Tim Bradner

Oil industry leaders offer update on Sakhalin work

YUZHNO-SAKHALINSK, Russia - A major Sakhalin oil and gas project being led by ExxonMobil Corp. has achieved its first major goal - recovery of initial capital costs - and is now gearing up for a significant expansion. Recovery of capital costs is a key milestone in Sakhalin I’s project agreement with the Russian government because it triggers and expansion of revenues paid to the federal government and the local Sakhalin Oblast regional government, James Taylor, president of ExxonMobil’s Russian subsidiary, said during an oil and gas conference in Sakhalin Oct. 3 and 4. Sakhalin I has been producing oil and gas since October 2005, with oil being shipped to export markets from an oil terminal on the Tartar Strait, which separates Sakhalin Island from Russia’s mainland. Natural gas also produced is sold to communities on the Russian mainland, Taylor told the 12th Sakhalin Oil and Gas Conference. Meanwhile, construction is essentially complete on Sakhalin II, a second major project on Sakhalin being led by Shell Oil and Gazprom, Russia’s state-owned gas company. The project is set to begin year-round oil exports later this year and exports of liquefied natural gas, or LNG, in early 2009, said Ian Craig, president of Sakhalin Energy Investment Co. Sakhalin Energy is the company managing the Sakhalin II project. The LNG plant was built at Prigorodnoye, the port city on Sakhalin’s southern coast. It is one of the world’s largest LNG projects. Sakhalin is emerging as one of the world’s major new oil and gas producing areas. ExxonMobil and Shell, with their Russian, Japanese and Indian partners, have established the initial infrastructure and now other discoveries are being made, mainly by Russian-owned state companies. One of these, Roseneft, announced another major gas and condensate discovery at the Sakhalin conference Oct. 3. Craig said Sakhalin Energy would begin filling a newly completed 800-kilometer oil pipeline later this month from the offshore Molipaq platform, one of three platforms in the project. Molipaq, which was brought to Sakhalin from the Alaska Beaufort Sea, has been producing oil and loading directly to tankers during ice-free months since 1999. “Oil from the Molipaq platform will be introduced into the northern section of the (onshore) pipeline system later this month,” Craig told the Sakhalin conference. “At this point the offshore export of oil will cease.” It will take several weeks for oil from Molipaq and Piltun-Astokhskoye-B, a second platform nearing completion, to fill the newly completed Trans-Sakhalin oil pipeline, he said. Delivery of gas to a gas pipeline from the two platforms, as well as LUN-A, a third platform, is also on schedule, Craig said. Two pipelines, one for gas and the second for oil, were built alongside each other from the producing fields, in the northern part of the island, to the LNG plant and export terminals in the south. The target is for the first LNG deliveries to be made in early 2009. As for the pipelines, Craig told the conference that pipeline crossings of 19 areas of high seismic activity have been completed, and remaining pipeline commissioning is underway. Each of the crossings had to be tailored to conditions at the sites. In the seismic crossings, the pipelines were provided with elbows to minimize stresses and add strength, and were surrounded by light, crushable material in the trenches to facilitate movement in an earthquake. Craig also said SEIC has made good progress on restoration of the pipeline right-of-way under an environmental action plan agreed on with Russian governmental agencies. “The reinstatement work will be substantially completed before the onset of winter, but we do expect some follow up work in 2009 and beyond as it takes some time for rehabilitation measures to become fully established,” Craig said. Meanwhile, drilling of new production wells is underway on both the Piltun-Astokhskoye-B and LUN-A. Wells for injection of drilling mud and cuttings back into underground reservoirs have been completed on both platforms and the drilling of the first oil production well is now underway on the Piltun-Astokhskoye-B platform, Craig told the conference. On the LUNA-A platform, two gas production wells have been substantially completed, but gas production will not begin until the platform and onshore processing facility is ready to accept the gas, which is expected to be in November, Craig said. Two more gas wells will be drilled at the LUN-A platform and the combined production from four wells on the platform should be sufficient for starting up production of liquefied natural gas in early 2009, he said. Craig also said condensates from the gas will be separated and mixed with crude oil. “The gas condensate will eventually become a significant proportion of our liquids production,” eventually reaching about a third of the liquids volume, he said. Sakhalin Energy is now in the final phase of commissioning the second LNG production unit. The first train, or unit, was commissioned last May with liquefied gas imported from other areas, including the Alaska LNG plant near Kenai. On the Sakhalin I project, Taylor told the conference that ExxonMobil plans to begin drilling in the Odoptu field in 2009 and will have construction underway this winter on a 50-mile pipeline from Odoptu to Chayvo, the Sakhalin I field currently producing. Odoptu is the second of three fields in the Sakhalin I project and is about 80 miles north of Chayvo, the first field to be developed. An oil field construction subsidiary of CH2M-Hill is managing pipeline construction in a joint venture with Russian partners, and CH2M-Hill’s Anchorage office is in charge of the pipeline. A number of Alaskans are working on the project. Pipeline construction is expected to be completed by March and the system should be tested in late spring. Taylor said ExxonMobil is also now moving the large Yastrub drill rig from the Chayvo field to Odoptu. Yastrub is a specialized rig, one of the world’s largest, built for the long extended-reach wells needed in both Chayvo and Odoptu. Constructed and operated by Parker Drilling Co., Yastrub weighs 5,000 tons. The rig has been broken down into truck-sized units and is being moved in 340 trips by truck over local roads to the Odoptu field. Although Odoptu is an offshore field, there will be no offshore platform, unlike at Chayvo. All of Odoptu’s production wells will be drilled from shore through extended-reach drilling. At the Chayvo field, some production wells were drilled from shore and from a single offshore platform, the Orlan. A third Sakhalin I field scheduled for development, Arkutun-Dagi, is in deeper water and will require a platform and pipeline to shore. Arkutun-Dagi construction is tentatively planned for 2010 and 2011. Taylor told the conference that Arkutun-Dagi and Odoptu will help offset the decline in oil production from Chayvo, which is now producing about 190,000 barrels per day, down from its peak of 250,000 barrels per day in 2007. The fields will also make more gas available for either exports or domestic sales. Taylor said that, to date, the Russian federal government has received $1.1 billion in taxes and shared production value, but Russia will receive about $50 billion in total over the life of the project. Sakhalin Oblast has received about $200 million in shared revenues with an additional $100 million paid to the Sakhalin Oblast Development Fund, Taylor said. Another $60 million will be paid in to the Sakhalin Oblast as additional phases of the Sakhalin I project start up, he told the conference. Since the start of the Chayvo field the Sakhalin I project has produced and exported 157 million barrels of crude oil through the De-Kastri export terminal on the Tartar Strait, Taylor said. There have been 200 tanker sailings and never a missed shipment because of weather of ice conditions, he said. Also, about 105 billion cubic feet of gas from the Chayvo field has been produced and sold to customers in Khabarovsk Krai, on the Russian mainland. The company’s customers there include a metallurgical factory, an aircraft plant, utilities serving several communities and several medium and small-sized businesses, he said. ExxonMobil’s Russian subsidiary, Neftegas Ltd., is the operator of the Sakhalin I project. Partners include Sakhalin Oil and Gas Development Ltd., a Japanese consortium; two affiliates of the Russian state-owned Rosneft, RN-Astra and Sakhalinmoreneftegas-Shelf; and ONGC Videsh Ltd., owned by the Indian state. Reserves at Sakhalin I are estimated at 2.3 billion barrels of oil and 17.1 trillion cubic feet of natural gas.

Loss of partner, political obstacles prompted BG bid drop

BG Group told Alaska legislators Feb. 2 that it had planned to submit a bid for an Alaska liquefied natural gas project in the state of Alaska’s recent solicitation for gas project proposals, but pulled back out of concerns for political risks and when a pipeline company partner pulled out of a proposed joint venture at the last minute. In a related development, former Alaska governor and U.S. Interior Secretary Walter Hickel told the state Senate Resources Committee the state should hold a second round of solicitations for proposals under its Alaska Gasoline Inducement Act and that results of the first round should be scrapped. In a prepared statement read by a spokesman, Hickel said a pipeline and LNG plant could become a “common carrier” for Arctic resources delivered to several nations. David Keane, vice president of BG North America, also told the resources committee Feb. 2 that political risks weighed heavily in BG’s decision to forego submitting a bid, mainly opposition voiced by Alaska’s congressional delegation to North Slope gas being exported. BG is a major U.K.-based energy company with extensive experience in liquefied natural gas trading. The company is now exploring for gas on the North Slope in partnership with Anadarko Petroleum Corp. The state received five proposals Nov. 30 under its solicitation but on Jan. 4 said only one met the terms of the request for applications, a proposal by TransCanada Corp. for an all-land pipeline from the North Slope to Alberta. Hickel is a strong supporter of an LNG project. Keane said BG believes the highest-value market for Alaska gas is Asia rather than the continental U.S. LNG sales will return better value for North Slope gas because gas is priced in parity with crude oil in Asia but against other gas in continental U.S. markets, Keane told legislators. “Asia-Pacific is the natural market for North Slope gas,” Keane said. BG also believes there are not enough proven gas reserves on the North Slope to support a large all-land pipeline that would deliver 4.5 billion cubic feet per day. TransCanada has proposed a large pipeline project, as has ConocoPhillips in a separate proposal. BG believes there are enough proven reserves, however, to support a smaller 2.7 billion cubic feet per day project, which is enough to support an LNG project. BG’s plan was to build the project in two phases, a pipeline to southern Alaska to an LNG project in the first phase, and a second phase pipeline branching off from the first to deliver gas through Canada to the continental U.S. when more gas reserves are discovered. BG’s plan was to build the pipeline oversized, with a 48-inch diameter, from the North Slope to Delta Junction in Interior Alaska, Keane said. This would have extra capacity for eventual shipments through a pipeline to Canada. The pipeline from Delta south to the LNG plant in Valdez would be 42 inches in diameter, he said. BG’s plans had called for a three-train LNG plant in Valdez. The pipeline part of the project was estimated to cost $13.5 billion in 2007 dollars. The entire project, including the LNG plant, was pegged at $22 billion, Keane said. The company was concerned with potential delays and the effect those would have on construction costs and tariffs for transporting gas, Keane said. The gas reserve uncertainties are widely acknowledged. The 35 trillion cubic feet of proven reserves on the Slope are enough to supply a large continental U.S. pipeline like that proposed by TransCanada or ConocoPhillips for 18 to 20 years, but another 15 tcf of gas will have to be found to supply long-term needs for the pipeline. North Slope producers as well as TransCanada are confident additional gas will be found, however, because much of the North Slope is gas prone and most potential gas prospects are unexplored. On political objections to an LNG project, Keane said there were political risks with Alaska gas being transported through Canada, “which may or may not ultimately go to the U.S.,” Keane said. In previous presentations in Alaska, BG has said LNG exports to Asia could be balanced by imports of LNG to the U.S. from Atlantic Basin LNG projects. BG has substantial experience in LNG trading and could handle such swaps, Keane said. In addition to concerns over political opposition to LNG exports from Congress, Keane said BG was worried because the pipeline portion of its LNG project could fall under the Regulatory Commission of Alaska jurisdiction rather than the Federal Energy Regulatory Commission. BG worries that state regulators might tilt decisions in the state’s interest, which is for low tariffs, at the expense of a pipeline company.

Clean water initiative now before elections division

  Lt. Gov. Sean Parnell has more than 60,000 signatures to review relating to a Clean Water act voter initiative. Photo/Rob Stapleton/AJOC     Backers of a proposed clean water ballot proposition that would place stringent environmental restrictions on large new mines have filed petitions with more than 60,000 signatures with the state Division of Elections. Meanwhile, a senior state Department of Natural Resources official downplayed reports of negotiations between the state and backers of the initiative that would have the state impose greater scrutiny on any application for a mine at Pebble. Deputy Commissioner Marty Rutherford said while there are no talks currently underway she held discussions on possible avenues of agreement between the state and mine opposition groups with Ashley Reed, a lobbyist for Anchorage businessman Bob Gillam, who is active in helping the opposition to the proposed Pebble mine. Rutherford said she and Reed discussed various possibilities, including having an independent group of scientists review any application for a mine at Pebble to strengthen the state’s Bristol Bay management plan. In the end, however, Rutherford and Reed were unable to find common ground and talks did not go further, she said. “I was disappointed that we couldn’t find areas of agreement,” she said. “I am very concerned about a growing public perception that the Pebble project is so large that the state will be unable to adequately protect the area and the Bristol Bay fishery.” From her perspective, the discussions with mine opponents were partly aimed at helping them understand the state’s present large-mine permitting system, she said. Rutherford’s hope was to get to a point where the initiative backers would not feel the need to go forward with the initiative. However, the petitions with signatures have now been filed with the lieutenant governor. The Division of Elections has 60 days to certify petitions that were filed Jan. 14. The division must verify that there are at least 23,831 signatures of registered voters on the petitions. “In order to qualify to be placed on the ballot, the petition must have qualified signatures from 10 percent of the votes cast in the 2006 general election,” Lt. Gov. Sean Parnell said. Parnell oversees the Division of Elections. “Signatures must be gathered from 30 out of the 40 state House districts with the number of signatures from each district equal to 7 percent of the votes cast in the region in the last election.” The verification and crosschecking of names on the petitions with the state voter registration system is a painstaking process because each signature must be verified, Parnell said. Backers of initiative campaigns usually gather more signatures than are really needed because some will inevitably be disallowed. When the elections division has verified that the petition has met all three of those goals, the division informs Parnell that it has been certified. The lieutenant governor and the state Department of Law then prepares the title and language for the ballot. Meanwhile, it is still uncertain whether the initiative will make it on the ballot even if the Division of Elections certifies the signatures. Parnell had initially disqualified the initiative on the grounds that it was an appropriation of state resources, which only the Legislature can do under the state constitution. Backers of the initiative disagreed and filed suit, and Parnell’s decision was overturned by the state Superior Court. The matter is now before the state Supreme Court. Signatures were allowed to be gathered for the initiative and for the petitions to be filed. It is also uncertain whether the ballot proposition, if cleared by the courts, will appear on the August primary election ballot or the November general election ballot. The law requires so many days to pass between the end of a regular session of the Legislature and the proposition being placed on the election ballot. If the Legislature sticks to its plan to adjourn in 90 days (roughly mid-April), the clean water proposition will appear on the primary election ballot. If the Legislature goes beyond 90 days in its regular session the question might be pushed to the November general election. Which election ballot the question appears on is important because primary elections usually have lower voter turnouts than general elections. A group of voters with special interests can have a greater effect in the primary election. The clean water initiative has sparked controversy in Alaska and opposition in rural communities because it would apply to many mining projects, not just Pebble. Any new mining permits for a project covering more than 640 acres would be covered by the initiative if it is approved by voters and becomes law. John Holman, who owns a fishing lodge on the Kvichak River, opposes development of the Pebble project and is one of the backers of the clean water initiative. The petition is aimed at large-scale mines, including Pebble, that haven’t previously been permitted, he said. “We didn’t intend on having impact on existing mines. “We are a little bit leery of the existing infrastructure that oversees the permitting (of the mines). The existing state laws in Alaska seem fairly lenient when it comes to dumping anything (from the mines) into the waterways. “I personally feel that mining in Alaska is fairly important, but there are some areas in the state where it shouldn’t happen,” he said. Holman, a resident of the Matanuska-Susitna Valley, said he has spent half of his life living in the Bristol Bay region, including Ekwok and Levelock. “There are so many people in the bay that don’t want this (Pebble mine) to happen,” he said. The Council of Alaska Producers, which represents large mines in Alaska, is organizing a campaign to oppose the clean water initiative, said Karl Hanneman, council president and manager of public environmental affairs for Teck Pogo. According to Hanneman, the measure would result in a shutdown of the mining industry. “The wording in the initiatives themselves precludes creation of storage of waste rock from tailings,” he said. Hanneman denied rumors that the resource development industry had a $7.5 million campaign budget. “We don’t have a budget yet, or a campaign plan,” he said. “It’s not certain yet how much will need to be spent.” Opponents of the initiative include many rural Alaska Native communities because it could affect projects being developed on Native-owned lands, such as the large Donlin Creek gold project near the Kuskokwim River. Donlin Creek sits on lands owned by Calista Corp. and the TKC Corp., but minerals royalties from any production would be shared with other Native corporations under terms of the 1971 Alaska Native Claims Settlement Act. It would also apply to producing mines that need new permits to be expanded. This includes the Red Dog Mine in Northwest Alaska, which plans an expansion into a new mine pit area. Red Dog is owned by Nana Regional Corp. Most of its revenues are shared with other Native corporations, as would be the case if Donlin Creek is developed. Pebble, the project that ignited the initiative effort, is a large copper-gold-molybdenum deposit 18 miles north of Illiamna, southwest of Anchorage. Two of the world’s largest mining companies, Anglo American and Rio Tinto, are now involved in the project along with the developer, Northern Dynasty Minerals. The project is now in an advanced stage of exploration with substantial environmental research also underway. If a mine is developed it would most likely involve a combination underground and open pit mine.

ConocoPhillips wants fiscal agreement

ConocoPhillips Alaska Inc. wants an agreement with the state on fiscal terms for a North Slope gas pipeline by February if the company is to begin preliminary field work for the project next summer, company officials said Dec. 13. ConocoPhillips submitted a proposal to Alaska Gov. Sarah Palin Nov. 30 for a 48-inch pipeline built from Alaska to Alberta. The proposal was made outside the state’s formal solicitation for pipeline proposals. Alaska received five proposals under its solicitation. Officials with the Palin administration did not return calls. Brian Wenzel, ConocoPhillips’ vice president for Alaska gas development, told the Alaska Support Industry Alliance that a long-term agreement on fiscal terms for its pipeline is needed before producing companies will sign 20-year to 25-year contracts to ship gas, which could entail financial commitments for as much as $150 billion. Wenzel said his company is ready to meet with state officials and hopes to have a fiscal agreement by February. The deal would still have to be approved by the state Legislature, but that could also be accomplished this spring. To meet a planned 2018 startup for the project, fieldwork must begin in summer 2008 to allow a non-binding open season in 2009 and a binding open season in 2010, Wenzel told the contractor group. To start fieldwork in June the company will have to start planning in January, Wenzel told the Alliance. If the agreement with the state comes together, ConocoPhillips will also start assembling a project development team by summer and would contribute $10 million to workforce training by the end of 2008, as well as fund an Alaska gas-needs study, Wenzel said. The $10 million for training would be in addition to $7 million appropriated by the state for training and $20 million that would be provided by the federal government once a pipeline proposal is approved. ConocoPhillips submitted an independent proposal rather than one under the state’s solicitation under its Alaska Gasline Inducement Act because there are terms under the act that are unworkable, Wenzel said. The company is willing to include an independent pipeline company in its project, Wenzel said, and hopes to work with the state in selecting a company, but a pipeline company licensed under the state’s AGIA process would not be acceptable to ConocoPhillips because of the state’s requirements, he said. A key objection by ConocoPhillips and two other major North Slope producers, BP and Exxon Mobil, is that the state is requiring a pipeline company to support rolled-in tariff rates for pipeline expansions that would have tariffs paid by original shippers increase by as much as 15 percent for each expansion. Wenzel said this amounts to a subsidy of new gas shippers by the original shippers. Under ConocoPhillips’ plan, the pipeline would support rolled-in rates for expansion tariffs that would expose original shippers to a potential 5 percent increase of the original tariff but that would be a ceiling no matter how many expansions are made, Wenzel said. If Palin chooses one of the proposals that were submitted under the state solicitation, the Legislature will have to either reject the proposal so that the pipeline company is relieved of objectionable requirements, such as subsidies for new gas shippers, or the AGIA law itself will have to be changes, Wenzel said. Another key ingredient missing in the state’s solicitation under AGIA is a lack of any long-term fiscal terms covering taxes and royalty terms for producers shipping gas. Legal questions have been raised as to whether the state can make any long-term deal fixing tax terms under the state constitution, but Wenzel said that there may be ways to accomplish this as a form of contract that would pass legal muster. In its proposal, ConocoPhillips seeks an agreement to fix terms only on natural gas production taxes. In a previous joint-proposal to the state made in 2006 by ConocoPhillips, BP and Exxon Mobil, sought to include fixed terms on oil as well as gas taxes. This prompted objections from state legislators last year. The references to oil taxes have been dropped in the latest proposal, Wenzel said.

Group hashes out railbelt power plan

  Liz Vazquez, chair of Chugach Electric Association’s board. File Photo/Rob Stapleton/AJOC     Six electric utilities in the railbelt regions of Southcentral and Interior Alaska spent two days Nov. 26 and 27 wrestling with how they can cooperate to fund badly needed replacements of aging power generation plants, and deal with a continued decline of natural gas from Cook Inlet region gas fields now used to generate electricity. Gov. Sarah Palin told the group the state is ready to help, up to a point. Palin has asked state agencies to draft a comprehensive energy policy that includes regional goals for different parts of the state, but state funding should go only for projects that are practical and sustainable, she told the Railbelt Grid Technical Conference. “Our policy has one goal - affordable, reliable energy for all of Alaska now and in the future,” Palin told the utilities. The Alaska Energy Authority, a state agency, sponsored the conference to consider ways of making the Southcentral and Interior Alaska railbelt power grid more reliable and efficient. JoEllen Hanranhan, a management analyst in the state Office of Management and Budget, told the conference that the governor has asked three agencies - the Alaska Energy Authority and the departments of Natural Resources and Environmental Conservation - to develop guidelines for new state energy policy. More information will be available when Palin rolls out her proposed fiscal year 2009 state budget proposal Dec. 15, Hanranhan said. Consolidations and cooperative agreements among utilities were a major topic of discussion at the conference. Liz Vazquez, chair of Chugach Electric Association’s board, gave the conference an update on talks now underway between Chugach and Anchorage’s city-owned Municipal Power and Light on possible consolidation to gain efficiencies. A consultant study showed the greatest savings in either the acquisition of Chugach Electric by ML&P or the acquisition of both utilities by a new yet-to-be-formed public authority. Other options, such as Chugach acquiring ML&P or both utilities being sold to private companies, would result in losses, Vazquez said. Chugach Electric is still analyzing the consultant report and asking questions of the consultants, she said. The energy conference followed the release a week earlier of a set of recommendations on energy issues by the Anchorage Chamber of Commerce. Two former utility managers, Tony Izzo and Joe Griffith, headed a task force of Anchorage business leaders who prepared the recommendations. Izzo is a former manager of Enstar Natural Gas Co., the Southcentral Alaska gas utility. Griffith headed Chugach Electric Association, the state’s largest electric utility, which also serves Southcentral. Among its recommendations, the task force asked the governor to develop a state plan to deal with energy issues and appoint a cabinet-level official to insure it gets carried out. The chamber suggested that BC Hydro, British Columbia’s public energy authority, could serve as a possible model for Alaska in planning and managing energy resources in a large geographic region. The most serious problem, Izzo and Griffith said in a briefing, is Southcentral natural gas supplies are being depleted and it will be years before new gas supplies can be made available from a spur pipeline bringing North Slope gas south, or a facility to import gas as LNG. “The problem is how we get from here to there,” Izzo said. The chamber reports said, “Cook Inlet natural gas supplies have fallen below what is a comfortable capacity upon which to base the railbelt economy. Supply and deliverability have become a challenge for energy managers.” Izzo said the situation is actually more serious than the report indicates. A combination of circumstances, such as extended cold winter weather, low pressures in producing gas wells and a mechanical mishap in the gas distribution system could severely disrupt the delivery of gas for power generation and space heating if no backup supply of gas were available. Having the ConocoPhillips-Marathon Oil liquefied natural gas plant in Kenai available to supply gas is essential in preventing emergencies in the future, Izzo said. However, the plant will close in 2009 unless an extension is granted for its export permit by the U.S. Department of Energy. ConocoPhillips and Marathon have asked for a two-year extension of the permits. Griffith said Alaska needs to tackle energy policy in a way it did 20 years ago, when the Alaska Power Authority built hydroelectric dams around the state, which today provide low-cost electricity to the communities they serve. One of these was the Bradley Lake dam, on the Kenai Peninsula, which supplies power to the railbelt grid today. On another issue, the Anchorage Chamber recommended that the Palin administration and Legislature have the Regulatory Commission of Alaska act more quickly and give guidance on gas sales contracts submitted for approval by gas producers and utilities. “The regulatory environment is inconsistent and reactive, thus increasing business risks and reducing reliability and consistency,” the report said. In the briefing, Izzo said the RCA spent a year in 2006 considering a proposed gas sales contract between Marathon and Enstar before turning it down. The commission also gave no guidance on what terms a new gas sales contract should have to be approved, which creates problems for Enstar and gas producers in developing new contracts. The chamber report also recommended that the Power Cost Equalization program for rural communities be continued until better ways of meeting rural energy needs are developed.

Revenue Department reviews PPT

State Revenue Commissioner Pat Galvin says an analysis of the state’s new Petroleum Profits Tax, or PPT, underway in his department shows no fundamental flaws so far in the state’s controversial petroleum tax law. However, a decision on whether to hold a special session of the Legislature this fall to reconsider the PPT will likely be made on issues outside the tax law itself, Galvin said in an interview. Those include public concerns over whether key votes in the Legislature were influenced by corruption when the tax was passed in 2006, as well as whether expenses related to replacing pipelines damaged by improper maintenance should be allowed as deductions under the tax. Alaska oil and gas producers meanwhile are concerned that a special session will result in changes to the PPT, increasing the amount of tax they pay. Alaska’s oil taxes are already the highest in the nation, and the PPT itself added almost a billion dollars a year to the industry’s tax burden.     Alaska Revenue Commissioner Pat Galvin is leading a study to determine whether the newly passed, yet controversial, petroleum tax law should be reviewed. Photo/Rob Stapleton/AJOC     Galvin said the department is doing a second research project comparing Alaska’s level of taxation on the petroleum industry against other producing regions. While it is still incomplete, it is proving to be difficult. “An apples-to-apples comparison between Alaska and other producing regions may not be possible,” he said. Gov. Sarah Palin said June 29 that she would wait on a recommendation from Galvin on results of the revenue department studies before deciding whether to call a special session in the fall to reconsider the PPT. Palin made the comment during a press conference on budget vetoes. In an interview, Galvin said he expects to have some results of the department’s modeling within a month and that a decision on the special session will be made later this summer. He acknowledged that a special session could be conducted in a highly charged political atmosphere in which outcomes could be unpredictable. He said he wouldn’t want the session to result in punitive-type actions against the industry. Meanwhile, the uncertainty over whether Palin will call the special session and the likelihood that the law will be changed if one is called is already affecting some companies’ plans for exploration and new development. “We really don’t know how to run the economics on our projects in this situation,” said Ken Thompson, managing partner of a group of independent companies exploring the North Slope. Thompson’s group, Brooks Range Petroleum LLC, drilled three exploration wells on the Slope last winter and found oil in two. Further work is needed to see whether the discoveries can be developed. Whenever it is uncertain whether investment tax credits will be allowed for new wells and projects, an important element of the new PPT, companies planning new projects must assume the credits won’t be there, said Jack Griffin, ConocoPhillips’ vice president for external affairs. “Uncertainty on taxes disrupts investment decisions. For example, if you don’t know whether exploration credits will survive a special session, a company is likely to run its economics assuming there are no exploration credits, just to be safe. The same will hold true for heavy oil,” Griffin said. “It’s the worst of all worlds for the state, really. The incentives are on the books, but the looming threat of tax changes means companies will be more conservative, and the state may not get the benefits of the investments it was trying to encourage.” he said. A key objective of the new PPT is to use tax policy as a way of stimulating new investment by the companies, which the revenue department concludes, based on earlier studies, is inadequate to stem a steepening decline of production from the maturing North Slope fields. Galvin said it is far too early to know whether the PPT’s incentives are working as intended or whether an alternative might be better. “The PPT is in place now. It’s the system we have. At this point we haven’t developed an alternative that is better, and we are not assuming that we will find one as the end result,” of the department’s studies, Galvin said. The department is about a year away from beginning audits of returns the companies are filing under the new tax, which will make actual cost information available to the state. The studies now underway are based on models that make estimates of companies’ investment behavior under the PPT, Galvin said. In terms of assessing actual responses to incentives, the department can rely on data from an exploration tax credit program that has been in place for several years, Galvin said. “We do have data for several years when the exploration incentive was in place,” he said. This incentive applies only to exploration wells and allows up to 40 percent, in some cases, of the cost of the exploration to be credited against state taxes. The PPT allows investment tax credits for a much broader range of industry investments, including new field development, heavy oil or high-risk projects involving very small, economically marginal developments. Galvin said an important part of the department’s study focuses on whether tax credits on particular types of investments will be more effective. “We might want put our money toward encouraging activity at the riskiest stage of the cycle instead of activity where there is already a high likelihood of success,” Galvin said. “We might get more bang for our buck with exploration, for example, than with in-fill development in a producing field,” where the producers already have sufficient incentives to invest. Galvin considers investment in heavy oil as something the state would want to encourage because it is high-risk, similar to exploration. Trying to target certain kinds of developments could, however, put the state on a trail of making its tax incentives too complicated to be effective, Galvin acknowledged. “If you spread the incentives across a broad range of activities you assume every investment is of equal value. But if you try to focus the incentive on certain types of investment you risk missing opportunities and creating complexity, which is when the uncertainties in the system can overwhelm its effectiveness,” he said. “In any event, its way too early for us to reach any conclusions,” Galvin said. “The goal is to have a tax incentives that are straightforward and easy to understand, and that target investments that hit the mark,” stimulating new oil discoveries and production,” he said. Even if a special session of the Legislature is not held this fall, some debate over the PPT is likely during lawmakers’ 2008 regular session, although attention to the oil tax issue will not be as intense as it would be during a special session. State Sen. Tom Wagoner, R-Kenai, will promote a bill he introduced last session to discard the PPT, which is based on industry net revenues, after production expenses are deducted and eligible investments credited, and return to the previous production tax, which was based on gross industry revenues. Criticism of the PPT by Wagoner and other critics is that it is a more complex tax that will be more difficult for the state to administer and audit, and provide opportunities for taxpayers to “game” the system to the disadvantage of the state. Galvin said the PPT has presented some challenges. Development of regulations to administer the tax has been extremely difficult and some regulations are still not done, he said. Hiring new auditors is also proving difficult. Auditing industry tax returns under the PPT will also be more challenging for the state because state audits of industry tax returns under a special corporate income tax on oil producers are somewhat easier as the corporate income tax is linked to the taxpayer’s federal income tax return. The PPT will require state auditors to work extensively with industry cost data for the first time, Galvin said. However, the PPT law also allows the state to gain access to inter-company audits of production operations where several companies jointly own producing fields but one company is the operator. Several companies own most producing fields on the Slope. Audits of the operating companies’ expenses by the partners are routinely done. When the PPT was enacted in 2006, former Gov. Frank Murkowski said he favored the new approach because the previous incentive formula in the production tax, the Economic Limit Factor, was no longer effective. Murkowski said he favored a tax based on net revenues because it rewards oil producers that reinvest in the state while taxing to the maximum producers, which do not reinvest. The new system also provided an effective incentive for costly oil and gas projects like heavy oil, the former governor said.

Ruling not a slam dunk for state

An Alaska Superior Court denied a request by Point Thomson leaseholders Exxon Mobil, BP and Chevron May 1 to stay a state administrative ruling terminating the Point Thomson Unit, but also ordered the Department of Natural Resources to seek termination on the unit through separate judicial action. The decision by Judge Sharon Gleason was not a clear-cut win for the state. Gleason also ruled that seven exploration and delineation wells drilled since 1977 in the Point Thomson Unit were capable of production under state regulations. This ruling could strengthen a separate legal action by the companies, claiming that a decision last November by the DNR declaring the wells as incapable of production was improper. The state DNR’s action on the wells was part of its decision to terminate the unit. If the companies prevail on reversing the state decision on the nine wells, Exxon Mobil and its companies could retain at least some leases in the Point Thomson Unit area. Alaska law allows leases beyond their normal expiration date to be held if there are wells drilled on the leases that are capable of production. The state DNR had argued that since the wells were capped and abandoned, they were incapable of production and could not serve to preserve the leases. Gleason disagreed, indicating that the agency had earlier classified the wells as capable of production. “The undisputed fact remains that the department certified these wells, and that as a result of these certifications, the wells will be considered capable of producing hydrocarbons,” Judge Gleason said in her ruling. In their statements to the court, the companies argued that even if the wells were plugged, they could be redrilled to produce. The court also ordered Exxon Mobil and its partners to pay a $20 million penalty agreed to as part of work commitments in the Point Thomson Unit that were not fulfilled, or to post a $25 million bond while litigation continues. In addition to the filing for stay of the administrative action on terminating the unit, the companies also have administrative appeals underway on the state action to terminate the leases. They also have court actions contesting the decision to terminate the unit and to declare the wells drilled at Point Thomson as incapable of production. In a separate action, the companies filed an application to form a new Point Thomson Unit April 16 under a provision that allows the Alaska Oil and Gas Conversation Commission to form units to ensure conservation of oil and gas resources. The normal method of forming units on state lands is through the DNR, but the AOGCC also has authority to form units in some instances. The filing with the AOGCC was made one day before a state DNR decision terminating the leases was to be effective. The DNR has since extended the termination date while administrative appeals are made. Eight trillion cubic feet of natural gas and 200 million barrels of liquid condensates have been discovered at Point Thomson, which is 60 miles east of Prudhoe Bay on the North Slope. The legal status of the Point Thomas leases is importance because gas reserves there constitute just under one-fourth of the 35 tcf of proven reserves underpinning a proposed $30 billion-plus Alaska natural gas pipeline.

AGIA gains ground in Legislature

Alaska Gov. Sarah Palin’s proposed legislation setting the framework for new natural gas pipeline proposals has cleared two additional hurdles in the state Legislature, but not without receiving several changes along the way. Key elements of the governor’s proposal, mainly having state officials choose a pipeline developer that commits to meet certain goals, are still intact in the legislation, however. The House Resources Committee completed amendments April 24 on its version of the bill. Meanwhile, the Senate Judiciary Committee completed work on the Senate version April 21 and passed the measure on to the Senate Finance Committee, which began hearings April 23. Palin’s bill was approved in late March by the Senate Resources Committee and the House Oil and Gas Committee. Among changes made in late-night meetings April 23 is a change in state royalty policy that could eliminate one roadblock to a pipeline that producing companies cite, the current ability of the state to switch between royalty payments in cash, known as “in value,” to royalty in the physical delivery of gas or oil, known as “in kind.” The state can currently make the switch on six or nine months’ notice to producers. The Resources Committee opted to limit the state to taking royalty in value for gas committed to a pipeline licensed by the state. Producers have said that the switching at short notice creates serious burdens in negotiating long-term sales contracts and in purchasing long-term capacity commitments in the pipeline during an open season. State Revenue Commissioner Patrick Galvin expressed concerns about the change. “We support the amendment in concept but have worries about some of the practical effects,” such as how the change would mesh with goals to assure gas supplies to Alaska communities near the pipeline, Galvin told the House committee. The Resources Committee turned down proposals to make the selection process more flexible for the state, however, and proposals to include punitive measures such as a gas reserve tax that would come into effect if producers fail to sign capacity agreements with a licensed pipeline during an initial open season. A substantial change made in the Senate bill by the Judiciary Committee would establish a voucher system for a company that purchases capacity in a pipeline but is not a producer. The voucher can be transferred to a producer that agrees to sell gas to the pipeline. Upstream inducements include special terms to freeze state production taxes for 10 years and to set firm royalty administration terms. Lack of clarity in royalty administration has created a minefield for disputes and litigation between the state and producers in the past. The legislation must still be approved by the Finance committees in both the state House and Senate before the Legislature adjourns in mid-May. If the bill passes, which now seems likely, Palin said she intends to have requests for proposals for pipeline developers out by early July. The schedule would ask for proposals to be submitted by October, and a project would be selected for a state license by January 2008. The winning project would qualify for $500 million in state matching funds. Under the bill, producers that sign capacity agreements at an initial open season would qualify for the upstream inducements. Palin’s approach is substantially different than a contract former Gov. Frank Murkowski negotiated with the three major North Slope producers in 2006. That agreement involved the state investing in 20 percent of the project, agreeing to take the gas royalty and tax share in kind for the duration of a 45-year contract, and for a long-term freeze on oil as well as gas production taxes. The Legislature failed to ratify Murkowski’s contract, and he was defeated in his bid for re-election last fall by Palin.

Gas leak takes Northstar field offline

  The Northstar field, which sits on a constructed gravel island in the Beaufort Sea north of the Prudhoe Bay field, will be down for an uncertain amount of time due to a small gas leak. ARCHIVE PHOTO     BP Exploration Alaska Inc. said Feb. 21 that its Northstar field on the North Slope will be off production for several days as work crews replace piping in the field’s gas handling system. A small pinhole-sized gas leak from a weld on an 8-inch pipeline was discovered Feb. 18 during a routine maintenance inspection of the field’s gas handling system, BP spokesman Daren Beaudo said. The field has been producing about 47,000 barrels per day. “Northstar is a single-train process facility, and when a problem is discovered in any section, we shut down the entire facility,” Beaudo said. Corrosion in the weld appears to be the cause of the gas leak, he said. BP is inspecting all pipes in the gas handling system and some other sections will be replaced, Beaudo said. Other repairs unrelated to the leak will also be made. “Whenever there is an unscheduled outage, we take advantage of it to accelerate maintenance that has been planned,” Beaudo said. State officials were notified by BP of the leak, but there was no spill or other environmental hazard created by the incident, said Lynda Giguere, spokeswoman for the Alaska Department of Environmental Conservation. Northstar is an offshore island in the Alaska Beaufort Sea six miles north of large Prudhoe Bay field, which BP also operates. Production facilities are located on a 5-acre artificial gravel island in 39 feet of water.

Alaska economy strong, but inflation a worry

Alaska’s economy is stable but faces some real uncertainties after this year, a leading Alaska economist says. The national economy, meanwhile, is on a roll that should continue through 2007, but inflation is an increasing worry, according to Wells Fargo Bank’s senior economist. Both economists spoke at the World Trade Center Alaska’s annual economic forecast luncheon held in Anchorage Jan. 17. Pat Burden, president of Northern Economics Inc., an Anchorage-based consulting firm, said Alaska economic conditions are generally healthy with total employment expected to grow 2.2 percent this year. Personal earnings should be up 5.4 percent and the state’s Gross State Product is expected to rise 2.7 percent, Burden said. There are reasons to be cautious, Burden said. Alaska is coasting on a surge of state, federal and oil industry spending continuing from 2006, but falling oil and metals prices, a decline in federal spending due to the Iraq war, the loss of “earmarks” in federal budgeting and decreased influence of the state’s congressional delegation could mean things may not be so good in 2008 and beyond. Burden showed Energy Information Agency data that showed low world oil supply figures for 2005 and 2006, the causes for spikes in oil prices, but recent increases in production, which explain the recent softening of prices. Oil prices are now nearing the state’s projected price average of $48 per barrel for the current fiscal year. Commodity prices, particularly in metals, are also down. The surge over the last two years was caused by high demand in China and India, which may now be moderating. Burden said the very low unemployment numbers for the state’s major population areas - 4.6 percent in Anchorage, 5.3 percent in Fairbanks - is both a blessing and a potential problem. Low unemployment means a lot of people have jobs, but it also means the labor force is tight, he said. In small, isolated economies like Alaska, it means the pool of potential workers for employers is small. For employers finding trouble recruiting qualified workers, this will put upward pressure on wages, Burden said. That’s good in some respects - big box retail employers are already giving raises to retain workers - but it could contribute to regional inflation, he said. On the national level, Wells Fargo Bank vice president and senior economist Eugenio Alleman said he sees no apparent end to good times despite recent jitters in the stock market. Inflation is the concern, he told the listeners at the World Trade Center Alaska luncheon. Alleman said continuing consumer confidence is providing strength to the economy. Consumption in the fourth quarter was up 4 percent, compared to the same period a year ago, with 3 percent growth expected in the first quarter of 2007. Labor markets are very tight. Unemployment is 4.5 percent, near a historic low, he said. “I am more concerned about inflation. The Producer Price Index was up 2 percent in November and rose another 0.9 percent in December, after being very low during the preceding 12 months,” Alleman said.

Budget: What to cut?

  House Majority Leader Ralph Samuels, right, House Speaker John Harris, center, and Rep. Kevin Meyer answer questions Jan. 16 during a press conference on the first day of the state legislative session.       As the legislative session opened in Juneau Jan. 16, state lawmakers cast doubts on whether Gov. Sarah Palin will be able to achieve significant cuts in the state budget this year. House Speaker John Harris said Jan. 16 that he is waiting to hear more on Palin’s ideas for a $150 million reduction, but said education, and health and social services budgets — mostly for Medicaid — dominate the state operating budget. Harris said cuts in these areas are unlikely. “We’re not going to reduce education. It isn’t going to happen. As for Medicaid, it’s going to cost more this year because the federal government is reducing its share of funding,” Harris said in a press briefing. Palin said Dec. 15 that $150 million in spending reductions will be a key part of her budget policy. House Finance co-chair Mike Chenault said the Legislature must put more money into public employee retirement accounts. He also said the Legislature must consider proposals for reinstituting municipal revenue sharing and senior citizens’ longevity bonus payments, and putting more money into the area-cost differential component of state school funding. Senate Finance co-chair Lyman Hoffman, D-Bethel, said Palin will have to come forward with specific recommendations for programs to be cut to achieve her goal. He said “unallocated” budget reductions, where agency administrators are told to find places to cut themselves, would be unacceptable. “She needs to decide on what should be funded. Without that, it’s hard for us to see what her priorities are,” Hoffman said in the press briefing. Palin may have to do that on an accelerated schedule, however. Chenault said the House would like to get its main business, the budget, done in 90 days, and doing that might require a shortening of the customary 45 days given to the governor to make amendments to her budget proposal. On the gas pipeline, lawmakers said they will give Palin some running room. “We’ll be patient. We’d rather have something good than something fast. If gets to be June, however, we may have a problem,” said new House Majority Leader Ralph Samuels, R-Anchorage. Samuels said he hopes to see Palin taking concrete action on gas issues in a matter of weeks. Chenault said it is critical that the state move forward on the gas project. “We can’t sit around for three or four years waiting on a pipeline.” Legislators, meanwhile, will use the time to get themselves up to speed on gas pipeline issues, Samuels said. Samuels, one of a handful of lawmakers who were deeply enmeshed in gas pipeline issues last year, will help organize workshops to brief new legislators on the intricacies of the gas project. All in all, the Legislature is facing a significant amount of work, which will be none the easier on a shortened schedule. Despite the fact that a ballot measure approved in November limiting the session to 90 days won’t take effect until next year, Rep. Harris and others in the House said it was a good idea to start this year. “The public asked for that,” Harris said. Leaders in both houses said they were open to the idea. Senate President Lyda Green said the Senate hadn’t been consulted yet on the plan, but she was willing to talk with her House counterparts about it. “I certainly look forward to the conversation,” she said. Minority Democrats in the House said they’d help the Republican majority move the session along — if the Republicans worked with them. “We’re going to try to do our own work and be out in 90 days as the people have decided,” said David Guttenberg, a member of the Democratic leadership from Fairbanks. To do that, he said, the Democrats “need to have the spirit of cooperation from them that they’ve asked of us.” One Democrat sounded skeptical, if not opposed to a shorter session. “I don’t think we need an arbitrary timeline,” said Beth Kerttula, D-Juneau. The Legislature needs to get its job done, not race through things to meet a deadline, she said. Some Republicans also acknowledged that with less time there would be less work done and fewer bills passed. Tim Bradner can be reached at [email protected] Juneau Empire reporter Pat Forgey contributed to this article.

Port of Anchorage could move coal for Agrium

Agrium Corp.’;s plan to switch its Nikiski fertilizer plant from running on natural gas to coal would initially rely on coal shipped from the Usibelli coal mine at Healy to Anchorage and transferred to barges at the Port of Anchorage. Agrium’;s project would require about 3 million metric tons of coal yearly. If all of the coal were acquired from Usibelli, it would require the company to approximately triple its current production of 1.5 million tons per year. Tim Johnson, manager of Agrium’;s “Blue Sky” project, told the Resource Development Council’;s annual convention in Anchorage Nov. 16 that the base case for the project would be purchasing coal from Healy. Johnson also said that coal might also be acquired from a planned new coal mine at Beluga, on the west side of Cook Inlet, if the mine is built. Steve Denton, Usibelli’;s vice president for business development, said his company is also looking at Port MacKenzie, across Knik Arm, as a place to load barges bound for Nikiski. Port MacKenzie now has facilities for loading bulk commodities. However, to make shipping from the port feasible, a 43-mile rail link would be needed to connect the port with the Alaska Railroad, he said. Costs of a rail spur have been estimated at about $200 million. Agrium announced the coal gasification project a year ago and has completed an initial feasibility study, Johnson said. If it succeeds, the plan would secure the future of the Nikiski plant, which is now uncertain because of the tightening of gas supply in Southcentral Alaska. Agrium is now in the front-end engineering design and permitting phase for the project, which is expected to last 18 to 20 months, Johnson said. If the company determines the project is feasible, a decision which could come in 2008. Agrium would then proceed to detailed engineering and construction, with a start-up possible in late 2011, Johnson said. Donna Boltz, deputy director of the Port of Anchorage, confirmed that discussions have been held with Agrium regarding shipments of coal. The port is now undergoing a major expansion, and once it is completed there will be room for a coal stockpile and loading facility, she said. The expansion plan includes a barge loading dock at the north end of the expanded port which would be suitable for loading coal, if Agrium’;s plan goes forward, Boltz said. A rail spur has been built to the port as a part of the expansion. “There have been no decisions yet, just an exploration of possibilities,” she said. Denton said about 20 to 40 acres might be needed to stockpile coal. In Nikiski, Agrium is looking at building the planned gasification and power plants on a 75-acre tract to the south of the existing ammonia and urea plant, Johnson told the RDC. Homer Electric Association would take the lead role in building the power plant, which would be a conventional coal-fired facility. The power plant is now planned at 190 megawatts with two-thirds of the power needed for the gasifier planned by Agrium. There would be about 70 megawatts available for the regional power grid, Johnson said. Agrium had initially considered a larger coal-gasification project that would have included an integrated gasification combined cycle power plant that would have produced both ammonia and urea. Agrium, however, changed the plan because it would be less economic than a conventional pulverized coal power plant, and Agrium is now focusing on a process for just urea production rather than ammonia and urea, Johnson said. The original process would have required 2 tons of coal to produce 1 ton of ammonia, Johnson said. The latest plan would produce 1 ton of urea from 1 ton of coal. Even through there would be less ammonia produced, the new plan is more attractive, he said. If the project goes ahead it would create a mini-construction boom on the Kenai Peninsula. Construction would take about three years, from 2009 to 2011, and would require 1,100 workers in the first two years and 1,300 in the third year, according to Lisa Parker, Agrium’;s public affairs manager. If it is successful, however, the Agrium plant would be assured an indefinite lifetime. The company now employs 230 at its manufacturing facility and is the Kenai Peninsula’;s largest employer. Agrium now uses natural gas as a chemical feedstock in the manufacture of ammonia and urea, but reserves in Southcentral Alaska gas fields are being depleted and Agrium has encountered difficulties in getting enough gas to operate the plant. The company down-sized the plant to use less gas in recent years and has suspended ammonia and urea production this winter because of inadequate gas supplies. Normal operations will resume in the spring. Agrium has been operating on a series of one-year gas supply contracts. The latest contracts will expire in late 2007.

A spill...an upset...and a raid

  A worker cleans spilled oil from an early August oil spill at the Prudhoe Bay oil field. PHOTO/Rob Stapleton/AJOC     It has been an almost-surreal series of events. In a matter of weeks, Prudhoe Bay pipelines spring leaks and the field is shut down, at least partially. An incumbent governor, one of the state’s political veterans, is trounced by an inexperienced newcomer. Federal Bureau of Investigation agents raid legislators’ offices looking for evidence of wrongdoing. The FBI raids are apparently the last nail in the coffin for the proposed Stranded Gas Act contract proposed by Gov. Frank Murkowski. House Speaker John Harris has told the governor there are not enough votes in the House for the contract to make a special session worth calling to consider it. The contract cannot now win approval before the November elections. Murkowski chief of staff Jim Clark conceded that the FBI investigation into political activities by VECO Corp., a major oil field contractor, has greatly complicated things. Clark said his greatest concern, if the contract is not acted on by November, is that a ballot proposition imposing a gas reserves tax on North Slope producers will pass, prompting lawsuits from the industry and further delay on the gas pipeline. The reserves tax will fundamentally change the state’s relationship with the industry on the gas pipeline from one of cooperation and negotiation to one of litigation, Clark said.     Gov. Frank Murkowski (right) concedes to Sarah Palin in the Republican gubernatorial primary at the election center in Anchorage, Aug. 22. AP PHOTO/Al Grillo     What will appear on the November statewide election ballot is a proposal for a 3 percent tax on natural gas reserves in producing North Slope fields. Tax revenues are estimated at $1 billion a year, and the tax would stay in effect until 2030 after a gas pipeline is operating, which would be 2016 under the most favorable schedule, the producers have said. Although the law created by the ballot proposition would allow taxes paid before production begins to be recouped from other tax payments until, in reality, not all of the tax payments can be recovered, Department of Revenue economist Roger Marks said. Pedro van Meurs, the state administration’s chief negotiator on the gas line contract, said the reserves tax will effectively add $10 billion to the $20 billion-plus cost of the pipeline and will make the project uneconomic. Clark said the reserves tax greatly complicates things for a new governor, either Republican Sarah Palin or Democrat Tony Knowles, because Knowles or Palin will have to not only sort out a new effort on the gas pipeline contract, but will also have to deal with the reserves tax litigation and find some way to end the tax if the project is to go forward.     FBI special agent Wade Dudley remove boxes from the office of Senate President Ben Stevens Aug. 31 at the state Capitol in Juneau. Federal agents raided the offices of at least six Alaska lawmakers in an investigation related to the oil field services firm VECO. AP PHOTO/Michael Penn/Juneau Empire     Political observers familiar with Alaska’s initiative process say state statutes require a law created by a ballot proposition to be in effect for two years before the Legislature can repeal it. However, it is possible for the law created by voter initiative to be amended by the Legislature with certain restrictions, they say. For example, a state minimum wage hike created by a voter initiative ballot proposition was amended by lawmakers to remove a cost-of-living escalator. The change withstood a court challenge. While it appears that Murkowski’s initiative on the gas pipeline may be put on the shelf, much was actually accomplished during the two years of negotiations on the contract and the Legislature’s deliberations during the last part of the regular session and two special sessions. The contract itself, though still in draft form, laid out the framework of a fiscal relationship between the state and producers. Under the contract, the state would become a partner in the project to reduce risks for the companies and also to enhance its own benefits, such as more control over state-owned royalty gas. One big accomplishment of the governor and the Legislature this summer was a new oil and gas production tax that was enacted as general law separately from the contract. It was part of the overall deal on the contract. The contract itself, however, was reviewed in public meetings around the state, and while a number of serious concerns were raised in the meetings, most comments were favorable and polls indicated that most Alaskans wanted the Legislature to approve the contract and get on with the pipeline project. While the public review process was underway, the Legislature was also reviewing the contract. While much of lawmakers’ time was taken up with the petroleum production tax change, some attention was paid to the gas contract, particularly in the Senate’s special gas committee. There, a number of concerns were identified. One was that the proposed long-term freeze on oil and gas taxes was too long. The contract proposed a freeze on gas taxes for 45 years, the term of the contract, and 30 years for oil production. The Senate committee proposed an amendment, which was never adopted, that would shorten the period of a tax freeze. It also provided a basis for changes in fiscal terms even after the freeze ended in ways that would give assurance to the industry investors. Among other changes, the Senate committee also proposed a strengthening of the Alaska-hire provisions in the contract through a form of Project Labor Agreement that would cover union as well as nonunion contractors. The administration had earlier opposed a PLA in the fiscal contract, arguing that a labor agreement would be needed eventually, but that it should be negotiated with the entity formed to build the pipeline, and not be in the fiscal contract. However, chief of staff Clark said the administration was acknowledging the Legislature’s concerns in these areas and even though the Senate amendments weren’t adopted, the administration was including the tax-freeze terms, labor agreement and other concerns raised by legislators in the new round of negotiations with the producers.

Unlikely allies

  Kate Troll is seen with former state Natural Resources Commissioner Pat Pourchot. Troll is executive director of the Alaska Conservation Alliance. Pourchot is a board member for Alaska Conservation Voters. PHOTO/Rob Stapleton/AJOC     When it comes to green, some Alaskans see red. Green groups, that is, not the currency. For these Alaskans, what comes to mind is locking up the Arctic National Wildlife Refuge, or Greenpeace activists chaining themselves to trees. But there are all stripes of conservation organizations, and while some do seem to use Alaska as a national fundraising poster, there are others based here, whose members are our neighbors. In fact, they are us. Alaskans pride themselves on being conservationists and taking care of the place where we live. That may explain why, getting down to brass tacks, Alaska-based conservation groups are pretty effective at what they do here. The message resonates. This year, the Alaska Conservation Alliance was very effective in getting its key legislative goals accomplished, despite a state administration and Legislature run by pro-development Republicans. The bottom line, asks Kate Troll, the executive director of the conservation alliance, is who could be against clean air and water, and the protection of wildlife habitat? The alliance is the statewide coalition of Alaska conservation groups, and Troll says its polls show Alaskans agree with the goals of the member organizations by wide margins. "We found 91 percent of Alaskans saying clean water is important to very important. Seventy-five percent said toxic waste contamination is important and 74 percent say energy conservation is important," she said. The numbers are from a poll done in February by Hays Research Group, she said. Roughly 38,000 Alaskans in 40 regional conservation groups are part of Alaska Conservation Alliance, and one of Troll’s major initiatives is to use a more pragmatic approach in building understanding and consensus with other Alaskans, and, in particular, the state’s business community. A former official in the state Department of Fish and Game and executive director of United Fishermen of Alaska, a statewide association of fish harvesting groups, Troll has learned how to tread carefully through the minefields of Alaska resource conservation politics. She has been involved in Alaska resource and conservation issues for 29 years. "Alaska’s future depends as much on a sound economy as on a sound environment," she said. "The more people in the business community realize that our long-term interests are more allied than polarized, the more we can work together to promote stable communities and healthy ecosystems. Tadd Owens, executive director of the Resource Development Council, thinks the state’s development community has a lot to gain by talking with Alaskans in the conservation movement. RDC’s board, in fact, has been engaged in a quiet dialogue with the Alaska Conservation Alliance for about two years. "We felt there are a lot of issues where we might have common ground, but we haven’t even given ourselves the opportunity to explore these," Owens said.     Juneau attorney David Rogers is the Alaska Environmental Alliance’s lobbyist in Juneau. Rogers, a former state environmental official, has represented a wide array of clients, including mining companies. PHOTO/Brian Wallace/JUNEAU EMPIRE     The meetings are periodic and ad hoc, and typically involve five to six people on each side. "They give us an opportunity to get to know each other, to build trust," Owens said. Based on these relationships, some RDC members have been able to present their projects to members of the environmental community and learn of concerns before the projects were before government agencies for permitting. Troll said the Alaska Conservation Alliance will consider development projects on a case-by-case basis, based on certain criteria. The group is supporting a natural gas pipeline from the North Slope, for example, as long as the project minimizes environmental impacts, protects wildlands and habitat, and provides incentives for development of clean energy. "Getting out and publicly stating we support a gas pipeline project within these criteria is a big, proactive step for the conservation community," she said. "I hope to build on that. For example, there is growing interest in getting engaged with utilities to develop a balanced energy plan for Southcentral Alaska. I think this is a positive direction, and one of the best ways to advance our goals." Troll said the nation "must actively pursue development and integration of new energy sources that are clean and renewable in order to strengthen our economy, reduce dependence on foreign sources of energy and to reverse global climate change that is threat to our way of life. "Alaska is in a unique position to help shape the energy future of the nation while maintaining our prosperity," she said. The alliance released a position paper on the gas pipeline on May 8. If that’s a pragmatic approach, it is also one that paid off in the state Legislature this year, where the conservation alliance’s key priority - establishment of a state commission to study climate change impacts - passed both the House and Senate unanimously. Other legislation, such as extending stream protection measures for Southcentral forests, establishing a Knik River public use area and a resolution calling for a "reopener" of the Exxon Valdez oil spill settlement to study long-term spill effects, also passed. "These are significant steps," Troll said. "The overwhelming support for these actions in the Legislature demonstrates that conservation in Alaska can indeed be a nonpartisan value," she said. Not all of the goals of the conservation alliance were achieved, however. An effort to get legislation to ban mixing zones in salmon spawning areas was unsuccessful. David Rogers, the alliance’s lobbyist in Juneau, said there was bipartisan support on many of the group’s initiatives this past legislative session. It’s usually assumed that Democrats will support environmental causes, but this year "there were a number of Republican legislators who were open to us, listened to us and ultimately voted with us," Rogers said. Rogers is a good example of the conservation alliance’s more pragmatic, middle-of-the-road approach to its mission. Rogers is a Juneau attorney who has been engaged in environmental policy and resource issues since 1977, as a state official, legislative advisor and even a lobbyist for mining companies.

New fuel may allow Agrium plant to run at full throttle

Agrium U.S. Inc. hopes to switch its Kenai fertilizer plant’s feedstock from natural gas to coal, a move that might allow the plant to eventually return to its full production rate of 2 million tons per year of ammonia and urea fertilizer. The plant is now producing at half capacity due to gas shortages. If the project moves ahead it will still take several years to make the change, and operations at the plant may still have to be shut down if additional supplies of natural gas can’t be contracted, said Agrium’s Alaska manager, Bill Boycott, in a Nov. 16 briefing. Agrium announced Nov. 16 it is considering installation of a coal gasifier at its Kenai fertilizer plant. If such a facility is built, along with a related power plant, it would approximately double the physical size of the Agrium plant in Nikiski, north of Kenai, Boycott said at the briefing. The company’s study is independent of a U.S. Department of Energy study of coal gasification at the plant. Agrium has had a conceptual feasibility study of coal gasification underway for about six months and is encouraged by the results so far, Boycott said. It hopes to complete the study by April and then make a decision whether to proceed with the project, he said. Boycott said the company is working with Alaska coal producer Usibelli Mine Inc., Kansas-based engineering firm Black & Veatch, and Uhde, a German engineering company. The gasification plant could be completed by 2011. The timetable is aggressive because of deadlines in the recently enacted federal energy bill for grants and loans to aid coal gasification projects, Boycott said Meanwhile, the DOE has contracted with Science Application International Corp. for a $490,000 study of a gasification plant located at the Agrium facility. The DOE study will proceed independently of Agrium’s effort and will also look at feasibility of using carbon dioxide that will be produced in the gasification process for enhanced oil recovery projects in nearby Cook Inlet oil fields. In such a project, the carbon dioxide would be injected into the oil wells to force more oil to the surface. Teams working on both studies are expected to meet in early December to coordinate the work, Agrium spokeswoman Lisa Parker said. Boycott said the conceptual feasibility study will consider a base case of 4 million tons of coal consumed yearly in two coal gasifiers, with a 350-megawatt power plant built adjacent to the gasifier complex. The gasifier and fertilizer plant would use 100 megawatts, which would leave 250 megawatts to be sold into the regional electric grid, he said. Steve Denton, vice president for Usibelli Mine, said his company is working with Agrium in an analysis of coal supply options. Usibelli operates a mine in Healy, in Interior Alaska, and coal could initially be transported to the Agrium plant by rail and barge from the existing mine, Denton said. The best option, however, is for coal to be supplied from undeveloped coal deposits at Beluga, on the west side of Cook Inlet 30 miles from the Agrium plant. Coal leases at Beluga are held by two groups, Placer Dome U.S. and the Bass-Hunt group. Plans for a coal mine at Beluga have been made and permits have been secured, but neither leaseholder has been able to secure commitments from customers to proceed with mine development. By coincidence, the power available for sale to the grid from the project could come when the proposed Pebble copper-gold mine will be in its initial phases of startup. Pebble will require 275 megawatts of power supply. Homer Electric Association is working with Northern Dynasty, the company developing Pebble, on a plan to provide power from the Kenai Peninsula by way of a submarine cable across lower Cook Inlet. Agrium has a troubled history with its plant at Kenai. The facility was built by Union Oil of California in 1969 as a way of commercializing large Cook Inlet gas resources, which at the time had no markets. Unocal expanded the plant in 1975 and sold it to Agrium in 2000. In 2002 Agrium began experiencing shortfalls in gas delivered by Unocal under a long-term supply contract that was part of the sale agreement. Litigation over the long-term contract resulted and a settlement agreement ultimately resulted in Unocal paying Agrium $35 million in compensation for reduced sales because of the supply shortage. The settlement also provided for a termination of the long-term contract on Oct. 31, 2005. Last January, Agrium announced that it would close the plant if it was unable to secure additional gas supplies at a price it could afford. The company also issued requests for proposals from Cook Inlet gas producers for supplies beyond Oct. 31. Neither Agrium nor Unocal has disclosed the price of gas in the long-term contract, but independent sources have determined it at $1.20 per thousand cubic feet (mcf) - a figure that Agrium has not disputed. In its request for new gas supply, Agrium said it would be willing to pay up to $3 per mcf. The company was able to secure additional commitments of gas from several local producers at an undisclosed price, but Boycott said the contracts are short-term and will expire next November. Agrium is now working on securing additional commitments for gas, but if those cannot be obtained the plant will have to be shut down while the company works on its conversion to coal as a source of feedstock, Boycott said.

Final accord injects capital into ASI

 Agreements to restructure ownership and bring additional capital into troubled Alaska Seafood International Inc. were finalized Jan. 5. John Brady, ASI’s chief executive officer, and Bob Poe, executive director of the Alaska Industrial Development and Export Authority, announced that Taiwan-based Bank Sino Pac and Central Investment Holding Inc. have approved plans to inject additional capital into ASI. "We’re very pleased with this agreement. We have not had the opportunity to exercise our business plan. A good deal of work remains, but we are progressing nicely with our production upgrades and implementing a marketing and sales program," Brady said. The deal was initially negotiated last September, but several months of further talks were needed to iron out details, Poe said. Under the agreement, Bank Sino Pac, which has made loans to the company, and AIDEA, which built facilities housing ASI’s production plant in South Anchorage, would become equity owners in the company. CIH, now an owner, would increase its holdings. A shareholder group led by ASI founder Howard Benedict will see its interest in the company decreased, but with an option to buy back shares up to 15 percent of the company. Poe said a new board of directors for the company is now being formed and a meeting is planned later this month to approve a business plan presented by ASI’s management team, led by Brady. The company’s original business plan called for it to produce 10 million pounds of manufactured seafood products in its first year. Greg Galik, spokesman for ASI, said the company has equipment installed for three production lines. A line that does precision cutting of four- and six-ounce portions, working with salmon, halibut, cod and pollock, is operational. A second production line to do breading is installed, and was undergoing testing and start-up when the company had to cut back its work force last August. Equipment for a production line to make fish patties has also been delivered, Galik said. As the company restarts operations, most likely in February, it will offer re-employment to workers who were laid off, he said. Poe said the search is still on for another partner in ASI. If that happens, additional capitalization will be brought to the venture. Meetings have been under way with an interested investor, an experienced seafood company, but the identify was not disclosed. Fifteen percent of the shares of the reorganized company are being held for a new investor. A new partner would have the opportunity to increase its equity by buying shares held by AIDEA and possibly Bank Sino Pac, Poe said. Under the restructuring, AIDEA contributes $6.5 million, primarily by foregoing lease payments on the buildings for two years, for an equity share of 25.4 percent. Bank Sino Pac converts $8 million in current debt to equity and contributes an additional $2.5 million in capital, for an equity investment of $10.5 million for 22.2 percent of ASI’s shares. Central Investment Holdings invests an additional $8 million in capital, in addition to $31 million invested so far, for 37.3 percent of the company’s shares. The shareholder group led by Benedict has invested $4.1 million and will own 0.1 percent of shares. The group has an option to buy an additional 2.9 percent of shares within two months, and a second option to buy 11.8 percent of shares within six years. ASI was just starting up production at the $125 million South Anchorage plant last spring when its major investor, Central Investment Holdings of Taiwan, said it would not make additional contributions of capital that were previously agreed to, and upon which ASI had based its start-up plans. Short of working capital, the company had to cut staff and put its start-up plans on hold. Last summer AIDEA, the state development authority which owns the buildings ASI had leased, called in a separate commitment CIH had made to the authority to provide $5 million in capital if the venture experienced difficulties.  


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