the Watana project would not be in operation until 2023. “We are still assessing the optimal size of the project and would have this at the time we file our formal application with FERC at the end of the year,” Dyok told the legislative committee. The project would be designed for expansion, most likely by raising the height of the concrete dam, he said. The power house for the dam would be built from the start with sufficient capacity for expansion, he said. The agency is also still considering different route options for a road and transmission line corridor that would be built to the site. One is a 44-mile route corridor from the Denali Highway south to where the project would be built. A second would be a 45-mile corridor east from the Alaska Railroad’s Chulitna station, on a route north of the Susitna River. A third, the Gold Creek corridor, would also extend from the railroad’s Gold Creek station east to the project, a distance of about 50 miles, with a route south of the Susitna River, Dyok said. The Denali corridor option would be a road from the Denali Highway at Mile 113.7. If this route is chosen it would require about 20 miles of the Denali Highway from the Parks Highway to be upgraded to handle heavy loads, Ford said. Watana is a scaled-down version of the much-larger Susitna River hydro project planned in the 1980s, which had involved two dams on the river. If the project is built it would generate electricity at a constant price for decades. Interior and Southcentral Alaska now depend largely on fossil fuels, mainly natural gas, oil and coal, for power generation, and the prices for natural gas and oil are subject to sharp swings. The state of Alaska conducted extensive studies in the 1980s for the large Susitna River project then planned, but dropped the project because of costs. It would have involved two dams, one at Watana and another upriver at Devil’s Canyon. The new version of the project involves just one dam at Watana and is smaller in scale. However, the AEA is now benefitting from a substantial amount of geotechnical work done in the 1980s that is still valid, Dyok said. That has reduced the amount of new geotechnical drilling needed, he said. Some new geotechnical drilling was done last summer, Dyok said. There also were a large number of environmental studies done for the earlier project that are valuable, although much of that information must be updated for the new EIS, he said. For example, federal definitions of wetlands have changed so that new wetlands mapping must now be done, Dyok told the committee. Last year the state Legislature appropriated $67 million, sufficient to fund planning and work on the FERC application through 2012, but more funding from the state would be needed to continue work after the application with FERC is filed late this year, Dyok said. If the project proceeds, the state would have to decide at some point whether to make a large equity investment in the project, Dyok said. This could involve an appropriation of several billion dollars. AEA’s current plan for financing is to pursue a model similar to that used for the Bradley Lake hydro project near Homer, where utilities in Southcentral and Interior signed long-term power purchase agreements. On the basis of those the Alaska Power Authority sold revenue bonds to pay for construction of Bradley Lake. However, the state made a direct investment in the project, which lowered the amount of bonds that had to be sold, reducing payments and the price of power the utilities paid. Today Bradley Lake hydro power is among the least expensive power available to the regional utilities, although coal-fired power, using coal from the Usbelli Mine in Healy, is also very reasonably priced compared with oil and natural gas.

Russian tanker, U.S. icebreaker out of Bering Sea ice

The Coast Guard Cutter Healy, an icebreaker, and the Russian tanker T/V Renda broke out of the Bering Sea icepack Jan. 29, just 10 days after leaving Nome and delivering 1.4 million gallons of fuel, a spokeswoman for Vitus Marine LLC said. Vitus Marine had contracted with Nome-based Sitnasuak Corp. to make arrangements for the Renda to deliver 1.4 million gallons of fuel to Nome, and for the Healy to break a path through ice for the tanker, according to Stacey Smith, spokeswoman for Vitus Marine. Ice conditions were difficult on the journey from Nome to the edge of the ice, a distance of more than 300 miles. Several times the Renda was halted in the ice, causing the Healy to have to circle back and break out a new channel. Mark Smith, Vitus Marine CEO, said the vessels encountered tremendous compression of the ice from winds and currents, and conditions were difficult at certain points such as along the north side of Nunivak Island. “The Arctic Ocean is like a big ice machine spilling down through the Bering Straits, and the ice tends to pile up on the north side of islands,” Smith said. A complication was that as soon as the Healy would break a path, the ice would close in behind it before the Renda could reach the open channel. Another complication on the outbound trip was that the Renda, having unloaded its fuel, was riding higher in the water and had less momentum to get though tight spots in the ice, Smith said. However, the tanker was able to adjust its speed faster, responding to changes in speed by the icebreaker, he said. The Renda is now en route to its base in Vladivostok, in the Russian Far East, Smith said. The Healy is on the way to its homeport in Seattle. Going to and from Nome, the Healy and Renda had broken through about 800 miles of icepack. The trip was organized after Nome’s scheduled late-fall delivery of fuel by barge was interrupted by a major Bering Sea storm. “Throughout this historic journey the Coast Guard has benefited from federal, state and local partnerships to deliver the critical fuel supply to the city of Nome,” said Rear Adm. Thomas Ostebo, 17th Coast Guard District commander. “Our number one priority in the last leg of this evolution is to continue ensuring the safety of both crews and the safety of the environment.” Vitus CEO Smith said, “we strive to bring creative solutions to our customers, and completing this fuel delivery to Nome offers an excellent example of how real teamwork can yield results.”

Nenana basin could hold oil as well as gas

The Nenana Basin west of Fairbanks could hold oil as well as natural gas, officials with the state Division of Geological and Geophysical Survey and Doyon Ltd., which is leading exploration company in the region, told a state legislative committee in Juneau on Jan. 30. An analysis of source rock samples from the Nunivak No. 1 exploration well drilled in the basin two years ago by Doyon and several partners, along with data from new gravity surveys and coal samples, show the presence of substantial levels of hydrogen, an indicator that oil as well as gas is present in the Nenana Basin. “This has changed the prospectivity of this basin,” said Bob Swenson, director of the state Division of Geological and Geophysical Surveys. New data indicates sediments in the basin could be much deeper than previously thought, as deep as 25,000 feet, Swenson said, a depth sufficient for the basin to generate oil.  Jim Mery, vice president of lands for Doyon Ltd., a Fairbanks-based Alaska Native regional corporation leading exploration in the region, said he believes the basin could hold 300 million barrels to 1 billion barrels of recoverable oil, most likely spread across several accumulations. “We don’t expect these to be giant fields,” he said. Swenson and Mery spoke before the House Resources Committee in Juneau Jan. 27. Doyon’s primary interest is gas as a fuel for local markets, Mery said, but the presence of oil as well as gas in the basin means any gas that might be discovered could hold gas liquids like propane, which could be an important fuel for small villages in Interior Alaska. Doyon holds exploration rights to 515,000 acres of state lands in the area, along with 43,000 acres of its own private lands that are nearby, although those lands are not included in the current exploration program. The Fairbanks company and several partners drilled a $20 million exploration well in 2009 in the southern part of the basin, and while no commercial discovery was made, the presence of an operating petroleum system in the basin was confirmed, Mery said. Interpretation of the well information along with new gravity surveys and seismic data that was acquired has now led Doyon to explore in the northern part of the basin, which is now thought to have deeper sediments and better chances for a discovery. This week Doyon and its partner, independent Rampart Energy of Denver, began a 125-mile two-dimensional seismic survey in the area, the data from which will be used to plan new drilling. The work will be completed in March, Mery said. SA Exploration, an Anchorage-based geophysical company, has been contracted to do the work, which will employ 30 to 60 people, Mery said. Doyon has been engaged in Nenana Basin exploration for 10 years and has had several setbacks, including two changes in state tax laws that scared off potential partners and difficulties in acquiring a drill rig suitable for the well. Rampart Energy is still a partner but two other partners involved earlier, Usibelli Energy and Arctic Slope Regional Corp., both Alaska firms, are not participating in the latest seismic work. While the area is very prospective, Mery said there are also commercial challenges. The closest market is Fairbanks, where fuel oil is now used for space heating and power generation, but Doyon’s plans to serve Fairbanks with could be affected by a plan by Golden Valley Electric Association and Flint Hills Resources, operator of a local refinery, to build facilities to truck liquefied natural gas from the North Slope. However, a longer-range plan for the state to assist construction of a gas pipeline from the North Slope to Southcentral Alaska could provide Doyon with other markets for Nenana Basin gas.

First hearings hydro project planned for March

JUNEAU — The Alaska Energy Authority and the Federal Energy Regulatory Commission will conduct  “scoping meetings” in March for the planned $5 billion-plus Watana hydro project on the Susitna River north of Anchorage. The meetings, planned for March 27 through March 30 in Anchorage, Wasilla, Talkneetna, Fairbanks and Glennallen, are the first step in a required federal environmental impact statement, or EIS, for the project, AEA officials told a state legislative committee in Juneau Jan. 26. The Federal Energy Regulatory Commission is the lead federal agency on the EIS, and will be the agency conducting the hearings. Following the “scoping” meetings, the next step would be preparation of a draft EIS document followed by a final EIS and record of decision, if the project is approved. On a separate regulatory track, FERC must also issue a federal certificate (a form of permit) for the project. AEA filed a Preliminary Application Document with FERC on Dec. 29 and anticipates filing a full application by the end of 2012, Wayne Dyok, Watana project manager for the Alaska Energy Authority, told the Energy Committee of the state House in the briefing.  An initial estimate of the project cost is $5 billon but Dyok said he expects to receive an updated cost estimate soon. The project would involve a 700-foot-high concrete dam at a location about 185 miles up the Susitna River from its mouth at Cook Inlet. It would create a lake 39 miles long by two miles at its widest, Dyok said. If it is built at the scale now planned, it would have a capacity of 600 megawatts and generate 2.5 million megawatt hours of power annually, which would meet about half of the electricity requirement expected in the future for communities in Interior and Southcentral Alaska now connected to the regional power grid, Dyok said. On its present schedule the Watana project would not be in operation until 2023. “We are still assessing the optimal size of the project and would have this at the time we file our formal application with FERC at the end of the year,” Dyok said. The project would be designed for expansion, most likely by raising the height of the concrete dam, he said. The powerhouse for the dam would be built from the start with sufficient capacity for expansion, he said. The agency is also still considering different route options for a road and transmission line corridor that would be built to the site. One is a route corridor from the Denali Highway south to where the project would be built. A second would be east from the Parks Highway near the Chulitna River bridge, and on a corridor north of the Susitna River. A third, the “Gold Creek” corridor, would also extend from the Parks Highway east to the project, but south of the Susitna River, Dyok said. Watana is a scaled-down version of the much-larger Susitna River hydro project planned in the 1980s which would have involved two dams on the river. If the project is built, it would generate electricity at a constant price for decades. Interior and Southcentral Alaska now depend largely on fossil fuels, mainly natural gas, oil and coal, for power generation, and the prices for natural gas and oil are subject to sharp swings. The state of Alaska conducted extensive studies in the 1980s for the large Susitna River project then planned, but dropped the project because of costs. It would have involved two dams, one at Watana and another upriver at Devil’s Canyon. The new version of the project involves just one dam at Watana and is smaller in scale. However, the AEA is now benefitting from a substantial amount of geotechnical work done in the 1980s that is still valid, Dyok said. That has reduced the amount of new geotechnical drilling needed, he said. Some new geotechnical drilling was done last summer, Dyok said. There were also a large number of environmental studies done for the earlier project which are valuable, although much of that information must be updated for the new EIS, he said. For example, federal definitions of wetlands have changed so that new wetlands mapping must now be done, Dyok told the committee. Last year the state Legislature appropriated $67 million, which is sufficient to fund planning and work on the FERC application through 2012, but more funding from the state will be needed to continue work after the application with FERC is filed late this year, Dyok said. If the project proceeds the state will have to decide at some point whether to make a large equity investment in the project, Dyok said. This could involve an appropriation of several billion dollars. AEA’s current plan for financing is to pursue a model similar to that used for the Bradley Lake hydro project near Homer, where utilities in Southcentral and Interior signed long-term power purchase agreements. On the basis of those the Alaska Power Authority sold revenue bonds to pay for construction of Bradley Lake. However, the state made a direct investment in the project, which lowered the amount of bonds that had to be sold, reducing payments and the price of power the utilities paid. Today Bradley Lake hydro power is some of the least expensive power available to the regional utilities, although coal-fired power, using coal from the Usbelli Mine at Healy, is also very reasonably priced compared with oil and natural gas.

Hearing on coastal management initiative planned by Legislature

JUNEAU – The Judiciary committees of both the state House and Senate will conduct a joint hearing on a pending ballot proposition to reestablish a state coastal management program, Rep. Carl Gatto, R-Palmer, chairman of the House Judiciary Committee, said in a Jan. 23 briefing by House leaders. The hearing is required by law, Gatto said. Statue statutes require the Legislature to conduct a hearing on a possible ballot proposition within 30 days of petitions for a citizen initiative being turned into the Lieutenant Governor. No date has yet been set for the hearing but it will allow for public testimony, Gatto said. The Alaska Sea Party, a group pushing the ballot proposition, turned in petitions with nearly 36,000 signatures on Jan. 17, the first day of the 2012 legislative session. Lt. Gov. Mead Treadwell must certify the initiative within 60 days of the petitions being turned in, a process to ensure that signatures are valid and that the petitions were gathered in different parts of the state as required by law. Petition organizers appear to have surpassed the minimum total requirement of about 25,000 signatures, although those must still be validated, but House Minority Leader Beth Kerttula, D-Juneau, said there are concerns whether the organizers, led by municipal officials including Juneau Mayor Bruce Botelho, were able to meet another requirement, getting the required number of signatures in 30 out of the 60 state House districts. In the same briefing Rep. Alan Austerman, R-Kodiak, said the House Majority has not yet taken a position on the ballot proposition, and will wait until the final decision on certification is made by the lieutenant governor. This will not prevent individual legislators from introducing bills to reestablish the program, said Austerman, the Majority Leader in the House. Under state law the Legislature can pass a bill enacting a law substantially similar to that proposed in a pending ballot proposition, resulting in the removal of the proposition. If no law is enacted and the ballot proposition passes in the election it goes on the books as law. The Legislature can amend a law enacted by a ballot proposition but it must generally wait two years, although there is a case where the Legislature made substantial changes in a state minimum wage law enacted by ballot proposition one year after it was passed by voters. A state court upheld the Legislature’s action in that case. Gov. Sean Parnell and major resource industries in the state like petroleum and mining firms are concerned about the ballot proposition because it would reenact the coastal zone management program, which “sunset,” or ended, last June, in a form existing prior to major structural changes made by former Gov. Frank Murkowski. The worry is that, reestablished in that form, the program would impose a complex new set of permit requirements on resource development projects that would be controlled, or at least heavily influenced, by coastal communities. If the proposition goes to the ballot and is passed by voters, it may be difficult to change once on the books. Legislators are generally reluctant to make substantial changes in laws enacted by citizen votes, particularly if the public vote is substantially in favor.

Lawmakers dig into agency budgets; oil tax, education top issues

JUNEAU — State legislators were engaged mostly in overviews of state agency budgets and programs as they ended the second week of their 2012 session, but there was plenty of discussion in the background on key issues that are shaping up. Education funding, coastal management and oil and gas taxes are likely to be the flash points for lawmakers in the weeks ahead. But one controversial issue likely to take up a lot of time, at least near-term and in the House Judiciary Committee at first, is cell phone regulation, according to committee chairman Rep. Carl Gatto, R-Palmer. The committee’s immediate focus is on a bill to make technical changes to legislation banning texting while driving which a Fairbanks judge said is unclear. Many legislators are pushing for a complete ban on cell phones in vehicles, and Gatto is concerned that the bill, which now involving only texting, could be amended to do that. A complete ban isn’t a good idea, Gatto said, and previous proposals to do that have faced tough going in the Legislature. That’s because too many small businesses need to contact technicians en route to a job or sales representatives headed for meetings, and parents want to be able to take calls from children, Gatto said. There are also legal ambiguities that arise with new digital technology. For example, technically texting occurs when a cell phone is used because the device must be turned on and off and otherwise manipulated. Lawmakers must be wary of these and craft language carefully, he said However, there are serious concerns about cell phone use in vehicles, Gatto acknowledged. “There’s too much looking down in a car or truck that may be travelled 88 feet per second,” he said. On other matters, House Speaker Mike Chenault, R-Nikiski, and Mike Hawker, R-Anchorage, said they will introduce a bill making changes to the enabling statute for the Alaska Gasline Development Corp. that would allow the state corporation to become a partner in a larger gas project. Rep. Dan Saddler, R-Eagle River, announced that he is working on a bill to allow establishment of business enterprise zones around military installations. The bill is being modeled on similar enterprise zones established in other states where installations are being downsized. They are created to offer special incentives for businesses locating in the zones to offset any loss of business or local employment due to the reduction in military forces, Saddler said in a weekly briefing by the Republican-led House Majority. On the contentious issue of oil and gas taxes, the first hearings of the 2012 session were scheduled for Jan. 27 on Senate Bill 167, a bill “decouping” oil and gas production taxes. Senate Finance co-chair Sen. Bert Stedman pushed a similar bill through to the House floor two years ago where it failed at the last minute. Stedman argues state taxes on natural gas and oil are linked in a way that will cause a significant reduction in oil revenues if a gas pipeline is built and gas production begins. Gov. Sean Parnell has said that he will consider making changes to the gas production tax in the 2013 legislation session if North Slope producers come to agreement on a gas pipeline and liquefied natural gas export project, and Stedman feels the “decoupling” of the two must take place first. As the state Senate readies its own proposals for oil production tax changes, a response to Parnell’s House Bill 110, which reduces the oil tax, Stedman’s decoupling proposal is very likely to be part of the Senate’s proposals. Senate leaders have indicated, meanwhile, that their oil tax proposal will be tied to commitments by oil producers to invest in new oil development. The lack of such a link to investment is a major point of criticism of HB 110, which has passed the House and is now in the Senate. Meanwhile, Democrats in the state House renewed their criticism of the state administration’s handling of oil and gas tax issues, particularly the lack of information about generous tax credits the state now offers for new industry investment and exploration. In a Jan. 25 briefing by House Minority Democrats, Rep. Berta Gardner, D-Anchorage, said she estimates the state has allowed industry to offset $3.5 billion in state taxes through investment tax credits allowed in the production tax law. However, the Department of Revenue is behind on its audits of industry tax returns, so there is a serious lack of information on what these investments are and what benefits the state is getting. Gardner said she had been promised a report from the revenue department on the status of the audits. “How can the Legislature endorse the governor’s jaw-dropping giveaway of revenues with such a shameful lack of information,” on what the tax credits are being used for, she said. Gardiner said there are reasons why the audits are taking a long time. The department has been grappling with antiquated computer systems and lack of personnel, although the Legislature did approve more funding for auditors. There have also been some uncertainties caused by regulations drafted for the production tax after it was changed to a net profits tax in 2006, she said. “There are undoubtedly some legitimate reasons for why the audits are taking so long, but we need to know,” what the problems are, she said. Gardner has introduced two bills, HB 262 and HB 263, which would require an industry applicant for tax credits to state what the investment was and how many Alaska jobs were created. Rep. Dave Guttenberg, D-Fairbanks, said in the same briefing by Democrats that he wants to know whether the investments funded by state tax credits are being made in new oil field development, for projects in existing fields, or in maintenance. Funding for schools will be an issue in the 2012 session as it has almost every year. School districts received increases over three years to the Base Student Allocation, or BSA, a formula used in state funding for local schools, but that ended two years ago. Last year Sen. Lyman Hoffman, D-Bethel, succeeded in getting an appropriation to help schools offset rising fuel costs, which has the effect of freeing up money for teaching and other activities. This year school districts are pushing to have the BSA adjusted automatically for inflation so that schools don’t have to reduce programs to deal with rising costs including for fuel. Kerttula, the Democratic House Minority Leader, said the Juneau school district, which is part of her constituency, had to send layoff notices to 66 teachers because of a looming deficit in the local school budget. “We’re hearing from parents about this. It’s unacceptable for a state with this much wealth,” Kerttula said. Despite that, even the current amount of state funds going to schools, about $1.2 billion per year, isn’t getting desired results, Rep. Dave Guttenberg said. Guttenberg is on the House Finance Committee. In budget briefings to that committee by the Department of Education and Early Development Jan. 23, Guttenberg learned that Alaska is still woefully behind in achieving acceptable reading levels by third graders. “We’re 46th in the nation in reading ability at the third grade,” he said. The key to solving this is more money invested in early preparation for schools for children. State education commissioner Mike Hanley told the House Finance Committee that the state has gotten very good results in a multi-year pilot program of pre-school preparation, and hopes the program can be expanded.

Report: Alaska health care industry booming

The health care industry is booming in Alaska, and growth will continue. Health care providers pay a $1.53 billion annual statewide payroll with nearly $1 billion of that in the Anchorage and Matanuska-Susitna regions of Southcentral Alaska. Jobs in health care totaled 31,800 in 2010, up 46 percent in 10 years. The growth rate is five times the rate of the state’s overall population, and three times that of all other sectors of the economy. New data on health care employment, payroll and its rising cost comes from a report recently released by the Alaska State Hospital and Nursing Home Association, an industry trade group. The report highlights the contribution health care makes to the state’s economy – $7.2 billion in 2010 – but it doesn’t shy away from the industry’s problems. Uncompensated care and underpayments cost Alaska hospitals $410 million in 2010, 21 percent of their total costs, a rate almost twice as high as the national average, according to the report. While much of that was underpayment – Medicare and many Medicaid payments are below hospitals’ actual costs – but $178 million was uncompensated care of patients who just couldn’t pay the bills, the report said. Karen Perdue, the association’s president, said those unpaid costs get shifted to others and show up in higher bills for those who can pay. It’s one reason why hospital costs are 38 percent above those in a group of comparison states, mostly in the Pacific Northwest, Perdue said. The bulk of health care employment, 51 percent of the jobs are in 13 hospitals and a large number of nursing homes that operate across the state. Hospitals employ most of these, 40 percent of all health care employment. What’s also important is that hospitals and medical clinics operate in different regions of the state, which means that that employment and local purchasing is spread statewide. “It’s easy to see why Alaskans often don’t think of health care as an industry. But it is, and a very strong one. Hospitals are major employers,” Perdue said. “It’s like a fire station, open 24 hours every day of the year. You love to know it’s there, and you want it staffed with the most competent people and the best equipment. And, you hope you never have to use it,” she said. Hospitals and other health care providers stimulate the regional economy in a number of ways other than employment. Construction spending for major Alaska hospitals alone was estimated at $305 million for 2011, the hospital and nursing home association said in its report. Major projects were under way in Nome, Anchorage, Fairbanks, and planned soon in Wrangell. As large employers, hospitals are a magnet for stimulating nearby business development including physicians’ offices and clinics, pharmacies, medical supply outlets and hotels. In Anchorage, for example, the growth of a community of medical offices and clinics in the Lake Otis Parkway area in midtown Anchorage is related to the presence of the nearby Providence Hospital complex and Alaska Regional Hospital that is not too distant. Another example: NANA Regional Corp. and its hotel partner, Marriott, built a new Marriott on Tudor Road mainly for families of patients visiting the nearby Southcentral Foundation clinics and Providence, both nearby. The hotel does a good business. Health care does cost more in Alaska than in other states, however. In a study finalized in late 2011, the Alaska Health Care Commission found Alaska hospital costs 38 percent above those in an average of six comparison states, which included Washington, Oregon, Idaho, Wyoming, North Dakota and Hawaii. Physician costs in Alaska were 60 percent higher than the average in the comparison states, according to the health commission’s study, which was done by Milliman Inc., a consulting firm. Perdue said these comparisons must be viewed in relation to other costs in Alaska. For example, the general cost of living is 30 percent over that in the six states used for comparison, she said. The cost of construction of medical facilities is significantly higher in Alaska, along with utility costs. For rural hospitals and clinics the cost of travel for technicians maintaining equipment imposes a heavy burden, Perdue said. There are also changing demographics. Alaska is still a young state compared with other states but the population of senior citizens, who typically require more care, is increasing. Also, obesity in Alaska is increasing, as it is in other states. Obesity is linked to a variety of health problems including diabetes and cardiopulmonary diseases. The uncompensated and undercompensated care cost is a huge burden on all hospitals. “By law, hospitals cannot turn away anyone needing care, even if they are unable to pay,” Perdue said. Medicare payments are higher in Alaska than in most other states but they still often fall below the actual cost for hospitals in providing service. Medicare payments, for senior citizens, are far below the actual cost of care by hospitals, about 74 percent on average.

Tanker and icebreaker head home from Nome

The transfer of 1 million gallons of diesel and 300,000 gallons of gasoline from a Russian tanker to onshore storage tanks in the iced-in city of Nome, Alaska has been completed, U.S. Coast Guard officials said Friday. The tanker T/V Renda and the U.S. Coast Guard Cutter Healy, a medium icebreaker, are preparing to depart Nome today. The Heavy must cut a path through about 360 miles of sea ice to reach open waters of the Bering Sea, Coast Guard spokesman David Mosely said. This is the return trip for the Healy and the Renda. The Healy assisted the tanker through the ice to Nome earlier. The Healy was able to get the tanker within 500 yards of shore in thick shore-fast ice, and worked to freeze the tanker in so that it would provide a stable platform for the fuel delivery. A hose was stretched 500 feet across the ice to onshore storage tanks operated by a local fuel delivery company. “The assistance for the tanker delivering of fuel to Nome was only part of the Healy’s mission. Now we have to get the tanker and the Healy out of the ice zone to open water,” Mosely said. Read Admiral Thomas Ostebo, the Coast Guard’s District 17 Commander, said, “Throughout this mission our Coast Guard crews, partners and industry partners at sea and ashore have been dedicated to insuring a safe transit for the Renda to Nome and completing a safe fuel delivery.  I am proud of the way our partners and the marine industry worked as a collaborative team along with the Coast Guard o get the needed fuel to the residents of Nome,” Ostebo said in a statement. Sitnuasuk Corp., which owns the local Nome fuel company, had contracted with Vitus Marine, an Alaska marine transportation company, to arrange for the delivery of fuel by the Renda, which is based in Vladivostok. Nome was caught short of fuel for the winter when a scheduled barge delivery of diesel and gasoline was unable to reach the town because of a major November storm in the Bering Sea.

State of the State: Parnell lays out 2012 benchmarks for LNG deal

In his annual State of the State address, Alaska Gov. Sean Parnell laid out benchmarks he hopes North Slope producers will reach in 2012 on a possible deal to build a natural gas pipeline and liquefied natural gas project. Parnell spoke to a combined audience of the state House and Senate in the state capitol in Juneau Wednesday night. If the companies meet the benchmarks, Parnell committed to introduce a needed agreement on natural gas production taxes to the 2013 state legislative session. The companies say a deal on fiscal terms including taxes and royalties are needed before a major gas project can be pursued. Parnell had met with the CEOs of the three major slope producers in Anchorage Jan. 5 and urged them to work together on a large LNG project in lieu of an all-land pipeline now being pursued by TransCanada Corp. and ExxonMobil Corp. BP's Robert Dudley, ConocoPhillips' James Mulva and ExxonMobil's Rex Tillerson met with Parnell. In his speech to legislators Parnell said he hoped to see the three companies come together in an agreement to pursue an LNG project by March 31, on a plan to integrate work the state has done with a 24-inch in-state pipeline from the Slope, and by Sept. 30 a schedule for a new, large gas project. An LNG project, aimed to serve export markets, would involve a large-diameter pipeline from the Slope to a southern Alaska port, either Valdez, the present terminus of the Trans-Alaska oil pipeline, or the Kenai Peninsula, near Anchorage, where ConocoPhillips now operates a small LNG plant supplied by Cook Inlet gas fields. Parnell said he is also pushing for quick resolution to a lawsuit over state leases at Point Thomson, east of Prudhoe Bay on the slope, which all parties agree must be resolved before a major gas deal can move forward. Point Thomson holds an estimated 8 trillion cubic feet of gas, a sizeable portion of the 35 tcf of gas reserves identified on the Slope that would support a gas pipeline. “In the last 24 hours I spoke with the CEOs of all three producing companies to ask if there has been progress on reaching agreement on Point Thomson, and I was told there was not,” Parnell told legislators in his speech. If agreement does not come in the next two weeks Parnell said the state would  “vigorously” argue the state's position in the dispute in a hearing planned Feb. 8 by the Alaska Supreme Court. The case involves a claim by the state that Point Thomson lease-owners, which include ExxonMobil, BP, Chevron and CononoPhillips, did not abide by work commitments. Based on the claim the state moved in 2007 to terminate the Point Thomson Unit. The lease-owners sued and the case has been winding its way through the state courts since, and is now before the state's high court. The state has negotiated a possible settlement with ExxonMobil, the operator of the unit, but BP, Chevron and ConocoPhillis, the other major leaseowners, have not agreed to the deal. Alaska Senate President Gary Stevens says many of Parnell's priorities fit with those of his bipartisan coalition. Stevens says Parnell is right that this will be an important legislative session, particularly as it pertains to oil and gas and trying to find meaningful solutions to spur production. But he says there are problems with Parnell's oil tax-cut plan and says he'd like the Senate to craft its own tax bill. House Minority Leader Beth Kerttula says her Democratic caucus wants to ensure Alaska gets its fair share from a tax regime and will stand against giving away the state's resources. The Associated Press contributed to this story.

Gov. Parnell says he's upbeat about state's economy

Gov. Sean Parnell presented an upbeat picture of Alaska’s prospects, but also highlighted the state’s immediate challenges in a keynote address to the Alaska Support Industry Alliance’s annual Meet Alaska conference in Anchorage Jan. 6. Parnell first applauded the Alliance and its industrial service and support company members. “You are in the business to do what Alaskans have done from the beginning: maximize opportunity, develop private enterprise,” the governor said. “Every day you accomplish what no government can do. You generate an authentic GDP. And I don’t mean ‘Government Dependent Programs.’ I mean an honest-to-goodness Alaska GDP based on free enterprise. You make that happen every day.” For now, things are looking positive for the state. “In case there’s any doubt, I want to make something very clear: Alaska is open for business. Today’s newspapers let us know we’ve had the third straight year of job growth in Alaska. Yesterday (Jan. 5) we saw further evidence that others are taking notice that Alaskans will work together to grow our economy. Three CEOs from major oil companies met here in Alaska to talk about a gas line, to talk about alignment,” Parnell said. “It was the first time these three CEOs have been together in Alaska. Our discussions were very productive, and I was very encouraged. Also, it was announced that our state bond rating was upgraded to AAA. In this world economy, think about what that means. Alaska’s business environment is getting better.” Still, there are troubling times ahead, he said. “In 2012, my administration will not yield in our effort to directly address the most pressing economic issue facing our state – the decline of oil coming through the Trans-Alaska Pipeline System. TAPS production is an economic survival issue for Alaska,” Parnell said. To address this problem, the governor’s plan to increase oil production from its current rate of about 600,000 barrels per day back to 1 million barrels per day was developed last year out of discussions with business and community leaders. “We sat down, talked with business and community leaders across the state, and we heard their concerns. We carefully listened to these ideas,” Parnell said. “We said we were going to put more oil leases up for sale. We did so in December, during the annual (North Slope areawide) lease sales. We said we were going to challenge federal foot-dragging, and we do so at every turn. Alaska’s voice has rung loud and clear. “Finally, we are seeing Washington loosen its death-grip on the NPR-A and OCS,” Parnell said, in reference to the federal government’s recent approvals of a permit for a key bridge crossing providing access to the National Petroleum Reserve-Alaska, or NPR-A. “The federal agency approval is for CD-5, which will mean a bridge over the Colville River that allows access to leases within the NPR-A,” Parnell said. There are also recent approvals for exploration plans for Shell’s offshore exploration. “Progress is slower than we’d like, and some of Washington’s decisions in this regard have been disingenuous. But there has been change. We’re thankful for it, and we’re going to keep on fighting,” the governor said. Parnell laid our some action items as the Legislature opens its 2012 session in Juneau. “We will restructure our oil tax system to increase production. We will build roads to resources, and you’ll note in my 2013 budget we have funds for a road to Umiat and the Ambler District. We will continue to make the case for a vibrant, business climate and a growing economy,” the governor said. Looking at the long term, Parnell said the state will reach the goal of having 1 million barrels per day in 10 years. And noted there will be a gas line, he said. Infrastructure investment is a key part of the plan, he added. “That means Roads to Resources. Transportation infrastructure. Maintenance of public facilities. And there’s a $350 million bond package I propose putting before Alaska voters to upgrade ports in communities from Ketchikan to Anchorage to Emmonak,” Parnell said. The state’s investment in a 600-megawatt hydro project in Watana, on the upper Susitna River, is also part of the plan, he said. Susitna-Watana means, “massive amounts of hydro power that will lower the cost of doing business all across the Railbelt, and grow jobs during the construction phase,” the governor said. There is other recent good news, most notably the fact that Sen. Lisa Murkowski introduced a bill to move permitting for offshore drilling under the Clean Air Act from the Environmental Protection Agency to the Interior Department. And, “we’ve got a great turn-around story in Cook Inlet, with new players coming in,” Parnell said. “LNG shipments have continued from Nikiski, in response to a changing market around the Pacific Rim. We’re seeing more exploration on the North Slope than we have for a few years. “Mining – now there’s a strong trend for 2012,” he added. “Red Dog, Greens Creek, Usibelli, all accounting for massive increases in our exports. Donlin (gold mine) is closer to production, and numerous other mines of all sizes are in advanced stages of development. We’re launching our state’s rare earth element mining sector.” According to the Alaska Miners Association, one-third of all mining exploration in the U.S. is happening in Alaska. And last year exploration in Alaska topped $260 million.

Slope producers lay out scenario with proposed oil changes

North Slope oil producers have laid out their vision of what’s possible with new oil development if the state Legislature makes changes in the state’s oil production tax. They’ve also highlighted the problems they face under the status quo. BP Exploration (Alaska) Inc. President John Minge said he believes there is about $5 billion in projects the producers could tackle if lawmakers pass Gov. Sean Parnell’s House Bill 110 or something like it this year. Many of the projects are within the existing producing fields. Minge also outlined one new project BP is testing this year, in a layer of tight oil-bearing rocks in the Prudhoe Bay field that could add up to 200 million barrels of new oil reserves. However, the project is economically challenged and needs the tax change to make it happen, he said. Minge spoke Jan. 6 at the Alaska Support Industry Alliance’s Meet Alaska conference in Anchorage. Mary Ann Kah, ConocoPhillips’ chief economist, told Meet Alaska that her company’s Alaska production is the highest-cost oil in its worldwide portfolio of producing assets. On average, it costs ConocoPhillips $15.48 to produce a barrel of oil in Alaska compared to $12.32 per barrel in Canada, $10.24 per barrel in the Lower 48 and $10.15 per barrel in the North Sea. The company’s production in the Middle East costs $6.98 per barrel, Kah said. The figures for operating costs come out of ConocoPhillips’ financial reports and do not include taxes, capital investments or transportation costs. ConocoPhillips has lower costs than some other producers because it has the benefit of long-established infrastructure. Kah said Alaska’s challenges include high costs and the probability of only modest-sized oil discoveries, which combined with the high state tax rate effectively puts a damper on investments in new oil. Citing data from consulting firm Wood Mackenzie, Kah told Meet Alaska that from 2000 through 2009 the average size of new commercially viable new oil discoveries in Alaska was about 80 million barrels. In Venezuela — which has a marginal tax rate comparable to Alaska’s — it was about 380 million barrels, Kah said. In Kazakhstan, another producing country with comparable taxes, the average-size new discovery was substantially higher over the nine-year period. “Kazakhstan has huge prospectivity. Investors there can afford the heavy tax,” Kah said. In his talk, Minge laid out BP’s problems with declining production and rising costs. In 2006, BP spent about $1.2 billion in operating the North Slope fields it manages and produced 82 million barrels of oil that year. In 2012 the company will spend $1.6 billion for operations and produce 56 million barrels, he said. “It is costing us one-third more to produce one-third fewer barrels, and not all operations costs are deductable from the state tax,” Minge said. The figures cited are for operations only and do not include dollars spent in capital investments. Ironically, the boom in industry activity outside Alaska has driven up costs for the companies here in terms of specialized materials, supplies and services. “Engineers can work anywhere. Our costs are being set by the global economy,” Minge said. Although it’s an encouraging development, the surge of exploration drilling on the Slope this winter, paid for partly by state of Alaska exploration tax credits and direct payments, has also added to the strain on drilling rigs and services, and is helping drive up costs for the existing field operators, he said. As for the producing companies’ capital costs, a good share of those are for projects in the fields related to maintaining existing production, and not on finding new oil, Minge said. “Only one in six of our North Slope employees work on projects related to developing more oil. The rests are in operations, maintenance and repair,” he said. Despite those problems, there are bright prospects for the North Slope if the economic environment improves, Minge said. The project to test production from the tight sandstone rock of the Sag River formation is an example of one possibility. BP has approved a five-well program to test production from the Sag River, a shallow layer of tight rock overlying the western part of the large producing Prudhoe Bay and Milne Point fields, Minge said. If the results are positive, it could result in a 200-well program and 200 million barrels of new oil reserves, he said. “We need to crack the technology problems first, but if there are also improvements in fiscal terms,” the Sag River could become profitable to develop, Minge said. In a nearby project, BP also is testing methods of producing heavy oil from the Ugnu, a large potential resource with an estimated 22 billion barrels of oil in place. The company had encouraging results with the first test well, which produced at a sustained rate of 650 barrels per day for 117 days. Four more test wells are planned. “What has encouraged us is that the (first) well is producing at three times the rate of heavy oil wells in Canada. The bad news is that costs are 10 times the cost of wells in Canada, so we have some work to do on cost reduction,” Minge said. The first test production well is off-line now for technical work but is expected to be restarted soon. Minge said new production techniques developed for heavy oil also can be applied to large viscous oil resources known on the Slope, some of which is being produced now. There are about 11 billion barrels of in-place viscous oil resources in formations like West Sak and Schrader Bluff in the Kuparuk and Milne Point fields. “If we can get just 10 percent of this it would be wonderful,” Minge said. The meeting in Anchorage Jan. 5 between the CEOs of the major North Slope producers and Gov. Sean Parnell that included Robert Dudley, BP’s chairman, was significant, Minge told Meet Alaska. “It would not have happened if Alaska wasn’t very important to all three companies,” he said. While a major focus of that meeting was on natural gas, “we must remember that gas is several years out. For the next 10 years what’s very important is sustaining our oil production,” Minge said. But if the three companies and the state can find alignment, many things are possible. “Out of alignment comes investment,” he said.


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