Tim Bradner

Walker seeks input to balance budget

Pick your poison: State income tax? State sales tax? A “cap” on Permanent Fund dividends? Draconian cuts to public services? A hike in oil taxes? It’s time for Alaskans to make decisions, say Gov. Bill Walker and Lt. Gov. Byron Mallott. There’s no escaping the reality that the state’s tough fiscal situation will continue. Oil revenues are sharply down, and multi-billion-dollar budget deficits are projected that will drain state cash reserves by 2019, leaving only the Permanent Fund and its earnings. By 2025, if the stars align, Alaska could have a large natural gas export project bringing in several billion dollars a year in new revenues. That’s not a sure bet, however, and the amount of revenue is still unknown. There are only rough estimates now.  That is academic, for now, because the state’s liquid cash reserves will be depleted five years before a gas project can be completed. Walker and Mallott are convening a citizen conference on the University of Alaska Fairbanks campus the weekend of June 5 through 7 with the hope that ideas for filling the budget hole will emerge. The Fairbanks conference will set the stage for a summer-long process of meetings that will extend into the fall, state budget director Pat Pitney said. The governor hopes that those at the conference, armed with information on the options, will help lead the later discussions. “The governor saw this legislative session (2015) as one of reducing costs of the budget. We felt we have to get our house in order first before we ask for new revenues,” Pitney said. “However, there is a lot of pent-up desire to talk about new revenues,” and Walker is now ready to take that step. Those at the conference will be divided up into seven subgroups Friday evening and asked to develop, by Sunday afternoon, ideas for filling annual budget gaps of $2 billion to $3 billion. “Our intent is to get everything on the table. We’re not looking for a single answer but on what the boundaries are, what’s acceptable and what’s off the table,” Pitney said. “This is just one step, but it will be taken by people who are relatively informed,” after the weekend briefing sessions. “We’ll then be taking this out to a much broader audience.” The first step, the weekend of June 5-7, will be a deep discussion that will be followed by a broad discussion with community groups around the state, Pitney said. The governor will use the information to draft revenue proposals later this year, which will be presented to legislators most likely in a special session, she said. The conference is open to all, and it is being streamed live on 360 North, a public affairs station operated by KTOO-TV, Juneau’s public television station. Almost 170 people have signed up to attend in person and about 100 of these were members of a citizen transition team assembled by Walker and Mallott late last year to make recommendations for the new state administration, which took office Dec. 1. Legislators, top state officials and the governor will be at the conference along with community and business leaders from around the state. Lawmakers, however, were still in an extended special session on June 3, trying to finish their business on the upcoming year’s state budget. Pitney will help lead the conference, and Brian Rogers, UAF Chancellor and a former legislator, will be taking an active role. Pitney said the Friday evening opening session will feature briefings by herself and Gunnar Knapp, director of University of Alaska Anchorage’s Institute of Social and Economic Development on the big picture of state’s finances, “what the big cost drivers are,” she said. Saturday’s sessions will feature briefings by commissioners and deputy commissioners on the agency budgets. “On Saturday we’ll be asking what the right size of government is, what people are comfortable with,” Pitney said. Moving the fiscal levers That night, people can work with an interactive model of state finances that allows different revenue options and spending levels to be punched in with the bottom-line effect pictured graphically. State Commissioner of Revenue Randy Hoffback said the model is similar to one put together earlier by David Teal, director of the Division of Legislative Finance, but has more bells and whistles. “It has more precision,” he said. The model allows a state sales tax at varying percentages, along with a personal income tax at different levels. Other taxes, like a gross receipts tax on business, which the state used to have, and higher fuel, fish, alcohol and other “sin” taxes are all in the model, Hoffbeck said. The model allows people to adjust petroleum tax rates and to eliminate state oil investment tax credits as options. Use of earnings from state reserve funds, including the Permanent Fund, are in the model along with adjustments that can be made to the Permanent Fund Division, such as capping it or even eliminating the dividend. “On Sunday, we’ll be asking people to actually balance the budget for future years,” using the model, Pitney said. “The groups are diverse enough that a wide range of options will be used, we believe,” she said. Revenue Commissioner Randy Hoffbeck said the usual outcome of exercises like this in the past is that a range of tools are needed to cover the gap, a mix of new revenue sources and continued spending reductions. There is no single answer, he said. There are multiple variations of income and sales taxes. Rep. Paul Seaton, R-Homer, already has a bill in the Legislature for a 15 percent personal income tax that would bring in about $500 million a year. A hypothetical state sales tax at 5 percent could bring in about $730 million if it were applied broadly, Hoffbeck said. “There’s not a lot of appetitite out there for a sales tax because many smaller communities have local sales taxes,” he said, and if a state tax were piggybacked on top of a local tax the burden would be significant. If the local taxes were allowed to be deducted from the state tax it would reduce revenues, as would exemptions that are often allowed with sales taxes, such as food or medicines. The big problem with options like these is that they will take time to set up. “The Legislature would have to enact these taxes next spring, in 2016, to allow up to get the machinery set up and revenue coming in by time the state’s reserve accounts are exhausted,” he said. Because 2016 is an election year with all 40 members of the state House and half the 20-member Senate standing for reelection, tax measures will be unpopular. Increases to a variety of smaller taxes like those on fuel, fish or alcohol, don’t really general significant new revenue. Increasing state taxes on oil and gas production won’t move the needle much, either, Hoffbeck said. Tapping Permanent Fund  earnings The only tool that can be implemented quickly is some form of using investment income, such as from the Permanent Fund, the commissioner said. Under certain circumstances, taking half of the Fund’s annual earnings could generate $1 billion to $1.5 billion for the state general fund. If the annual dividend were capped, say at $1,000 per year, that could reach $2 billion a year or more, according to the financial model developed for the conference. There are complications even here, however. While the corpus of the Fund can’t be appropriated, the earnings, which flow into the Fund’s Earnings Reserve Account, are available for appropriation. However, under current law only actual cash earnings like interest on bonds and cash receipts from sales of stock, or rentals paid on property, go into the Earnings Reserve, which is also the account from which the dividend is paid as well as the inflation-proofing injection of cash back into the principle of the Fund. While the Earnings Reserve fund is certainly available, and it currently holds about $6 billion, the annual payments depend on interest payments and what is sold. The state wouldn’t want to be in a position, in a down market, of having to generate cash for the budget by selling stocks, Hoffbeck said. The solution would be to switch to an endowment approach to managing the Fund’s income, a certain percent of market value that can be deposited into the earnings account. This is a common procedure used by most large investment funds, such as large university endowments. However, switching to an endowment method of payout may require a constitutional amendment, Hoffbeck said. Although the matter is not clear — the Legislature may be able to do it on its own — attorneys in the past have advised that a constitutional amendment, requiring voter approval, would be the safest route.

Walker requests acceleration on AK LNG

Gov. Bill Walker said May 29 he’s about “half-way” through a 45-day review of the Alaska LNG Project partnership terms and said he’s pleased at what he’s seen so far of the details, which are confidential. The state is a partner in the Alaska LNG Project along with North Slope producers BP, ConocoPhillips and ExxonMobil, as well as pipeline company TransCanada. Walker also said he has requested that negotiations between the state and industry partners be “accelerated” so have to have agreements concluded in time for a November special session of the Legislature, which he said will be needed for approval by lawmakers. The quickened pace means somegroups of state and industry people will be meeting on a continuous rather than intermittent basis, Walker said. The governor made his comments May 29, following an address to the Alaska Oil and Gas Association’s annual luncheon in Anchorage. “There are a lot of moving parts to this. We need to focus in getting to a FEED (Front-End Engineering and Design) decision no later than mid-2016,” Walker said. The priority given by the governor on the Alaska LNG Project negotiations also means that a plan to ramp up a state-backed gas pipeline as an alternative to the big project is on the shelf, at least for now. In a budget move, state legislators in April re-appropriated $158 million from the Alaska Gasline Development Corp. to public school budgets. This was money the governor had intended to use for engineering studies in the scale-up of a smaller state gas project. The governor has asked to get $118 million of the money back but so far legislators have not agreed to that. Since then Walker has said little about the backup pipeline and appears now to be putting most of his effort into finalizing the negotiations with the industry partners. For the Alaska LNG Project, agreements still to be finished include a deal on fiscal terms for gas production between the state and North Slope producers as well as a gas “balancing” agreement, basically a plan for managing capacity if there are shortfalls or upsets in gas production. The state must also sign a long-term commitment to TransCanada to ship state-owned gas, which amounts to about 25 percent of total production, through TransCanada’s share of the large gas conditioning plant on the North Slope and the 800-mile gas pipeline. Municipalities along the pipeline route and the state must also agree to a proposed Payment-in-Lieu of Tax plan for property taxes on the project. This is an important item because property taxes will amount to about $1 billion per year, state Revenue Commissioner Randy Hoffbeck has said. A proposed PILT deal now being studied by municipalities would not reduce property taxes as much as making their administration more flexible. Finally, the state must also conclude agreements with North Slope producers on how the state’s share of gas, in the form of LNG, would be marketed. The state could choose to market the LNG itself, which would require setting up a state LNG marketing organization, or the state could forge agreements with the three producers to sell state LNG. Meanwhile, the governor has said very little about the 45-day review since he announced it at an April 1 luncheon speech to Commonwealth North, an Anchorage business group. The starting and ending date for the review have been hazy, the governor acknowledged. Walker had hoped to initiate it at the end of the 2015 legislative session, he said, but the postponed adjournment and subsequent special sessions, and the budget gridlock, have preoccupied administration officials. The administration has also been silent on who is doing the review, although the name of Rigdon Boykin, a special advisor to Walker on natural gas, and the Washington, D.C., law firm, Greenberg Traurig, were released shortly after Walker spoke at Commonwealth North. The governor has said the results of the review will be made public. Industry partners in Alaska LNG have said the state, as a partner, has the right to review terms of the deal at any time. On another issue related to AGDC, the governor has so far not named a replacement to former state Sen. Joe Paskvan, who was nominated earlier for one of three vacant seats on the state corporation board but who was turned down by the Legislature. Two other nominees by Walker, Hugh Short, a financial specialist, and former state Sen. Rick Halford, were confirmed by lawmakers. AGDC’s board has not meet since March 12 but a meeting is now planned for June 11; the board is required to meet every three months by law. The corporation has been carrying out directions of the board at that March meeting, according to Miles Baker, spokesman for AGDC. This is mainly a $60-million work program designed to benefit both the Alaska LNG Project and the smaller in-state backup gas project if it is built, Baker said. The state corporation is also carrying out certain technical work, such as geophysical testing, on behalf of the Alaska LNG Project consortium. Items tentatively on the June 11 agenda for AGDC’s board include updated engineering estimates on the cost of pipeline connections and lateral pipeline to supply gas to communities along the 800-mile Alaska LNG Project route as well as an updated study of in-state demand for North Slope natural gas delivered through the 42-inch pipeline. Pipeline connections for communities is a state responsibility under the Alaska LNG Project partnership, and this has been assigned to AGDC.

A busy summer ahead for AK LNG

It will be a busy summer for work on the Alaska LNG Project. Engineering and environmental teams are at work, aiming to complete a $500 million pre-Front End Engineering and Design, or pre-FEED, study by later this year. This will include a revised cost estimate, currently about $45 billion to $65 billion, for the project that would transport North Slope gas for state use and exports through an 800-mile pipeline to Nikiski. The Alaska LNG Project is being planned by consortium of the three major North Slope producers, the State of Alaska as a 25 percent partner, and pipeline company TransCanada; ExxonMobil Corp. as the project manager. The state partnership is through the Alaska Gasline Development Corp., or AGDC. The pre-FEED work will set the stage for a decision next spring on whether to proceed to the more advanced Front-End Engineering and Design, or FEED, stage. That decision is planned for mid-2016. Two important efforts underway this summer include an integrated logistics plan, being done by Alaska-based PRL Logistics, that will indicate areas needed for pipe laydown yards, work camps and fuel storage. The plan will also describe how pipe will be moved and modules built for the giant project. Completion of the PRL Logistics study is scheduled for the end of the year. Meanwhile, Bechtel, a major engineering and construction firm, is working on a labor needs study that will include an inventory of available construction-related skills in Alaska. The company began work in April. The project team will also bring a small jack-up rig to Cook Inlet later this fall to do marine soil-sampling for a marine terminal at Nikiski, on the Kenai Peninsula, the site of the large proposed LNG plant. Work is also underway on the regulatory front, with a draft environmental impact statement, or EIS, being led by the Federal Energy Regulatory Commission. The EIS is part activity now underway that will allow FERC to license the project. The agency will begin “scoping” sessions with the public in November for the draft EIS, said Ann Miles, FERC’s executive director, who was in Alaska May 28. The scoping process officially started in early March, when FERC issued a formal Notice of Intent to begin the EIS. A second, more complete drafts of resource reports for the project are due to be released next February. A formal, detailed application to the FERC is expected in September 2016 and the final approval has been requested by July 2018, Miles said. Miles appeared at a “roundtable” on the project in Anchorage that was chaired by U.S. Sen. Lisa Murkowski. In a major step forward, on May 28 the U.S. Department of Energy issued a conditional approval for the project to export LNG to non-Free Trade Agreement countries, a category that includes potential big purchasers like Japan, Taiwan, India and China. Exports to countries that have signed a Free Trade Agreement with the U.S. was approved last November. Except for South Korea, which is an FTA nation, most nations on that list are not significant LNG buyers. DOE’s conditional approval for non-FTA buyers is significant because it allows LNG marketing activities by the North Slope producers to get underway officially. It is also the first form of approval for the project by the U.S. government, which is important for potential customers in Japan. Larry Persily, an oil and gas advisor to the Kenai Peninsula Borough and the former federal natural gas coordinator, said the Department of Energy is giving Alaska special treatment, allowing it to jump the line ahead of pending Lower 48 LNG export projects. “The Alaska LNG partners applied for export authority 10 months ago; some Lower 48 projects have been waiting three years for Energy Department approval,” Persily said in a written analysis. “What is also significant is that the permit is for 30 years, 10 years longer than the DOE has allowed in most export applications.” DOE would allow exports of up to 2.55 billion standard cubic feet of gas per day. Final approval of the export permit is conditioned on the completion of the EIS and final approval by FERC. Meanwhile, a lot of fieldwork and other activity is underway with the project. Persily reported, in his analysis, that more than two dozen Alaska LNG and contractor team members met with 60 federal, state and municipal officials May 12 to discuss the latest revisions on the project and the most recent planning for the pipeline route. For about half of the 800-mile route, the gas pipeline parallels the existing trans-Alaska Pipeline System, but planners are working to keep the high-pressure gas line at least 200 feet from the oil pipeline to allow space for construction equipment to maneuver. There will be pinch points in some constricted areas, however. The summer field season includes bore-hole drilling and soil testing, stream surveys, wetlands mapping and cultural resource surveys. AGDC will be conducting bore-hole drilling and other geotechnical work on behalf of the project. In his analysis, Persily said 51 streams will be surveyed this summer, adding to water-flow and fisheries data already collected on 253 streams. About 30,000 acres of wetlands will be mapped, adding to mapping already done on 153,000 acres of wetlands, Persily said. All in all, there will be 446 waterbody crossing including rivers, stream and lakes and including a 30-mile underwater section crossing the Inlet to Nikiski.

Haul road to reopen after limited impact to Slope operations

The Dalton Highway is scheduled to reopen June 5, with the completion of repairs to flood damage, said Meadow Bailey, spokeswomen for the Alaska Department of Transportation and Public Facilities. The highway is a vital supply link to North Slope producing fields that has been closed for an extended period due to flooding of the Sagavanirktok River near northern end of the road at Deadhorse. With truck supply cut off, field operators are flying ultra-low sulfur diesel and other fuel to the Slope along with other vital supplies. High waters also cut access roads to some drill sites in the Prudhoe Bay field and to the small Endicott field, resulting in some curtailment of production, field operators reported. “BP completed an orderly and safe shut-in of some of its drill sites. This is a precautionary action in response to the flooding from the Sag River which has temporary impacted the road access to these drill sites,” BP spokeswoman Dawn Patience said. “Crews are working on repairing roads. There are no safety or environmental incidents.” Natalie Lowman, spokeswoman for ConocoPhillips, said her company is flying in fuel and vital supplies to support field operations, as are other companies. “At this point our operations are not being affected,” she said. Access to the Endicott field, which is now owned and operated by Hilcorp Energy, was also cut off and Endicott production was temporarily suspended as a safety precaution, said Lori Nelson, Hilcorp’s spokeswoman. Meanwhile, trucks that normally carry drill pipe, ultra-low sulfur diesel, drilling chemicals and groceries to the North Slope are waiting in Fairbanks, at the southern end of the 430-mile highway, said Aves Thompson, executive director of the Alaska Trucking Association. While most critical supplies can be airlifted there are concerns that certain hazardous chemicals, including those used in drilling, cannot be shipped by air, Thompson said. However, producers and major contractors had anticipated the flooding, due to an unusually warm spring and heavy snow-melt, and laid in stockpiles of supplies, he said. A similar, although shorter, closure of the road occurred a few weeks ago when rising waters in the Sagavanirktok River, which is adjacent to the highway for many miles, forced heavy ice sheets across several miles of roadway. Bailey said the cost of the repairs to date, to replace culverts and place new gravel, is about $15.5 million, the bulk of which will be paid for by the federal government. Cruz Construction has been the primary contractor on the emergency repairs, she said, but Bryce Construction also also been involved. Bryce was awarded a contract on a $26.7 million Dalton Highway remediation project in the area where the flooding occurred, and DOT will soon transition the project from emergency repairs to the previously-scheduled construction planned for this summer, Bailey said. Bryce was awarded a contract in January to rebuild the road from Mile 401 to 414, near the end of the road at Deadhorse, and that work will be extended south to Mile 398. This summer the agency hopes to add another increment, to Mile 309. The new construction involves adding three to seven feet of gravel to the existing roadbed so the new road will be 7 to 10 feet above the floodplain. New culverts will also be added.

CD-5 production to begin in December

In what is likely the final action in a lengthy environmental lawsuit against ConocoPhillips’ CD-5 project on the North Slope, U.S. District Court Judge Sharon Gleason denied the plaintiff’s final motion for a summary judgment to invalidate the U.S. Army Corps of Engineers’ Record of Decision and permits for the project. The suit was filed in 2013 by several residents of Nuiqsut, a nearby Inupiat village. The project itself, a satellite of the producing Alpine oil field near the Colville River, has been under construction since 2013 and is nearing completion. Although Gleason ruled in 2014 that the Corps did not adequately justify its permit for CD-5, she refused to issue an injunction that would have halted construction. ConocoPhillips spokeswoman Natalie Lowman said CD-5 will begin production as scheduled in December, and will produce about 16,000 barrels per day at peak production. About 700 people were employed in construction on CD-5 over the past two winter seasons, Lowman said. Drilling has also started on production wells, she said. The cost of the project is about $1.1 billion for ConocoPhillips and its minority partner, Anadarko Petroleum Corp. “We are pleased with the court’s decision. Construction of CD-5 is almost complete,” Lowman said, “and we expect to see first production in the fourth quarter of 2015.” In a statement, Trustees for Alaska, an environmental law firm representing the plaintiffs, said the permits approved by the court allow ConocoPhillips to build multiple bridges and a six-mile-long road between CD-5 and the Alpine facilities . “The project runs directly through sensitive fishing and hunting areas for the residents of Nuiqsut. The Colville River Delta is the largest and most complex delta in the Arctic Coastal Plain,” the statement said. Sam Kunaknana, a Nuiqsut resident and lead plaintiff in the case, said, “I am very unhappy with the decision. This development is in the heart of our most important hunting and fishing areas. The high embankments make the road impassable, and prevented me from hunting for seal this winter.”   In her decision, Gleason said the Corps made a reasoned evaluation of changes to the CD-5 project configuration since the agency’s Record of Decision was issued. The changes were the basis of the plaintiffs’ 2013 challenge. The Corps review met the legal requirements, so no further environmental evaluation is required, the judge ruled. Although the plaintiffs were from Nuiqsut village, Kuukpik Corp., the village corporation at Nuiqsut, sided with ConocoPhillips and the Corps and against the plaintiffs in the case. All residents of Nuiqsuit including the plaintiffs are shareholders in Kuukpik. Also, Arctic Slope Regional Corp., the Alaska Native regional corporation for the North Slope, sided with ConocoPhillips and the Corps. ASRC owns the subsurface mineral rights at CD-5 and will receive oil production royalties that will be shared with Kuukpik Corp. and, under terms of the 1971 Alaska Native Claims Settlement Act, all other Native regional and village corporations in the state.   

Shell to move rig despite conflict with City of Seattle

Message from Foss Maritime Corp. and Shell to Seattle Mayor Ed Murray: Shove it. At the urging of environmental groups, Murray is attempting to block Shell and its support contractor, Foss Maritime, from using the Port of Seattle. Murray told the port May 4 it must obtain a special permit from the city to allow the semi-submersible Polar Pioneer, which has been hired by Shell, to be docked at Terminal 5 at the port. Foss Maritime Corp., which holds a lease on the terminal and has a contract with Shell to service the rigs, disagrees with the city’s interpretation of its land-use regulations and said Foss has a valid contract with the port to use the dock. Foss plans to fulfill its contract with Shell, the company said. Shell spokesman Curtis Smith said May 12 that, “our shared view (with Foss) that Shell’s lease and the supporting contract with Foss is valid, we have made the decision to utilize Terminal 5 under the terms originally agreed upon by the parties involve, including the Port of Seattle. Rig movement will commence in the days to come.” The port owns the land and terminal at issue and the city’s only legal tie is a land-use permit issued in 1994. Murray is now arguing that the permit allows Terminal 5 to only be used as a “cargo” port. Terminal 5 is a large multiuse dock that has been used for years by container ships, and light maintenance similar to any work planned for the drillships was frequently performed on container ships, Foss Maritime spokesperson Paul Query said. Foss is appealing the mayor’s decision to a city hearing panel and the port will join the appeal, the port’s commission decided May 12. The commission also asked Foss and Shell to delay moving the semi-submersible to the terminal until the legal issues are resolved, a sop to environmentalists who packed a public hearing held May 12, but the companies will not delay, they said later. “We understand the Port Commission’s request for more time but given the short windows in which we have to work in the Arctic,” the work on the Polar Pioneer must proceed, Smith said. “Foss intends to provide its customer the services for which it has contracted over the next few weeks as it prepares for the summer oil exploration season,” Foss said in its appeal letter to the city’s decision. “The city’s position is not supported by the plain language in the permit at issue. Foss President Paul Stevens said the port commission knew full well what activities would be occurring at the terminal when it granted the lease. “We’re going to proceed,” he said. Just what the city can do about it is unclear, although a notice of violation issued to the port is expected. “Under normal circumstances the city would not issue a violation to Foss or the Port of Seattle unless it prevailed in the hearing,” Foss said in a statement. The Polar Pioneer was meanwhile anchored in Port Angeles, a nearby Puget Sound port, until Foss moves it to Terminal 5 soon for the needed work. The Noble Discoverer, another Shell drilling vessel, was expected to be in Everett, Wash., another nearby port, by midweek. The Seattle affair is another political dustup for Shell as it prepares for its Arctic drilling. The company said it has other options but that it prefers to use the Port of Seattle because Terminal 5 is available along with the skilled labor needed. The matter has raised serious concerns in the maritime and Alaska business communities, however.  “If the Port of Seattle does not uphold a legally-binding contract with Foss Maritime, the negative consequences will be far-reaching, expensive and ruinous to the port and the region,” said Richard Berkowitz, Pacific director for the Transportation Institute, a maritime trade group. Berkowitz called the mayor’s action, “a political stunt promoted by fringe elements of our community who will never be appeased by rational decision-making.” Alaska Chamber President Rachael Petro echoed Berkowitz. “Should the City of Seattle’s effort to derail Foss Maritime’s Terminal 5 lease be successful, it will set a dangerous precedent. It will send a clear message that Seattle is closed to business by creating uncertainty,” Petro said in a statement. “It will signal to maritime companies involved with industries like tourism, seafood, retail import and export that their lease contract with the port could be derailed at the last minute should anti-business interests or elected officials decide to do so.” It its statement, Foss warned that the city’s interpretation of the Terminal 5 permit could have wider effects. “Under the city’s initial interpretation, Alaska fishing trawlers would not be allowed to winter over at the cruise ship docks at Terminal 90 and 91; the Seattle Fire Department’s fire boats would not dock at terminals 90 and 91 as they are now doing; and vessels of the U.S. Navy and other navies that visit during Seafair would not be allowed to tie up at port facilities. “Maritime businesses from Ballard to South Park (in Seattle) are doubtless nervously checking their permits and wondering if the mayor will deem them worthy.” Environmental groups showed up in force at the port commission hearing including a group of grandmothers who had composed a song against Shell, which they sang for the commission. One young women was in tears, describing how Shell’s drilling would raise global warming by two degrees, destroy the ocean plankton on which all life depends, she said, and lead to the end of civilization. Mothers with young children in tow displayed hand-drawn signs saying “Stop Shell!” which they said the children designed. However, plenty of supporters for Foss and Shell showed up at the commission’s hearing including substantial numbers from the regional maritime industry, organized labor and from Alaska including the state’s Arctic communities. Anthony Edwardsen, president of UIC, Barrow’s village corporation, said his company has done business with the Port of Seattle for years through its barge company, Bowhead Transportation. “We’ve operated since 1985 shipping fuel and freight to our northern communities and we depend on the Port of Seattle. We’re asking the port to abide by its lease with Foss,” Edwardsen said. “This action (attempting to deny access) is an attempt by environmental groups to hold our communities hostage.” John Hopson, Jr., Mayor of Wainwright, Alaska and a North Slope Borough assemblyman, told the commission he had left spring whaling camp to fly to Seattle to testify to the port commission. “We came off the ice (from camp) to speak to you and it is a huge imposition at a critical time of year,” Hopson said. He urged the commission not to be swayed by environmental groups. Economic development is important to the Arctic to build infrastructure that is badly needed. “The Arctic is just not a place for polar bears. We live there,” he told the commission. Two Alaska state officials, state Sen. Cathy Giessel, R-Anchorage, and state Commissioner of Commerce and Economic Development Chris Hladick, reminded the commission of the long shared history between Alaska and Seattle. Giessel reminded the commission that the Alaska and Klondike gold rushes helped the city grow to dominate the U.S. Pacific Northwest and that Seattle played a vital role in Trans-Alaska Pipeline System construction in the 1970s. She urged the commission not to buy the message that the Arctic is “some sacred place.” People live there, she said. Hladick, who is a former mayor of Unalaska, a major fisheries port with extensive links to Seattle, said he was shocked that the termination of Foss’ lease would even be considered. “If this happened it would hugely damage the reputation of the port. After a century of economic partnership, we ask you to honor that lease,” Hladick said. Glenn Reed, president of the Pacific Seafood Processors Association, said his member companies use Port of Seattle facilities to winter over and do maintenance on large fishing vessels. The fisheries community is often also targeted by environmental groups and Reed said there is concern that environmental activists could attempt to pressure the port over its support for fisheries.

Shell wins injunction against Greenpeace

Shell made a big step forward May 11 in its quest to explore in the Chukchi Sea. The U.S. Bureau of Ocean Energy Management conditionally approved the company’s exploration plans, filed earlier this year, for federal Outer Continental Shelf leases Shell bid on in a 2008 federal lease sale. Since then the company has been able to drill two partly-completed wells in 2012, one in the Chukchi Sea and one in the Beaufort Sea, and has spent about $6 billion so far on its Arctic program. In another development, Alaska U.S. District Court Judge Sharon Gleason issued a preliminary injunction May 8 that bars Greenpeace, the environmental organization, from attempts to impede operations of Shell’s vessels while in Puget Sound, in ocean transit or in the Arctic this summer. Gleason ordered safety zones for the ocean surface around each of the vessels ranging from 500 to 1,500 meters depending on the activity being performed and also established a restricted airspace zone of 3,000 feet and a half-mile radius around drillships and major support vessels while in the Arctic. The court also prohibited the use of drones by Greenpeace without prior court approval. Meanwhile, the approval of Shell’s exploration plan by the U.S. BOEM still requires the company to secure other federal permits such as drilling permits issues by the U.S. Bureau of Safety and Environmental Enforcement, a sister agency to the BOEM within the Interior Department. Biological Opinions on endangered species from the federal National Oceanic and Atmospheric Administration, or NOAA, must also be obtained, BOEM said in its May 11 announcement. According to NOAA Fisheries Alaska Region spokeswoman Julie Speegle, there are two pending biological opinions. One is related to Lease Sale 193 in the Chukchi Sea. The other is specific to Shell’s 2015 exploration, and includes incidental harassment authorization protocol for encounters with protected species. Speegle said both are expected to be complete by the end of May. BOEM Alaska officials praised the Alaska community and tribal leaders who participated in reviews of the exploration plan. “The review of this plan was a team effort,” said James Kendall, BOEM’s Alaska regional director. “We’d like to thank the experts in our cooperating agencies, the tribal government representatives who took time out from their busy schedules to do government-to-government consultations and of course the many members of the public and stakeholder organizations who provided us with valuable comments during the review process,” Kendall said. Alaska U.S. Sen. Dan Sullivan praised the BOEM’s approval decision. The Obama administration has worked to limit energy exploration in Alaska, “but I hope this announcement represents a new approach,” the senator said. “The Department of the Interior and Shell still have work to do before any exploratory drilling occurs in the Arctic this summer, but this news is a positive step,” Sullivan said. Alaska Oil and Gas Association president Kara Moriarty also voiced support for the BOEM decision: “Shell continues to prove to regulators that it has a legitimate plan to work safely in the Arctic, and that balance between development and protection can be achieved.” Journal reporter DJ Summers contributed to this article.

Sullivan tapped for oversight of Pacific force rebalancing

Alaska U.S. Sen. Dan Sullivan has been tasked by Senate Armed Services Committee chairman John McCain to be the committee’s point person on oversight of the Pentagon’s Pacific “rebalancing” of U.S. forces, being done to counter potential North Korean aggression, an expanding Chinese military presence and Russia’s own rebalancing of forces to the Arctic. Sullivan wastes no opportunity to remind top Pentagon brass that reinforcing the U.S. presence in the Pacific doesn’t make sense if the Army pulls troops out of Alaska. Additionally, energy supplied from Alaska in the form of liquefied natural gas reinforces security in the Pacific region because it diversifies supplies, reduces transport and comes from a politically secure source, the U.S. Sullivan got a chance to reinforce that point in his first official trip to the Pacific, done at McCain’s request, when he scored a private meeting with Japan Prime Minister Shinzo Abe. That was a bit of a coup for a newly-elected freshman senator. Sullivan said he’s been a frequent critic of President Barak Obama, particularly on foreign policy, but he is supportive of the president’s two Pacific initiatives: the force rebalancing and a pending Pacific trade agreement. “The Asia-Pacific region is critically important to Alaska, not only in trade but also in defense,” because Alaska forces will be among the first responding to an emergency in the region, Sullivan said. McCain asked Sullivan to meet with top U.S. military officers in Hawaii, Guam and Okinawa, and Sullivan added Tokyo to meet with top Japanese officials including Abe. It was just before the prime minister’s trip to the U.S., which included an address to a joint session of Congress. “The message I delivered to the prime minister and also to the U.S. Ambassador to Japan, Caroline Kennedy, is that the military rebalancing is on track but that a component is missing, energy supply,” Sullivan said in an interview. “That is an opportunity to significantly deepen our security relationship with Japan and Korea. They badly need energy, and we have it.” In their meeting Abe told Sullivan that Japan needs more natural gas and that he would be pleased to see it come from places other than the Middle East. Abe told the senator that obtaining gas from Alaska makes sense, Sullivan said. “I found the prime minster very up to speed on Alaska gas,” he said. Sullivan explained the regulatory status of the Alaska project and that it was now in the pre-front end engineering and design, or pre-FEED, phase, but he was able to describe construction now underway at Point Thomson, involving several billion dollars of investment, as a sign of serious commitment to the gas project by industry and the state. Given the interest in Japan, now would be perfect time for the U.S. Energy Department to grant conditional approval to the Alaska LNG Project for the export of natural gas to Asia, Sullivan said. It would be an important gesture in the energy-security relationship. “This would be the first official U.S. approval for the project and it would communicate that the support from the federal government is real,” the senator said. The U.S. DOE has said that it will “fast-track” the export permit application for the Alaska LNG project, Sullivan said. U.S. Energy Secretary Ernest Moniz told the senator in January that the permit was “to be issued soon,” Sullivan said he was told. It’s now May, and “I’m still waiting,” Sullivan said. On the force rebalancing, Sullivan was briefed by officials on the large U.S. military buildup on Guam and the transfer of forces away from Okinawa to Guam and Australia. Alaska is already playing a part in the rebalancing, as seen in the recent Air Force moves to retain F-16s interceptors at Eielson Air Force Base and plans to locate two new F-35 squadrons there. However, the Army’s plan to reduce its forces, which could affect Alaska and Army brigades stationed here, seems contrary to the plan, Sullivan said. Sullivan grabs opportunities to make that point with top brass during meetings of the Armed Services Committee. In one hearing on April 30, Sullivan questioned Air Force Gen. Philip Breedlove, commander of the U.S. European Command. Given the buildup of China’s military and Russia’s recent assertiveness in the Arctic, the senator asked Breedlove: “Do you think it makes sense to remove one Army soldier from Alaska, let alone one or two entire Combat Brigade Teams and the only airborne Army capabilities in the Pacific and Arctic?” Breedlove replied, “Senator, you rightly recognize that this (Alaska) is a strategic area and one that is important, and that (Russia’s president Vladimir) Putin will be watching. “I do know the Army is facing some fiscal issues but I do believe it is important that we keep the right capabilities to resist aggression in the north.” In an earlier April 16 hearing of the committee, Admiral Samuel J. Locklear, commander of the U.S. Pacific Command, agreed that the Alaska forces could be mobilized quickly to Asia. “If you look at the globe you can see that the Alaska forces are as far west, or even further west, than Hawaii. So the response time of those forces to Asia would be very good,” he said. Locklear also complimented the training facilities in Alaska: “The range complexes we have in Alaska are very important, because that’s where we get our high-end training for some of the hardest-type environments our aviators will fly in,” he told Sullivan and other Armed Services committee members.

Gridlock stiffens over budget

It seems inconceivable that a state government endowed with billions of dollars in liquid assets must develop contingency plans for state agencies running out of cash shortly after the new fiscal year begins July 1. But that is just what the departments of Revenue and Administration are doing, just in case the political gridlock over funding the state’s fiscal year 2016 budget isn’t ended. The current fiscal year ends June 30, and unless there’s agreement among a group of Democrats in the state House and the Majority Republicans by then, a state government shutdown could be possible. As remote as it might seem, there is concern that even the possibility of it could raise concerns among bond rating agencies who are already wary of Alaska’s huge deficits. There are still six to seven weeks for a bargain to be struck — the main issue is over money — and a deal is likely given the high stakes. However, who would have thought the impasse would have lasted this long past the Legislature’s scheduled adjournment of April 19? Both sides seem dug into the positions and there’s little that Gov. Bill Walker can do except jawbone, because only the Legislature can appropriate money, not the governor. Walker is reported to be meeting with both sides to try and find compromise. Here’s what the disagreement is about: The state faces a yawning budget deficit of about $3.9 billion for the current budget year, ending June 30, and another deficit of about $3.2 billion is estimated for fiscal year 2016. There are two liquid asset reserve funds available to fill these gaps. One is a Statutory Budget Reserve, or SBR, that can be tapped with a majority vote by the Legislature. The second is the Constitutional Budget Reserve, or CBR, which requires a three-quarters vote of both the House and Senate. In the Republican-controlled, 20-member Senate there are enough votes in the majority to provide the three-quarter approval of 15 votes. That’s not the case in the 40-member House, however. The Majority doesn’t have the needed 30 votes. Some votes are needed from the House Democratic Minority. The impasse kept lawmakers in Juneau an extra week beyond the statutory adjournment deadline of April 19, but they finally gaveled out on April 27 after passing a budget bill agreed to in a House-Senate conference committee. The budget funded the deficit for the current fiscal year 2015 budget, but not the fiscal year 2016 budget. The governor immediately called a special session, mainly on the budget, to begin April 28. Legislators covered funding for the fiscal year 2015 deficit with money from the SBR fund, which pretty well drained that fund, and with money taken from the Public Education Fund, a reserve held for school allocations for fiscal year 2017.  Republican House and Senate leaders have passed a budget that trims state operations spending for fiscal year 2016 by about $443 million. Democrats in the state House say too much is being cut. The governor is proposing that $95 million be added back, but the Republican-controlled Senate Finance Committee said that’s a non-starter. Not surprisingly, the House Democrats are bargaining hard for their votes on the needed CBR withdrawal for fiscal year 2016. They are demanding more money for education, the state’s honoring of 2.5 percent cost-of-living pay raises for unionized state employees agreed to by contract, and expansion of Medicaid as allowed under the federal Affordable Care Act. The governor is urging legislators to resolve the money issues before the end of the fiscal year on June 30 so that the budget for upcoming fiscal year 2016 is fully funded.  Although Walker included Medicaid expansion in his call for a special session, in subsequent remarks he has said he is willing to have legislators consider Medicaid in a separate special session later this summer. It’s not known whether the House Democrats will agree to that, however. On the money issues, the big controversy has been over funding for education. The Senate Finance Committee cut money for schools by more than $47 million for fiscal year 2016, but a House-Senate conference committee softened it to a $16 million reduction. However, the conference committee also did not fund two increments of additional money for the Base Student Allocation, or BSA, a formula that governs state money for school districts, that were authorized by lawmakers last year. These would have amounted to $12.5 million added one year and an additional $12.5 million in the second year. Just how much more the House Democrats are pushing for is unknown, although it has been said that eliminating the $16 million cut and funding the two sequential $12.5 million increases is being requested. As for the state employee pay raises, the increases for unionized state employees add up to about $33 million in state unrestricted general funds for the union members and about $12 million in state unrestricted general funds for the non-union state employees. In a budget bill introduced at the start of the special session the governor has asked for $54.59 million in additional state unrestricted general funds and the spending of an additional $29 million transferred from other funds, or a total of about $95 million. In addition to money for education and the union state employees’ pay raises — but not the non-union workers — Walker asked for money to be restored to other agencies, such as $7 million for state ferries an $7 million to the University of Alaska. It is not clear whether Walker’s budget request would meet all the demands of the House Minority Democrats. Meanwhile, in terms of available money, if the funding for fiscal year 2016 is not resolved the state will be able to limp along and pay bills until the end of September, or possibly through November by raiding two other reserve funds that can be tapped by a majority vote. One is an endowment established to support rural Power Cost Equalization payments, which has about $980 million. A second is a fund established to support scholarships for Alaska students, which has about $460 million. However, the Earnings Reserve Account of the Permanent Fund, an account that holds accumulated earnings that are not spent on citizen dividends and inflation-proofing payment to the principle of the fund, holds about $6 billion and could also be tapped by the Legislature with a majority vote. However, any use of fund earnings is considered politically risky for legislators, although the money is available if really needed. Whether it would be tapped to avoid a state government shutdown, if it came to that, is an unknown.

AIDEA approves $30M deal for Cosmo development

The Alaska Industrial Development and Export Authority has given approval for a $30-million financing package that will allow BlueCrest Energy to begin drilling and development at its Cosmopolitan offshore oil project in Cook Inlet. BlueCrest will have construction of onshore facilities underway in late summer and drilling started near the first of next year, company President Benjamin Johnson said. BlueCrest plans to drill 33 production and injection wells over seven years and to produce 8,000 barrels per day, according to information supplied by BlueCrest to the Alaska Industrial Development and Export Authority. Crude oil will be trucked from the Cosmopolitan onshore oil processing facility near Anchor Point to the Tesoro Alaska refinery at Nikiski, north of Kenai. That will require about 20 to 25 trucks moving north on the Sterling Highway, or about one truck per hour, Johnson said.  “We’re very pleased,” by AIDEA’s approval,” Johnson said. “We’ve got a lot to look forward to.”  In a statement, AIDEA’s Executive Director John Springsteen said, “AIDEA’s financial participation in this rig will not only help secure long-term energy supplies for Alaskans, but it will help job growth and to secure the region’s economy.” Analysis of the reservoir indicates that BlueCrest will be able to produce 8,000 barrels per day after the first three to four production wells have been completed, according to information supplied by the company to AIDEA.  Johnson said updated resource estimates for Cosmopolitan are still confidential. However, an estimate published in September 2013 by Buccaneer Energy, a former 25 percent partner in Cosmopolitan, indicated a proven oil reserve of 31 million barrels and proven and probable reserves of 44 million barrels, based on previous drilling by other companies.  “Since then we’ve drilled another well, so we have a lot more information,” Johnson said. BlueCrest and Buccaneer did additional delineation drilling in 2013. The Buccaneer estimate was derived mainly from previous drilling at the deposit by former owners ARCO Alaska and Pioneer Natural Resources. BlueCrest’s total development cost is estimated at $40 million with the state authority providing $30 million in a seven-year loan, according to documents provides to AIDEA. The company intends to purchase a 3,000-horsepower rig with a capability of drilling to 30,000 feet. Johnson said the rig is new but is in components that will be assembled and tested near Houston, Texas, then disassembled and moved to Anchor Point. Once there the rig will be assembled and tested again. The Cosmopolitan deposit is about three miles offshore Anchor Point, which is north of Homer on the east side of Cook Inlet. The oil production wells drilled into Cosmopolitan’s oil reservoir will be high-angle wells drilled laterally from an onshore pad. BlueCrest’s schedule is to begin construction of onshore support facilities this fall and then begin drilling in early January, Johnson said. The first production well would be complete in February 2016 and a second well completed in April, according to information given by the company to the state authority. Production is to begin in late spring, 2016, the company told AIDEA. Johnson said BlueCrest also plans development of a shallow gas deposit that overlies the oil reservoir but that is not included in the current plan. A tentative contract to sell the gas has been agreed to with Los Angeles-based WesPac Midstream, which plans to develop a medium-sized natural gas liquefaction plant in Cook Inlet to supply LNG to utility and industrial customers in Alaska. Development of the gas would require construction of two small gas production platforms at the location, Johnson said previously.  The Cosmopolitan deposit has long been known in Cook Inlet. Oil was initially discovered in the early 1960s by Pennzoil, but the discovery was not developed. ARCO Alaska later acquired state leases on the prospect and in 2001 and 2003 ConocoPhillips, which had purchased ARCO’s Alaska assets, drilled exploration wells to confirm the oil discovery and also conducted production tests. Dallas-based independent Pioneer Natural Resources acquired the leases from ConocoPhillips and drilled another test will in 2007 and also conducted an extended production test. During its production tests ConocoPhillips encountered problems encountered by the well drilled through thick coal seems, company officials acknowledged at that time. Pioneer Natural Resources did not mention problems during its production tests, however. The leases were sold to BlueCrest and Buccaneer after Pioneer Natural Resources decided to focus on shale oil development in Texas.

SBA honor is an award for Ketchikan

Renee Schofield, owner and CEO of Ketchikan’s TSS Inc., has won the Small Business Administration’s Small Business Person of the Year award for Alaska in 2015. The award is really for Ketchikan, Scofield said. “This isn’t about me. It’s about a community that has raised a business,” she said. Schofield’s business, which is in drug testing and safety counseling, is still small. She has 13 employees in six locations, three of them outside Alaska. The TSS story is pretty much start-from-scratch. She bought the bare-bones firm in 1999 when it had one small office and four clients. “No one really knew how long the company had been in business. It was started in the 1980s when federal requirements for drug screening came about,” she said.  There had been several owners by the time Schofield got it. Schofield hustled despite naysayers in the community who predicted a no-growth future. Ketchikan is a small community and Schofield developed a networking strategy, joining the Chamber of Commerce and, most important, seeking the help at the Ketchikan office of the Alaska Small Business Development Center. All this paid off. She now has 400 clients in several Southeast communities with branches in Juneau and Craig, and Lower 48 branch offices in Keokuk, Iowa, which is where Schofield and her husband are from, as well as Quincy, Ill., and Hannibal, Mo. Her timing was good, because she got into the substance-abuse testing field just as federal requirements for screening were expanding. A lengthy client list now includes sport fish charter and tourism boats and marine tug operators as well large companies like Vigor Alaska, operator of Ketchikan’s shipyard, which is expanding. Ketchikan, with its vibrant maritime industry, is a key location for Schofield, but the nature of the business is changing, too. Vigor Alaska, for example, has asked her firm to screen for exposure to harmful chemicals that workers might encounter at Vigor’s Ketchikan shipyard. As she developed her business Schofield grew to appreciate the value of networking. In 2006 she entered a national contest for women entrepreneurs, “Make Mine a Million,” and was one of 40 women business-owners chosen for a $250,000 prize. Among the judges was Hillary Clinton, the former U.S. senator, Secretary of State and now presidential candidate. The competition was held in New York. “A critical part of it was that we had to show how we could grow quickly, in three years,” Schofield said. “I had to give an elevator pitch,” a quick pitch like one could give in an encounter with a potential investor while riding in an elevator. “My pitch showed how I develop a culture of safety with my clients, and secondly, on the social-benefit side, how to reduce the stigma people who are recovering from substance abuse often feel,” Schofield said. She feels a personal stake in this because of problems her own family has experienced. Winning the award opened up a new universe of contacts and networking opportunities, however. She also joined the national Drug and Alcohol Testing Association, which further helped her refine procedures and instill confidence among clients. The business of substance use testing has grown far beyond alcohol and the common recreational drugs that include marijuana, cocaine and opiates. There is a routine screening for substances that can now be expanded to include others if desired by clients, Schofield said. There are other ways to do tests than urine and blood samples also, including testing of samples of hair or sweat. TSS Inc. can now do paternity tests, too, and also does training in CPR and assisting clients in dealing with federal and state safety regulations. “This (occupational safety) is a specialized area so we mostly help our clients find the right people in the state or federal agencies to provide assistance,” she said. Several Southeast school districts are also among the company’s customers. Schools have to screen members of athletic teams for substance use. Schofield’s firm doesn’t conduct school tests but rather advises schools on how to do them. The legalization of recreational marijuana use in Alaska has opened up a new field of business although testing for marijuana has long been a staple of the firm’s business. There are a lot of uncertainties around thresholds of impairment with marijuana that will take time to sort out, Schofield said. Colorado and Washington, two states that preceded Alaska in legalizing recreational marijuana, have set tentative thresholds for impairment and these are low enough that, “even casual smoking might put a person under the influence,” legally, Schofield said. Some European nations that have been quite liberal with marijuana, such as the Netherlands, are now becoming more concerned with long-term health effects and are starting to roll back legal thresholds, she said. Also, as legalization expands there are concerns about having global, uniform standards. “So many of us work globally and we need to have common understandings as to when a person who is traveling is impaired. We need to have everyone on the same page,” Schofield said. Schofield grew up in Iowa and her roots in the area led her to locate a branch of TSS Inc. there. Her husband, Ed, is from Ketchikan but the family moved to Iowa when he was young, and that was where he met Renee. The couple eventually relocated back to Ketchikan and lived there through the community’s experience with losing its major industry, a large pulp mill, in 1997. That was painful for the community but it has now rebounded with a more diversified economy that is now expanding, including the shipyard, fisheries and tourism. “Our community has ridden the roller coaster and we found we just had to find ways to get through it, and to be creative and innovative,” Schofield said. The small town character of Ketchikan was what sustained Schofield as he was developing TSS Inc., she said. Things like having a local banker, and an accountant, who had personal knowledge of people and the community, and who looked on customers as friends, counted for a lot. “Ketchikan is the reason why this business has done so well,” she said. But then, there’s the rain. Having grown up in Midwest with warm summers and lots of sun, it took a lot of adjustment to get used to 60-degree summer days and rain every day. “The hardest thing for me was getting my kids out to play, but in the rain. Where I come from you go indoors when it rains,” she said. After all these years there are still days when the rain wears on her, Schofield admitted, but in so many other ways, including with her business, she feels blessed in living in Ketchikan.

Modest bidding for 7 Cook Inlet leases at areawide sale

Bidding was modest in the state’s annual Cook Inlet areawide lease sale held May 7, a symptom of low crude oil prices and a limited regional market for natural gas. The state Division of Oil and Gas auctioned seven oil and gas leases May 7 to three companies. Hilcorp Energy LLC and AIX Energy LLC, two producers in the region, bid on and were awarded tracts along with Woodstone Resources LLC, a small independent company based in Texas. Corri Feige, director of Alaska’s Division of Oil and Gas, said the state collected $749,819 in bonus bids on seven tracts. The most aggressive bidding came on three tracts east of Homer, on the southern Kenai Peninsula, near where Buccaneer Energy drilled an unsuccessful exploration well two years ago. One bid in that area, on Tract 790, came from Hilcorp Energy for $210,486, the highest bid of the sale. Woodstone Resources bid on two nearby parcels, with bids of $145,152 for Tract 789 and $126,280 for Tract 788. The only competitive bids in the sale were on one tract adjacent to the small Kenai Loop gas field near the city of Kenai. AIX Energy, which owns and operates the Kenai Loop field, bid $66,091 and was high bidder on Tract 158, but Woodstone Resources offered a competing bid for the lease, for $44,625. Hilcorp Energy bid and won on a nearby Tract 126, for $67,746. Woodstone Resources also bid $64,720 and won one tract on Cook Inlet’s west side, Tract 437, near the village of Tyonek. In total, that company acquired three tracts in the sale, while Hilcorp Energy and AIX Energy acquired two tracts each. The state Department of Natural Resources holds an annual “areawide” Cook Inlet sale every spring, making 28,800 acres of unleased onshore and offshore lands available. A sale on state onshore and offshore lands on the Alaska Peninsula, in southwest Alaska near Bristol Bay, was held simultaneously with the Cook Inlet sale, but there were no bidders as usual. Bidding in the 2015 Cook Inlet sale was much lower than in previous sales, observers at the sale said. Firms that have previously been active in Cook Inlet sales, like Apache Corp., were absent this year. Apache is a major leaseholder in the region and is exploring for oil and gas. While the bidding was modest there is a substantial amount of activity in the Inlet, most notably work by Furie Operating Alaska to develop its Kitchen Lights gas discoveries in Upper Cook Inlet. A barge carrying an assembled gas production platform is reported to be en route from Seattle for Furie’s project. The company also moving pipe for subsea pipelines by barge that was stored at Port MacKenzie, in the Matanuska-Susitna Borough. Furie plans to install and platform late this spring and construct its subsea pipeline this summer. The company, which is privately owned, has not disclosed the extent of its gas reserves or its intended customer.

Legislature strips funds for gasline

After a session spent dueling with Gov. Bill Walker over his plan to spend $85 million in state funds to increase the size of a state-led natural gas pipeline, and Walker’s veto of a bill stopping him from spending the money, the Legislature may have gotten the final word. In their final budget action before adjourning April 27, lawmakers took the money away from the governor. The House-Senate conference committee report on the operating budget, which resolved differences in the House and Senate-passed budgets and stipulated the sources of funds, took $157 million in unspent funds from the Alaska Gasline Development Corp., the entity that would lead the state-backed pipeline. In a twist, however, the committee gave the money to schools, through an appropriation to the Public Education Fund. Legislative budget analysts say the governor can certainty “line item veto” the action, but if he does so it subtracts $157 million from money available for school districts. Walker’s fight with legislative leaders over the funding for the pipeline dominated the final weeks of the session. The squabble doesn’t affect the state’s payments for its share of the large Alaska LNG Project, for which preliminary engineering is underway, but involved unspent money in AGDC’s budget that Walker wants to increase the size of a separate, smaller state-led gas pipeline intended to serve Alaska communities in case the project falters. In a budget bill submitted to the special session of the Legislature that convened April 28, Walker asked for some of the AGDC funds to be restored. Whether that will happen is problematic given the state’s projected deficit this year of $3.9 billion and the ill feelings between the governor and House Speaker Mike Chenault, R-Nikiski, and Senate President Kevin Meyer, R-Anchorage, over the issue. Meanwhile, what legislators and the governor are now grappling with is how to complete the budget funding for the state fiscal year 2016, which begins July 1. An impasse over funding for education and other issues led to the Democratic minority in the state House refusing to vote for a withdrawal of funds in the state Constitutional Budget Reserve, or CBR, to completely fund the fiscal year 2016 budget. About $8.5 billion is currently in the CBR fund. The state Constitution requires a three-quarters vote of both the House and Senate to make the withdrawal. The Republican majority in the Senate holds enough seats in the 20-member body to reach the required three-fourths, and the Senate voted to approve he withdrawal when it passed the state operating budget, House Bill 72. However, in the House the Democratic minority holds enough votes to block the withdrawal (some Democrats in the House, from rural areas, are aligned with the majority), and the Republican-controlled majority couldn’t muster the 30 votes needed to get the money. House Democrats had a list of demands in addition to more school funds including passage of Medicaid expansion and approval of pay raises for state employees. When a deadlock developed, the House and Senate majorities decided to circumvent the House Democrats by taking funds from other accounts, like the unspent AGDC money, where a simple majority vote could approve the action. Legislators had to first fund the deficit for the current state fiscal year 2015, which ends June 30. With oil revenues for the year now estimated at about $2.2 billion, the 2015 deficit is now estimated by the Department of Revenue at $3.93 billion. About $2.8 billion of that can be covered with money taken from the Strategic Budget Reserve, another cash account where only a majority vote is required for a withdrawal. This essentially drains that account, leaving only the money in the CBR. That still left about $1 billion in the 2015 deficit, so the House and Senate majorities opted to cancel an appropriation of that amount typically made to the Public Education Fund, an account that holds money for state payments to school districts in the following year. This won’t immediately affect schools because money now in the education account, appropriated last year, will go out to school districts as scheduled. But the fund won’t be replenished, which means the Legislature will have to make a $1 billion-plus appropriation next year for the fiscal year 2017 school funding cycle. As the budget conference committee members scrounged for sources of money to tap, they considering taking money from the Power Cost Equalization Fund, an endowment of about $980 million that finances subsidies for residential power costs in small communities around the state, and from the Alaska Higher Education Investment Fund, which funds college scholarships and holds about $460 million. In the end the conference committee left those funds alone, however. As a last-ditch reserve the Legislature could also appropriate money from the Earnings Reserve account of the Permanent Fund, which currently has a balance of about $6 billion. Although the principle of the Permanent Fund cannot legally be spent, its annual earnings can be appropriated, and these have now accumulated in the Earnings Reserve account. Tapping these funds would be politically sensitive, however, and that source was not considered.

REI advances work for Port MacKenzie LNG

A critical action-item for Resource Energy Inc., or REI, is getting engineering and design work underway this year for its planned 1-million-ton per year liquefied natural gas project at Port MacKenzie, in the Matanuska-Susitna Borough across Knik Arm from Anchorage. REI also hopes to initiate its pre-application process with the Federal Energy Regulatory Commission later this year, the company’s Alaska manager Mary Ann Pease told Commonwealth North’s energy working group April 24. Commonwealth North is an Anchorage-based public policy group. REI is on an aggressive schedule to get its plant into operation by 2019 or 2020 to take advantage of available market opportunities in Japan. A target date for completion of an environmental impact statement, or EIS, is late 2017, but the company is now discussing the possibility that a full EIS might not be needed, and that a more streamlined environmental assessment could be used. Those discussions are underway with the Federal Energy Regulatory Commission, Pease said. Another challenge, however, is that REI has been unable to nail down a gas supplier for its project, although talks are underway with independent companies that have made recent discoveries in Cook Inlet, Pease said. The supply picture is likely to firm up if the company gets its project into engineering, she said. About 160 million cubic feet per day of gas would be needed for the plant. REI is important for Cook Inlet because the company represents a major new customer. Independent companies have made new gas discoveries in the Inlet but currently have no customers, she said. Hilcorp Energy, an existing gas producer, has met needs of the regional utilities into 2018, she said. “Cook Inlet’s potential for gas will remain just that unless there are additional customers for the gas,” she said. “The only other new customer on the horizon is Fairbanks but the amounts of gas needed will be too small to justify the development and exploration for additional gas.” REI’s plan is for its plant would be built in modules and while an LNG technology supplier has not yet been identified one modular system the company is considering is that of General Electric. That company manufactures LNG units capable of producing 250,000 metric tons per year of liquefied gas. To get to 1 million tons per year the project would employ four of the GE units as an example, Pease told Commonwealth North. Capital costs are now estimated to range between $1.2 billion to $1.8 billion, and an additional $1 billion would be needed to purchase the gas needed for the plant, she said. REI plans to supply LNG to two municipal and regional industrial customers in Japan. The company sees no conflict with the large Alaska LNG Project, Pease said, because REI needs to be in operation much sooner, by 2020, compared with the Alaska LNG goal of 2024 or 2025. If either the Alaska LNG Project or an alternative state-led gas pipeline is built, then REI plant could become a customer, purchasing North Slope gas delivered through one of those pipelines. The primary motivation of REI’s backers in Japan is for the customers in that nation to have better control of the LNG supply and its cost structure by owning the plant. Also, REI would import LNG into smaller, regional ports in Japan, which would mean customers would have more flexibility than is currently the case, where there are just a few large LNG import facilities that are controlled by major utilities and trading companies. REI’s plant would be about the same size as the existing ConocoPhillips LNG export plant at Nikiski, near the city of Kenai. It would be built on a privately-owned land tract near the borough’s Port MacKenzie. Pease said REI has an option to purchase the land that must be exercised by the end of the year. Anchorage-based Golder Associates has been doing geotechnical bore-hole drilling at the site, Pease said. Pease said the Japanese company sees advantages in its “start small” strategy compared with the larger project, however. REI believes that being first into the market, at least with a new Alaska LNG project, is important. Being smaller, starting with 1.5 million tons of LNG per year, will allow it to get a toehold in the Japan market and then expand as the market grows. The Alaska LNG Project, in contrast, is so big that it will have to secure sales contracts for very large volumes at long terms, which is a challenge given the many other LNG projects chasing the same buyers in Asia, including Japan. “There has been a recent change in thinking in the LNG business. Until just a few years ago people thought in terms of mega-projects that would supply a lot of LNG, but those also requires large, long-term contracts. The new thinking is toward smaller-scale projects that can be put into operation much more quickly and which don’t require large contracts,” Pease said. REI got its start in 2011 after the earthquake and tsunami severely damaged Japanese coastal communities and nuclear power plants. Japan had to sharply escalate LNG imports, and prices shot up. One regional government, Hyogo Prefecture, formed a group, led by a team of experienced retired Japanese LNG experts, to explore options for its own, independent source LNG. REI was subsequently formed, and after a study of sources of LNG in 2011 the company settled on Alaska as the best sources for long-term reliable supplies. The shorter sailing distance and Alaska’s  long track record of reliably supplying Japan with LNG from the ConocoPhillips plant at Nikiski were key factors in the decision, Pease said. A smaller LNG project is also being discussed for Port MacKenzie. That is a plant planned to produce LNG for internal Alaska markets like Fairbanks by WesPac Midstream, a California-based firm. If WestPac’s plant is built it would on a land parcel leased from the port. Negotiations are currently underway on a lease of borough-owned land at the port, Mat-Su Borough officials said.

Judge extends TRO after hearing on Greenpeace injunction

Shell’s court battle to obtain a preliminary injunction against Greenpeace USA continued in U.S. District Court Judge Sharon Gleason’s court in Anchorage April 28. Gleason is considering whether to issue an order that would keep Greenpeace protestors at a certain distance from vessels Shell hopes to use for its 2015 Arctic offshore drilling. After the hearing, Gleason extended the temporary restraining order against Greenpeace covering two drill rigs and a heavy lift vessel; that order issued April 11 expired April 28 and she extended it to May 9 or until she rules on Shell’s request for an injunction that would cover all 27 vessels being mobilized for its Arctic exploration this summer. The company is asking for a court-ordered safety zone of 1,000 meters while vessels are en route, and a 1,500-meter safety zone while drill ships are anchored in the Chukchi Sea and support vessels are maneuvering in the area to move anchors and perform other support tasks. Greenpeace is opposing Shell’s request, arguing that a 500-meter safety zone that the U.S. Coast Guard has authority to impose is sufficient for safety and that a larger exclusion zone would prevent the environmental organization from carrying out its core mission of observing and monitoring companies like Shell. “Shell is not entitled to a preliminary injunction. The events of 2012 following the last preliminary injunction dramatically demonstrate why Shell should not be given the 1,000-meter ‘safety zone’. Shell’s 2012 season was marred by a series of grave errors, mishaps and poor judgment that vividly illustrate the risks of a massive oil spill in an area of the world where containment and cleanup may well be impossible,” Greenpeace wrote in its opposing brief. The environmental organization relies on being able to monitor, protest and photograph actions like Shell’s Arctic drilling operation to pursue its core mission of raising public awareness, the brief stated. For its part, Shell said it has more evidence now than in 2012 that Greenpeace intends to create obstructions. “Not only has Greenpeace USA’s Executive Director threatened to do ‘special things’ to Shell with vessels, but Greenpeace USA also sent one its own employees to follow through on those threats,” Shell argued, referring to the mid-Pacific boarding of the Shell-chartered Polar Pioneer drill rig by six Greenpeace activists while it was in transit aboard the heavy lift vessel Blue Marlin. Greenpeace activists boarded and then left the Polar Pioneer after six days, a couple hours before Gleason issued a temporary restraining order against Greenpeace April 11. The Coast Guard has already established a 500-meter safety zone around several Shell-chartered vessels now in Puget Sound ports. Seattle attorney Jeff Leppo, representing Shell, said what the company is seeking for 2015 is similar to what was granted by a federal court in 2012, when Shell last explored in the Arctic. Greenpeace challenged it then, too, but was unsuccessful. Leppo said the Coast Guard’s 500-meter zones are intended mainly to ensure that waterways are kept safe for general marine traffic and apply to all and are not aimed at particular parties. David George, Shell’s safety expert, said the Coast Guard’s safety zones are helpful but they are, “for the express purpose of safely balancing marine traffic in these areas by all water users, and address the maintenance of orderly marine traffic.” “The Coast Guard safety zones are not developed to address the risks posed by intentional and unlawful actions directed to specific vessels,” George said in a brief filed in the court. Shell’s request for a larger zone is narrowly aimed at Greenpeace USA and parties affiliated with it because of Greenpeace’s announced intention to try to interfere with Shell’s activities and the recent action of six protesters boarding the Blue Marlin. The protesters ended their occupation of the ship when it neared U.S. territorial waters but Shell is still inspecting the semi-submersible Polar Pioneer to see if any damage was inflicted during the occupation, George said April 28 in the hearing in Gleason’s court. Greenpeace attorney Matthew Pawa, from Newton Center, Maine, said the large exclusion zone is unnecessary, that the responsibility for this should be left to the Coast Guard, and that an expanded exclusion zone will have the effect of chilling the First Amendment rights of Greenpeace supporters and others who oppose Arctic drilling. George said that 500 meters is too small a safety zone for a large vessel like the Polar Pioneer when it is under tow or on station while drilling. “This vessel is 400 feet by 300 feet and weighs 32,000 tons. Your ability to maneuver (to avoid obstacles) is limited. You need time and space. It’s not like a smaller vessel,” George told Gleason. “If I were a captain on a vessels being shadowed by the Esperza (the Greenpeace vessel) 500 meters off by starboard side, it would be cause for serious concern. There is a small margin for error,” in such situations, George said. The anti-collision guidelines used by mariners require, first, the use of prudent judgment. “Five hundred yards is not prudent,” George said. Shell has asked for Greenpeace to be restrained from coming within 1,000 meters of a vessel underway, and 1,500 meters in the Chukchi Sea because of the extended length of anchor chains. While the Polar Pioneer and another Shell drill vessel, the Noble Discoverer, are drilling, they must be securely anchored to the sea floor, but the anchors must constantly be tended by large anchor-handling vessels because they can slip on the sea floor and must be put back in position. To do this there is constant maneuvering of vessels around the drillships. To have the Greenpeace ship Esperanza also moving around within this zone presents a safety problem not only for Shell’s chartered vessels but also the Greenpeace ship, George said. “The Esperanza is an older ship,” with less speed and maneuverability, he said. Pawa, arguing for Greenpeace, said the organization must be able to be close to Shell’s vessels to properly observe them. Many things did not go as planned for Shell in 2012, and there were criminal violations of federal safety and environmental rules by Shell’s contractors. The public deserves the right to more closely monitor the company in 2015, he argued. “In 2012, just as Shell was in this court arguing that Greenpeace was illegally obstructing the company, the drillship Noble Discoverer was en route from New Zealand and was illegally disposing wastes overboard and then falsifying records,” Pawa said. Coast Guard inspectors ultimately discovered that and Noble Drilling, the vessel owner, plead guilty to a series of federal charges and were hit with $12.2 million in fines. Based on that record, Pawa said, “My client wants to be able to observe, to go out in 2015 to monitor and document,” Shell’s activities. Shell is asking that the preliminary injunction, if it is issued, be extended to 27 support vessels the company has contracted for the 2015 season. Fifteen vessels are now in various Pacific Northwest ports while others are still en route to the Northwest.

Finance Committee defends cuts amid bleak budget

The budget crisis the state of Alaska is facing is not understood by the public, state Senate leaders said April 21. The state is facing budget deficits approaching $4 billion a year with the prospect that Alaska’s main cash reserves will be drained in two years. Community leaders are now worried about the effects of cuts being proposed this year for schools, agencies and other public institutions, but it’s nothing like what’s coming down the road, said the co-chairs of the Senate Finance Committee, Sens. Pete Kelly, R-Fairbanks, and Anna MacKinnon, R-Eagle River, in a briefing by the committee. The Legislature was in an extension of its 90-day session as a House and Senate budget conference committee wrestled with how to resolve differences mainly in education spending. The Senate had proposed a $47.5 million cut to education. “It’s important that people understand the magnitude of the budget problem. It’s unlike anything we’ve ever experienced before. We started talking in the 1990s about hitting a ‘fiscal cliff’ but now we’ve hit it,” Kelly said at the April 21 briefing by the Finance Committee. “We’re now getting the point that the public does not understand the magnitude of the problem, and that’s our fault,” for not making the information available earlier, Kelly said. MacKinnnon said she is still getting up to 100 emails a day from people asking for more money in the budget. Sen. Lyman Hoffman, D-Bethel, underscored the current dilemma. “We saved close to $16 billion by fiscal year 2014 but we’ll burn through that in four years,” he said. By fiscal year 2018 the money will be gone, he said. By the end of fiscal year 2014, $3 billion of the surplus was gone partly due to a transfer of funds to bolster state pension account. “We’ll burn through another $4 billion in fiscal year 2015 (the current year) which leaves $9 billion,” in the two savings accounts going into fiscal year 2016 beginning July 1, Hoffman said. If the spending and revenue picture remain status quo this gives the state enough cash to pay deficits for two more years, fiscal year 2016 and fiscal year 2017. By fiscal year 2018 the money will be gone. Even if oil prices rise to about $70 per barrel, which is considered quite possible, it would extend the reserves for only a year, according to estimates by the Legislative Finance Division. The two accounts are the Statutory Budget Reserve, or SBR, and the Constitutional Budget Reserve, or CBR. The SBR has essentially been drained already, which leaves the available funds in the CBR. However, the state Constitution requires a three-quarters vote of the Legislature, in both the House and Senate, to tap the CBR. This puts House Minority Democrats in the driver’s seat in the end-of-session budget negotiations because the Republican-led Majority in the House, which includes a handful of Democrats, still isn’t large enough to get the three-quarters vote. However, there are additional liquid reserves available including several billion dollars in the Permanent Fund’s earnings reserve account. The Permanent Fund itself it not available for spending but its accumulated earnings can be appropriated. There is also about $1 billion in an endowment created to support Power Cost Assistance payments in small communities around the state where electricity prices would otherwise be very high. The only experience the state has that is close to what it faces now was in the mid-1980s when oil prices also collapsed and Gov. Bill Sheffield had to sharply cut spending and impound funds to keep the state operating. There were no reserve funds then. A gradual recovery of oil prices eventually stabilized the situation but this time is different because oil production is a fourth of what it was in 1985. Kelly and other members of the Senate Finance Committee defended the Senate-passed budget in the April 21 briefing. “This budget ensures we don’t fall off the fiscal cliff. It preserves jobs and school funds, and some measure of what Alaska depends on for public service,” Kelly said. He gave Gov. Bill Walker credit for getting the ball rolling with a $132 million reduction in state operations spending. “He stepped up to the plate, but it wasn’t enough,” Kelly said. The House made further reductions to about $350 million when it passed the operating budget to the Senate, Kelly said. “All these reductions were wiped out when the spring revenue forecast came in the night before we were to close our (Senate) operating budget, estimating an additional $400 million drop in revenues,” he said. MacKinnon, who is in charge of the capital budget, moved to offset some of this in further reductions in the capital budget. The total budget package, as it left the Senate, is $850 million down from current fiscal year 2015 spending of about $6.1 billion, but about half of this reduction is in the capital budget, which is a one-year cut that cannot be done again from the bare bones fiscal year 2016 capital budget. Despite the budget wrangle, several bills are now passed by the House and Senate and on their way to the governor. They include HB 158, the fuel tax surcharge to replenish funds in the state spill response fund; HB 146, which gives municipalities new tools to exempt property from tax when land is subdivided (an aid to housing development); SB 46, allowing regional health facilities to work with the Alaska Municipal Bond Band in financing new facilities; SB 59, a repeal of the state film tax incentive program. One bill held hostage to the end-of-session negotiations in the Senate, for reasons that were unclear, is HB 105, the Interior Energy Project. The bill allows gas to be shipped to the project, which is state-sponsored, from Southcentral Alaska. Current law stipulates that it must come from the North Slope. Also, the capital budget, SB 26, is still on the House floor. Stripped down as it is, this will be part of the final package.

Medicaid fight expands as session nears end

JUNEAU — Medicaid has quickly become one of the explosive issues of the 2015 legislative session. For several weeks House and Senate committees have been grinding through details of ways the program can be reformed to reduce costs. Those costs are running at $1.8 billion per year, half of it paid with state funds. Gov. Bill Walker has meanwhile been pressing hard for expansion of Medicaid to cover more low-income Alaskans. That’s allowed under the federal Affordable Care Act, and the federal government will pick up the bulk of the costs of expansion, the governor says. Republicans in the state House and Senate are balking at expansion, however, saying reform, which Walker also endorses, must come first. In an April 14 briefing by Senate leaders, Sen. Pete Kelly, R-Fairbanks, said, “The current system is broken and we should make sure it’s fixed before we expand it.” Kelly, who co-chairs the Senate Finance Committee, is a sponsor of one reform bill in the mix, Senate Bill 74. Sen. John Coghill, R-Fairbanks, the Senate Majority Leader, agreed with Kelly. “Our computerized system for making payments is just not working. The new (federal) money is attractive but our ability to deliver (to an expanded population) is suspect,” because of the system problems, he said. “If we can’t get sustainability with our system we’re making false promises by expanding it.” Sen. Charlie Huggins, the Senate Rules chairman, said the current Medicaid system must be fixed and reforms must be adopted, and the results of those measures, before any expansion should be discussed. The issue is now coming to a head. In the April 13 briefing Senate leaders said they may sideline the various Medicaid bills for more work over the summer. “I’m perfectly willing to look at reform as an interim project,” between sessions, Kelly said.  Democrats in the state House disagree with this, however, and they have a significant card to play. They say they are conditioning their agreement on a crucial vote needed to fund the state budget on passage of Medicaid expansion. Democrats in the House hold the needed 10 votes for a withdrawal of funds from the Constitutional Budget Reserve to balance the budget, which is running a huge deficit this year, said House Minority Leader Rep. Chris Tuck, D-Anchorage. The governor has also said he may call a special session on Medicaid if the Legislature adjourns without passing the bill to expand the program. This is a mixture that could turn explosive when combined with other hot-button issues pending. The Legislature is set to adjourn Sunday night, April 19, but lawmakers could extend the session into Monday if needed, or even longer. Meanwhile, work has continued on the reform bills even as Walker’s expansion bills appear headed for the shelf, at least now. On reform, Kelly’s SB 74 is getting the most attention. The Senate Health and Social Services Committee moved that bill out of committee April 9 to the State Affairs Committee, which took it up April 13. The committee also moved the governor’s bill, SB 78, to the Finance Committee, which is co-chaired by Kelly. Kelly’s bill reforms the current Medicaid program but does not expand it. The House Finance Committee introduced Kelly’s bill, or the language from it, in a new HB 190, on which the committee began work April 13. The governor’s expansion bill, HB 148, is also in House Finance. The committee may decide to take reform elements from the governor’s bill and insert them into HB 190. The House Health and Social Services Committee had worked over the governor’s HB 148 earlier, strengthening several of its reform measures. One provision in the governor’s bill that does not appear in Kelly’s SB 74 and the House Finance bill, HB 190, is the tax on health providers proposed by the governor to help defray any expenses the state might bear in expanding the program. Meanwhile, an element of Kelly’s original version of SB 74 that was taken out is a section authorizing Health Savings Accounts for Medicaid patients funded partly with Medicaid recipients’ Permanent Fund dividends. Two important differences from the governor’s reform proposals in Kelly’s current SB 74, and HB 190 are the privatization of state-owned treatment and seniors’ facilities like the Alaska Psychiatric Institute in Anchorage and the state Pioneer’s Homes in several cities, as well as several state-operated juvenile facilities. Before state operating facilities can be sold, a feasibility study must be done to spell out costs and benefits, and SB 74 provides for those, with a deadline for completing and submitting them to the Legislature within the first 10 days of the 2016 legislative session. Another provision in Kelly’s bill is that specific reform steps are mandated, including development of a reform program by the state Department of Health and Social Service that includes measures to enhance case management, redesigning payment to medical providers based on positive outcomes of treatment as well as “bundled” rates (a single negotiated fee for a procedure), and measures to expand telemedicine and coordination to reduce travel. A key part of the bill is in case management to reduce non-urgent use of hospital emergency rooms. Many Medicaid patients use emergency rooms for routine primary care because they do not have primary care provider. This section of HB 190 and SB 74 would expand on a pilot program the health and social services department already has underway in Anchorage for about 2,000 identified heavy users of emergency rooms. The difference is that where the current program is voluntary, it would become mandatory under the pending legislation. The managed care program, designed as a demonstration project, would be contracted to a third party such as an insurance company, and must be designed and initiated by Jan. 31, 2016, under the legislation. The department’s current managed care program began in January with its administration contracted to MedExpert, based in Redwood City Calif. For Medicaid patients who do use emergency rooms for non-urgent care frequently, the bill directs the department to help make appointments with a primary care provider within 96 hours.

Walker outlines gas pipeline plans in letter to lawmakers

JUNEAU — Gov. Bill Walker says he can do the engineering for a scale-up for a state-led natural gas pipeline for $85 million and have the work done within a year. That’s in time to have it ready in case the state’s industry partners in the larger Alaska LNG Project decided not to proceed to final engineering in 2016. The state is now a 25 percent partner in the larger project in a partnership with North Slope producers BP, ConocoPhillips and ExxonMobil, along with pipeline company TransCanada. In an April 9 letter to state legislators, the governor said that if $85 million is spent on the scaled-up engineering it would leave about $100 million still available for the state-owned Alaska Gas Development Corp. from a 2013 appropriation by the Legislature. Walkers would like to keep this money available, he said, in case the Alaska LNG Project does not move forward and the state wants to purchase information from TransCanada that the pipeline company did as its part of the larger project. It is not clear whether a new legislative appropriation would be needed for that, however. Walker’s letter also acknowledged, possibly for the first time, that a liquefied natural gas, or LNG, partner will be needed for the state project, which is now only a pipeline from the North Slope to the Matanuska-Susitna Borough north of Anchorage. In his letter, Walker said a lot of work that has been done on the smaller Alaska Stand-Alone Pipeline, or ASAP, can be used in the scale-up. “New work will be required to appropriately re-size the pipe (which is already at 36 inches) and design the steel metallurgy to best transport the LNG gas at lowest cost,” Walker wrote. This part of the work will take 12 months to 18 months and will cost $25 million. On another part of the scale-up, the gas conditioning and compressor station facilities, the work will also take 12 months to 14 months and can be done for $21 million. The state will, “re-tool the design premise of the gas conditioning facilities to meet LNG gas quality specifications,” the governor wrote in his letter. Other work will include continuing with a supplemental environmental impact statement, or SEIS, that is already underway, which will take 12 to 18 months and cost $21 million. Another $24 million is needed to develop construction plans, design camps and equipment yards and to develop procurement strategies, the letter said. The SEIS that is now underway for the ASAP project is for the 500 million cubic feet per day design, however, and the scale-up with a compression station along the pipeline route (the current design does not have one) and a much larger gas treatment plant on the North Slope will almost certainly require a revamp of the SEIS. The U.S. Army Corps of Engineers has meanwhile stopped its work on the current SEIS until the governor’s plans become clear. Redesigning the gas treatment plant will also be one of the more complex parts of the expansion engineering because it will involve a switch to a different process technology, an Amine process, than the simpler process used in the current design of the gas treatment plant, which is designed to handle 500 million cubic feet of gas per day. The Amine process is needed to not only process the larger volumes of gas but to remove virtually all carbon dioxide so that the gas can be used in the making of LNG. The current design would remove most carbon dioxide and process the gas to a quality acceptable for utilities like Enstar Natural Gas Co. or a gas utility in Fairbanks, but not for an LNG customer. However, the Amine process also uses more water than the current design, which is an added complication for the North Slope. The governor’s letter did not address it, but another complication is that gas processed for LNG specifications will also be of a higher energy content than gas processed for in-state use by utilities. This may require another process step, when gas is taken off a state pipeline for local use, to lower the energy content so the gas can be used by local consumers. In his letter to legislators Walker said the state would be taking the lead on an expanded state project if it, rather than the industry projects, moves forward. “Alaska will be in control of the financing strategy for the ASAP project and will be in a position to attract funding from buyers interested in investing in our project. We will not have to compete for financing sources with the producers, nor will we be dependent on alignment among producers with potentially divergent financing objectives,” the governor wrote. That plan is similar to the strategy used by the Alaska Gasline Port Authority, a municipal group that Walker headed, where potential partners and contractors were solicited for financial contributions to the port authority’s project. A former financial advisor to the port authority, Rigdon Boykin, is now on Walker’s staff in the governor’s office. Walker cited firms in Japan, Korea, Indonesia and China that have expressed interest previously in Alaska gas. He also said in the letter that the state will have less expensive financing costs and the advantages of federal tax-exempt status as a state-owned pipeline. Meanwhile, ExxonMobil is managing the larger project, and the partners are now engaged in preliminary front-end end engineering and design, or pre-FEED, a $500 million effort is due to be complete in early 2016. The next step would be to proceed to final front-end end engineering and design, or FEED, which will require an approximate $2 billion investment. Walker and state legislators consider the FEED decision in 2016 a critical milestone for the project because it will require a significant investment by the partners that would not be taken unless the big project appears to be viable. If the industry partners step back, however, the governor wants to be ready with a backup plan, a state-led gas pipeline. The state’s gas corporation, the Alaska Gasline Development Corp., has already done significant work on a smaller backup project designed to move North Slope gas to Interior and Southcentral Alaska communities with a maximum volume of 500 million cubic feet of gas per day. Walker announced his own idea of scaling up that project to much higher volumes in a newspaper op-ed column, which has set off a testy dispute with state legislators over spending the money for it before it is known if the industry partners will proceed with the larger project. The governor has fiercely defended his plan, however, arguing that the larger volumes will make for a more economic state pipeline and that he wants the scaled-up work to be underway sooner in the belief it will strengthen the state’s hand in negotiating important agreements on the larger project that are still needed. The dustup with legislators is turning into a political brawl that is complicating the final days of the 2015 legislative session, which is due to end April 19 unless it is extended. Walker said his plan for an expanded backup has created no big concerns among major producer company partners in the Alaska LNG Project, although in a speech to Commonwealth North, an Anchorage business group, the governor acknowledged a push-back from one company, which he did not identify. In his April 9 letter to legislators, Walker said he has emphasized his support for the larger project and that the backup plan is not a competing or parallel pipeline, “but a backup to ensure Alaska will not have to start over if the AK LNG Project does not proceed.” That represents a step back from the governor’s comments during a press conference following the announcement of the new plan in the newspaper op-ed that his intention is to develop the state project on a parallel path and, in the end, compare the advantages of both and make a decision as to which project the state will support. Those comments stirred up the Legislature as well as the industry partners, but since then the governor has backtracked to emphasize, now in writing, that the state gas pipeline is only a backup. However, the governor’s recent announcement that he is forming a special team of advisors to probe the Alaska LNG Project partnership and to make recommendations on possible changes, has raised new uncertainties among the partners. As a partner in the project the state has the right to review project details, one company official said, as long as the state team signs the appropriate confidentiality agreements. As of April 15, Walker has not named his review team or indicated when the team will start work, the governor’s spokeswoman Grace Jang said. She previously said the review team would be composed of individuals with large project experience and would be paid for their work. Meanwhile, in his April 9 letter Walker said most of the partners aren’t bothered by his plan to do engineering on a state pipeline scale-up. “BP and ConocoPhillips have publicly indicated support for Alaska having our own backup plan,” Walker said in the letter. That is true for at least one company. In a statement, ConocoPhillips spokeswoman Amy Jennings Burnett said, “ConocoPhillips understands the State’s desire to have a backup plan in place in the event the Alaska LNG project does not move forward. We do not believe that causes a problem for the Alaska LNG project. ConocoPhillips does not believe that the State’s backup plan should compete with the AK LNG project, but by definition, should provide a fallback option.” Two other company partners were more reserved. BP spokeswoman Dawn Patience said BP’s management “has met with the governor,” but could not provide details on discussions. ExxonMobil spokeswoman Kim Jordan said, “While we have spoken with the governor, we don’t comment on meetings with government officials.” Tim Bradner can be reached at [email protected]

Sparks set to fly over gasline and budgets

JUNEAU — It may be a wild finish for the 2015 legislative session. Things could really blow up, in fact. Lawmakers are set to finish at midnight on April 19, the 90th day and the required adjournment date under state law, but last-minute tangles could push the ending into Monday or beyond. That happened last year when the Legislature went in overtime for several days to work out problems on school funding. The absolute limit is 120 days, required by the state Constitution. There are plenty of things that may cause a blow up on April 19. Two are Medicaid and a possible veto by Gov. Bill Walker of a bill, House Bill 132, which limits him from spending money on a state-led natural gas pipeline. A bill making needed changes for state aid to the Interior Energy Project is in the mix, too. The Interior energy bill, House Bill 105 and Senate Bill 50, are priorities for the governor and because of that have been slow-tracked and heavily amended in the Legislature. Other administration bills, like a measure on state timber sales, are also on the slow track, although things can change fast in the final days of the session. The big blowup could come over confirmations of the governor’s appointees including all of his commissioners, which is an issue now related to the possible veto of HB 132. A signal that something is afoot came April 13 when House Speaker Mike Chenault, R-Nikiski, called Senate President Kevin Meyer, R-Anchorage, to ask to have the joint session for confirmations, then scheduled for April 17, reset. There is no new time for the joint session, however, at least as of April 15. Most thinking in the capitol building is that Chenault and Meyer will wait until Saturday afternoon April 18, the deadline for Walker to veto HB 132. The Speaker and the President will then work to line up votes for a veto override. Forty are needed and they appear to be two short given the pattern of House and Senate floor votes when HB 132 passed those bodies. If the veto override comes up short, legislators may take vengeance by failing to approve several of Walker’s appointments. They can do that simply by not putting names forward during the joint session or by actually voting them down. The belief among many in the capitol is that the confirmation automatically fails, on all appointees, if the Legislature adjourns the regular session without holding the vote. However, this is uncertain legal territory. The state Constitution is silent in this area only to say that appointments must be confirmed by “the Legislature.” A Legislature spans two years during which sessions are held, and technically when legislators gavel out at the end of a session they simply take a recess. If the appointment is not confirmed by the end of the two-year Legislature the Constitution seems more clear. The stakes are big, because if an appointee is rejected in a vote the jobs ends for the person appointed and the governor cannot reappoint them. However, if legislators simply don’t vote, there would be some who interpret the law that the appointee can remain, at least for the two-year period. If commissioners are rejected it could disrupt ongoing operations in agencies because temporary replacements will have be quickly named. It’s not known for sure that HB 132 is the sole cause of the confirmation delay, but it is surely one of the issues involved. “It’s likely that it is part of the overall adjournment negotiations,” said Sen. Berta Gardiner, D-Anchorage, the Senate Minority Leader. Other issues are likely in the tangle, she said in a briefing by Senate Democrats on April 15. “It’s all in the stew pot. We’ll have to see what comes out,” she said. Sen. Bill Wielechowski, D-Anchorage, thinks it’s a terrible idea from just a process point of view. “I thought a Friday vote (the original date) was really late. Confirmation joint sessions can take a great deal of time because there’s often extended debate. Typically this is a week or two before adjournment. The last day is complicated by approvals of the operating and capital budgets and final bills, and to push this into it is a terrible idea,” Wielechowski said. Meanwhile, the steam is building on Medicaid, too. Senate Republicans are digging in on their resistance to Medicaid expansion, holding firm on “reform first, expand later” strategy. The governor, and Democrats in the Legislature, say it’s best to do both together. That’s partly because the health care provider community, which must cooperate in and even lead the “reform” program, has incentives to do that because they see expansion as helping them overcome a huge financial burden of uncompensated care. Hospitals in Alaska must absorb about $92 million a year in write-offs and nonprofit primary health care providers who are required to care for people regardless of ability to pay have an additional $22 million in losses.  The losses are mainly for medical service to lower-income people who do not have health coverage and are not eligible under the current Medicaid program. An expanded program would extend health coverage to 25,000 to 40,000 Alaskans who currently do not have coverage. However, Sen. Pete Kelly, R-Fairbanks, said he thinks it wouldn’t hurt to have all the Medicaid bills pending including SB 74, his own reform proposal, held over the summer for more study. Sen. John Coghill, R-Fairbanks, the Senate Majority Leader, said it’s widely acknowledged that the current Medicaid system is broken and needs to be fixed before it is expanded. However, the stakes on Medicaid could get big before adjournment. That’s because Republican leaders in the House need the cooperation of the House Democrats to get a needed three-quarters vote for a draw from the Constitutional Budget Reserve to fund the budget. A withdrawal takes three fourths of both the House and Senate, according to the state Constitution. The Senate Republican-led Majority has enough votes, but the House Republican majority is short. Rep. Chris Tuck, D-Anchorage, the House Minority Leader, said Medicaid expansion, smaller cuts to education and restoration of some funds for the state ferry system is on the list of demands for the Democrats. Meanwhile, a House-Senate conference committee is working through different versions of the state operating budget passed by each body. It may be soon resolved but a big issue in the Senate operating budget is a decision by that body not to fund raises agreed on in public employee union contracts that are in effect. All labor contracts are subject to appropriations by the Legislature but while lawmakers have voted before not to approve new contracts, and to send negotiators back to the bargaining table, a decision not to fund terms agreed on in the middle of a multi-year contract is unprecedented, according to Don Etheridge, lobbyist in Juneau for the AFL-CIO. Most of the contracts are for three years and have agreed-on cost-of-living increases of 1 percent in each of the first two years and 2.5 percent in the third year, Etheridge said. When the dust settles on the budget negotiations there may also be efforts to roll back health benefits for public employees, sources in the public employee unions said. On the state capital budget, which is a shadow of itself just two years ago, one issue is the Senate’s deletion of an $8 million appropriation to fund continued construction of a new engineering building at the University of Alaska Fairbanks. The building is only partly finished and the $8 million appropriated this year would allow more work to be done, but still not finish it. The university is meanwhile working with private donors to fund part of the completion.

Repsol to file for permits, nearing final decision

Spanish major Repsol may be close to revealing what it has found in the Colville River delta on the North Slope. The company made discoveries in exploration wells drilled in 2012 and has been working to delineate and test the discoveries since then. The company is still not releasing details of oil reserve estimates or expected flow rates but is moving step-by-step toward a decision on development. Applications for permits will be made in June, Repsol said. Those will indicate the scale of production facilities that are planned, and indirectly indicate what may have been discovered. Production tests on two evaluation wells drilled this winter on the Colville Delta must be completed before a final decision is made, a company spokeswoman said. “We are planning to file for permits for the potential project in June to initiate the process and move us one step closer to development,” Repsol spokeswoman Trish Baker said. Baker said that a stand-alone oil and gas processing facility and separate production pads for wells will be included in plans for the “Nanushuk” project to be submitted to federal and state agencies. Repsol has also been briefing state and federal officials and state legislators in Juneau on the plans.  “Repsol’s development project is currently under evaluation,” according to the company statement. “Our final investment decision on the project will depend upon a variety of factors, including positive results from the appraisal wells we are currently drilling, as well as management and partner approval.”  The company also gave credit to the state of Alaska for its 2013 overhaul of the state’s petroleum tax, which makes North Slope investments more attractive. “The tax improvements (made by Alaska in 2013) under Senate Bill 21 will definitely have a beneficial effect and could even be the factor that sways the final decision,” Repsol said in its statement.    Repsol is a recent large-company player on the North Slope, a region long dominated by three companies — BP, ConocoPhillips and ExxonMobil — in the existing large North Slope fields that have been producing more than four decades. There are also small independent companies that are producers including Caelus Energy, which purchased the small Oooguruk field last year from Pioneer Natural Resources, another independent, and Cook Inlet Energy, which purchased the small Badami field from Savant Energy. Repsol’s entry came when it purchased a majority stake in leases held by a Denver-based independent Armstrong Oil and Gas in 2011. Agency officials familiar with the North Slope said a stand-alone production facility and separate wells sites could present a multi-billion dollar investment for Repsol and Armstrong, its minority partner. “We believe it would require more than 100 million barrels of reserves to pay for a stand-alone new production facility, new drill sites and 22 miles of road,” said one agency official, who asked not to be identified as he was not authorized to speak officially. By way of comparison, Caelus Energy’s new Nuna project, now being developed east of where Repsol is working, will cost that company an estimated $1.5 billion for a single production pad, short access road and pipelines and no separate processing plant. Nuna is estimated to hold 75 million to 100 million barrels of reserves and is projected to product 15,000 barrels per day to 20,000 barrels per day at peak, the company has said. Repsol will initially file for a U.S. Army Corps of Engineers Section 404 permit, and that agency will determine if an environmental impact statement, or EIS, is needed or a more streamlined environmental assessment, or EA, can be used. An EIS could take 18 months to 24 months, while the EA could be done much sooner. Environmental groups can be expected to press the Corps for a full EIS, which has requirements for public hearings and extensive analysis of possible alternatives. The permitting could be complicated because the project will be in an ecologically-sensitive wetlands area of the Colville River delta, which will attract the attention of environmental groups. Potential road access to the site may also become an issue with Alaska Native hunters and fishers because, depending on the route, a road could affect subsistence areas that are used by residents in the nearby Inupiat village of Nuiqsut. According to agency officials, one road route being considered would connect with existing oilfield roads near where Caelus is working on Nuna. An alternative route being studied is from the south, from a connection with an existing roads near the Mustang field project now being developed by Brooks Range Petroleum. Reports are that Repsol is also considering a “roadless” development for its project with support by ice-road in winter and by air in summer, which is the way ConocoPhillips operates its nearby Alpine field, but Repsol’s preference is for year-around road access to allow quick response with equipment in an emergency, the agency source said. Repsol’s project, if its moves ahead, would be the latest in a series of new developments by companies across a region of the central North Slope between the Kuparuk River field and the Alpine field near the Colville River. Independents Brooks Range Petroleum and Caelus Energy have two small new producing projects in construction to the south and east of Repsol’s leases, Mustang for Brooks Range and Nuna for Caelus. Several geological formations with known oil and gas potential extend across the region, many of which are supporting production in nearby fields like Alpine, Oooguruk and Kuparuk River, state geologists have said. The presence of oil has long been known but the nature of the formations, with thin conventional reservoir intervals and tight rock in other places, discouraged development. The advent of new technologies like use of 3-D seismic, large-scale hydraulic fracturing and horizontal production wells is changing the picture, however.


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