Elwood Brehmer

Regulators air draft plan to increase well bonding amounts

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

AGDC navigates trade friction, touts Alaska-hire agreements

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

Salmon stakeholders split over ballot initiative

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

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

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

Permitting to start on Ambler copper prospect early next year

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

Oil Search planning two new wells into southern Pikka Unit

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

NPR-A oil flow means major money for Slope communities

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

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

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

Judge orders briefings in suit challenging tax credit bonds

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

Trustees keep up push for inflation-proofing Permanent Fund

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

Karl seeks federal OK to pave way for Chinese charters

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

Alyeska tests latest spill response gear at Shotgun Cove

WHITTIER — With flat seas, gentle clouds playing hide-and-seek with the mountains and marine life aplenty, it was a perfect scene to reemphasize just how important a place Prince William Sound is to protect. About 20 small commercial fishing vessels were joined in Shotgun Cove near Whittier by large barges and state-of-the-art tugs practicing to do just that with the latest in oil spill response equipment. Smaller craft towed “current buster” oil booms in tandem with larger fishing boats practiced deploying skimmers that would collect the oil out of the boom before it would be transferred to a barge tank. On first glance it appeared to be a kind of carefully orchestrated aquatic slow dance, set to the tune of barking sea lions. While indeed diligently planned, it was one in a continuous series of training exercises by the Alyeska Pipeline Service Co. annual $8 million Fishing Vessel Response Program. “Without these fishing vessels you don’t have a response plan,” said Jeremy Robida, the spill prevention and response manager for the Prince William Sound Regional Citizens’ Advisory Council, or RCAC. Two RCACs, another in Cook Inlet, were formed by Congress in the wake of the Exxon Valdez spill. In all, the program includes roughly 400 boats with crews totaling 1,600 people from six Southcentral ports, Alyeska Ship Escort/Response Vessel System Manager Mike Day said. The Sept. 25 training was not an emergency-style drill; it was a methodical annual testing of equipment to make sure that if the worst happened, everyone knows their role and how to perform it. Boats towing booms in formation focused on following tide rips and other areas oil would concentrate in the event of a tanker spill. Day said the new booms can be towed several times quicker — up to about four knots — than older versions before they begin losing the oil they’ve trapped. Robida added that new skimmers take a “real minimal cut of water,” meaning less oil-fouled seawater would need to be stored in the barges. Additionally, new internal pumps installed on the barges eliminate the need for lowering the whole pump system to the water level. Now it’s just a hose that goes overboard, Robida said. The water routines were preceded by a day of classroom training in the Whittier school. Robida said some of the Fishing Vessel Response Program participants have been involved in the spill response efforts since the Exxon Valdez grounding nearly 30 years ago. Day joked that the longest-tenured members of the program are sometimes tasked with teaching the classes to keep them from nodding off in class when they’d rather be on the water. The Prince William Sound RCAC contracted with Stan Stephens Wildlife and Glacier Cruises out of Valdez for a tour boat to observe the training. Council staff then invited Whittier school children to join them on the three-hour field trip. After observing the training, the tour vessel cut across the mouth of Passage Canal to Pigot Bay, the head of which has been deemed an area of special ecological importance and as such has its own geographical response strategy, or GSR, Robida said. Salmon spawn in the stream that feeds Pigot Bay and numerous similar areas around the Sound have been identified for additional protections with spot-specific equipment, according to council and Alyeska officials. If an oil spill or cruise ship or fishing vessel accident resulting in a large fuel release were to occur, a sensitive area protection team would be sent out immediately to those nearby places, whether it was already contaminated or not. “The whole concept of the sensitive area protection is to get ahead of the oil slick,” Robida said. “The goal is not so much recovery; it’s keeping the area sectioned off.” The FVRP training is separate, but in addition to ongoing training Alyeska continues to conduct with Edison Chouest Offshore, its new SERVS operator, out of Valdez. While Edison Chouest took over the SERVS operation from Crowley Maritime in early July, Day said, “We’re still doing a lot more training exercises than normal.” About 200 tanker towing, escort, docking and other practice routines have been conducted since Edison Chouest vessels began arriving to Valdez in March, compared to the roughly 35 exercises that would be done over that time in a normal year, Alyeska representatives said. Day added that an Alyeska official is still onboard each tug to monitor each tanker escort out of Valdez. Two of the new tugs towed the spill response barge to the scene of the drill. State House Resources Committee co-chair Rep. Andy Josephson, D-Anchorage, who joined the tour as the Legislature’s liaison to the council, said he was impressed by what he saw, adding he got the sense from talking to various people that Edison Chouest “is settling in, understanding the culture and the environment.” One of the primary ongoing challenges is helping Edison Chouest employees settle in to Valdez, said Day, who is a lifelong resident of the quiet little Prince William Sound port town. Josephson acknowledged that there is still an open question as to whether Alyeska and Edison Chouest should seek to train in adverse weather conditions at times — the council believes so — while Alyeska contends it would be an unnecessary risk. He commended Alyeska for the advanced spill response program, which gives local fishermen “some ownership and involvement” in protecting where they work. “Apparently the Scotts are interested in what we’re doing” with oil spill cleanup techniques, Josephson said. He later added, “I only wish that we would’ve had all this in March 1989.” Elwood Brehmer can be reached at [email protected]

Industry group’s salmon initiative complaint to be heard Tuesday

State campaign regulators on Monday afternoon agreed to hear arguments Tuesday morning over a complaint alleging that the groups pushing the contentious Stand for Salmon voter initiative committed multiple fincancial disclosure violations. Commissioners with the Alaska Public Offices Commission concluded Stand for Alaska-Vote No on 1’s Sept. 20 complaint against Yes for Salmon-Vote Yes on 1, Stand for Salmon and The Alaska Center warranted an expedited hearing with Election Day 43 days away. The hearing will be held at 8:30 a.m. Tuesday at APOC’s Midtown Anchorage offices. The roughly two-hour Monday hearing over whether to expedite the complaint was largely a debate over the merits of the complaint against the groups advocating for Ballot Measure 1, which would establish stringent new permitting requirements for development projects in salmon habitat. Stand for Alaska, funded primarily by oil and mining companies, alleges in its Sept. 20 complaint that the three groups are coordinating their campaign efforts without admitting as much to APOC and Alaska voters. The complaint notes that the same individuals are in leadership positions in both Stand for Salmon and Yes for Salmon and all three share the same Downtown Anchorage office space. Matt Singer, an attorney with Holland and Knight representing Stand for Alaska, claimed further that The Alaska Center has not disclosed the source of nearly $270,000 it has spent supporting the Ballot Measure 1 efforts. Stand for Alaska insists much of the money behind Ballot Measure 1 has come from Outside environmental groups. “Alaskans are entitled to know who’s spending money to influence their votes,” Singer said, adding that the matter needs to be resolved quickly because post-election fines would do little to help voters. Earlier this month APOC levied a $1,925 fine against Stand for Alaska for having a name that did not clearly indicate the group’s position on the issue; that led the group to add “Vote No on 1” to its official name. Stand for Alaska’s complaint against Yes for Salmon also points out that the group didn’t add “Vote Yes on 1” to its name until Aug. 15 despite the fact that Stand for Salmon filed its complaint about Stand for Alaska’s name July 6. Birch Bittner Horton and Cherot attorney Jack McKenna, representing the salmon advocates, said Yes for Salmon didn’t change its name because its position on the Ballot Measure 1, which is also referred to as the Stand for Salmon initiative, is right in its name. The organizations don’t have to file as a single group with APOC because The Alaska Center and Stand for Salmon have missions that go beyond Ballot Measure 1, according to McKenna. To the primary funding sources, McKenna questioned why The Alaska Center should have to disclose where its contributions to the Ballot Measure 1 effort came from if the three largest donors to Stand for Alaska — BP, ConocoPhillips and Donlin Gold — don’t have to explain the sources of their money, whether it’s from investors, or profits made inside or outside of Alaska. He also contended that Stand for Alaska had roughly “$2 million missing from its books” until it fixed its APOC filings Saturday. McKenna insisted the complaint is a political maneuver aimed at derailing the campaign. “There’s a reason the media had this complaint before APOC did,” he said. Singer responded that technical issues prevented Stand for Alaska representatives from filing the complaint with the commission as soon as they originally planned.   Elwood Brehmer can be reached at [email protected]

AGDC chooses route for Kenai Spur Highway around LNG plant

State gasline officials have picked their plan to reroute a highway around the site for the massive LNG plant they hope to construct, but now they need to pay for it. In June, Alaska Gasline Development Corp. leaders selected the shortest and least expensive route to bend the Kenai Spur Highway around the roughly 800-acre LNG plant site in Nikiski. They are currently working to determine what it will cost to secure the right-of-way for the 3.4 miles of new road before further work can begin, said Frank Richards, AGDC vice president and Alaska LNG Project manager. The “West LNG” route was picked from six alternative paths for the Kenai Spur Highway, in part because of its cost, but also because it will impact the least number of Nikiski residents, according to Richards. The $20 million highway project will require AGDC to purchase seven residential properties and portions of two commercial parcels along the route, which, as its name implies, would curve the highway around the western edge of the LNG plant property. The highway currently parallels the Cook Inlet shoreline and bisects the plant site. “Really, what we saw (in public meetings) is people wanted the least impact to the community, the least impact to neighborhoods and wanted the shortest distance to be able to do that,” Richards said in an interview. The other options considered would have meant building between five and 12 miles of new road for $33 million to $85 million. A reroute option suggested by a group of residents would have required AGDC to purchase just five full properties, but the nearly 10-mile corridor would have affected 57 parcels in some way and cost $72 million to construct, according to AGDC estimates. The resident-suggested route would have also impacted 126 acres of wetlands, which likely would have necessitated a substantial additional environmental review of the road construction. The West LNG alternative does not cross any wetlands, Richards noted. ExxonMobil purchased most of the approximately 800 acres needed for the plant, LNG storage tanks and marine terminal in 2014 and 2015 when the company was leading the project in a partnership with BP, ConocoPhillips and the state. Richards acknowledged that the Legislature gave AGDC the authority to invoke eminent domain to secure land for the $43 billion Alaska LNG Project, but said there are no plans to use it. He added that he personally contacted the landowners that will be most directly impacted by the new road before AGDC made its selection public. “Our process is going to be, we go through a negotiation and discussion with the private landowners; we’re going to do an appraisal process to determine fair market value and negotiate a sales agreement with them,” Richards said. “We want to be good neighbors in terms of the property acquisition.” The state-owned corporation has hired an engineering and surveying firm to delineate the exact right-of-way for the new stretch of highway. That is likely to continue through the rest of the year before more detailed design work and property acquisition can begin. As someone who has had a highway routed through a parcel of family property, Richards said he understands this situation some Nikiski residents are being put in, but money will be available for those with properties in the path of the highway and not individuals on the edges of the work. “We are concerned about the impacts to people’s lives and how they’re being impacted by this but we aren’t in a position to be able to provide any monetary relief to folks that aren’t directly impacted by the right-of-way necessary for the project,” he said. “That being said, we want to hear how folks are being impacted, specifically if their lands are directly adjacent to it. Once the right-of-way is settled, AGDC plans to advance the road design to about 30 percent complete, at which point a design-build proposal will be put out to bid for a guaranteed not-to-exceed contract amount, according to Richards. The corporation is consulting with the state Department of Transportation as well to make sure the highway it builds will meet federal standards, thus continuing its eligibility for federal maintenance funding, Richards said. DOT Commissioner Marc Luiken serves on the AGDC board of directors. He added that geotechnical and soil surveys done at the plant site indicate the nearby road work should be relatively straightforward process without any significant engineering hurdles. AGDC is also working to determine just how much it will cost to purchase the parcels it needs for the highway, which will be in addition to the $20 million construction cost, he said. Those costs are all rolled into the $43 billion price tag for the Alaska LNG Project. However, AGDC needs to find a way to pay for it all before the properties can be purchased and the work can be put out to bid. “The next phase will be contingent on us have the money to be able to ultimately go forward with construction,” Richards said. AGDC has contracted with the Bank of China and Goldman Sachs to help it solicit investments for the LNG project, but last session the Legislature opted not to give the agency the authority to accept outside funding, at least for now. The Federal Energy Regulatory Commission, which is writing the environmental impact statement for Alaska LNG, does not have direct say over the highway work, but because it is a “non-jurisdictional connected action,” actual highway construction cannot be done until FERC approves the overall project, according to Richards. FERC expects to issue its decision on the project by February 2020. At that point, road work will start in earnest as AGDC wants to be able to needs to be able to shift traffic onto the new road before most of the foundational work can begin on the plant, Richards said. ^ Elwood Brehmer can be reached at [email protected]

A family affair lives on at GBR Oilfield Services

Billy Reynolds is often short on words but long on hard work. It’s a combination that has helped him navigate 50 years in Alaska’s oil industry, most of which have been spent working for and running the Reynolds’ family business, GBR Oilfield Services. One might question Reynolds’ Alaskan bona fides when he does speak, as his West Texas roots come through in every word as if he flew up from Midland yesterday. That is, until you get past the drawl and listen to the decades of history he recounts matter-of-factly. “I came up in ’67 when I was 17 years old,” Reynolds said of his arrival to Alaska. “First I went to the Inlet in ’68 to work for Reading and Bates. Then I went to work up on the Slope on Rig 20 and Rig 25 for Reading and Bates — roustaboutin’, roughneckin’, you know.” Reynolds’ mother Rita Reynolds and his three brothers Jim, Bobby and Mike made the trek north from Midland a few months later with the family’s German shepherd in tow. “Man, that was a trip I could never forget,” Rita recalled while chatting in GBR’s South Anchorage offices. “I think I asked God every step that I wouldn’t have a flat (tire) because the backseat of that car was filled with clothes and boxes.” “Miss Rita”, as everyone in the GBR office affectionately calls her, arrived with her sons to a trailer home in Anchorage’s Mountain View neighborhood on Christmas Eve 1967. Instead of toys, her children got winter coats and galoshes that year, she said. Rita’s husband John Reynolds had already been in Alaska about a year working on the platforms in Cook Inlet for Reading and Bates Drilling. After a few years as a “company man” with BP, John joined with fellow oil hands Jim Gribbons and Jack Barr to form a tool rental company, GBR Equipment, in 1973. Barr soon moved on to other work but Gribbons and Reynolds kept the original name. And when Gribbons passed away in 1976, GBR became the Reynolds’ family business. By 1984 John was able to recruit his sons Bobby and Billy away from industry giant Parker Drilling to help their brother Jim run the well casing services the family business had expanded into a few years prior. The challenges of the oil business in Alaska have chased off some of the biggest players in the industry and doomed numerous smaller companies, but the Reynolds have navigated GBR through the ups and downs. Now president of GBR, Billy acknowledged the price crash of the mid-1980s was a struggle— oil went from about $30 per barrel in late 1985 to $9 in 1986 — but the small company continued getting at least some work. “We had to cut back on wages. We had to cut back on our prices for the oil company,” he said. “We were able to keep most of our hands. Some of them quit; you can’t blame for that but we were able to keep going.” Well casing is still GBR’s primary business, but the Reynolds added welding services to the company’s work in early 1994, Billy said. When patriarch John passed away in 1997, Billy and Bobby took over the operation. GBR’s business has generally followed that of most of the industry in recent years, Billy said, noting the last couple years have been slow but demand for the company’s services is gradually picking back up. Over the years GBR has had a hand in developing the iconic Prudhoe Bay and Kuparuk River oil fields. The company has also done substantial work at the Endicott field, according to Billy, and its 20 employees are now split between working on Italian major Eni’s ultra long-range exploration wells at the offshore Nikaitchuq field and for ConocoPhillips at various locations. “Now that the price is going back up more oil companies are interested in the finding,” Billy said of the status of exploration on the Slope. As someone who has witnessed North Slope oil go from literally nothing to powering the largest state in the union, he said most of the evolution in the industry has been for the best. “It used to — back in the ‘60s — take almost a year to drill a well. Now it takes about two weeks,” Billy said, noting that personal safety requirements have gone hand-in-hand with equipment comforts. “Back then they didn’t make you wear ear plugs or safety glasses and the clothes wasn’t really qualified for that cold, cold weather up there,” he added. “I’ve seen a crew from Oklahoma came up and was supposed to relieve us on the drilling rig so we’d go home, but they got off that airplane in cowboy boots and a Levi jacket,” Billy recalled. “The only time they got out of that airport was to get back on that airplane back to Oklahoma, you know. They just caught it at the wrong time.” As someone who at times spent six months on the Slope at a time and was regularly there for six-week stints, he said one of the biggest advancements, aside from environmental sensitivity, was shortening the work rotation. What started as six weeks on and three weeks off was first cut to four-and-two, Billy said, and eventually the current two-and-two split to prevent workers from becoming homesick, which can lead to accidents caused by wandering minds while working. “Two and two really hurt the wages, but that’s the way it’s going to be,” he said simply. Billy still travels to the Slope occasionally, but he now spends as much time as he can fishing on his boat out of Seward, particularly since his son-in-law Jim Wohlers, GBR’s general manager, took over the day-to-day operations about 10 years ago. Despite semi-retirement, Billy said he doesn’t see himself returning south; 50 years in Alaska has made Texas just “too hot” for him, even though his drawl still says he should be at home there. And while they won’t say it, Billy and Rita are clearly but quietly proud of the business they’ve helped support over 45 years. “Man, has it been that long? I quit counting somewhere along the line,” Rita said when asked to reflect on GBR’s 45th birthday. “GBR’s been up here for a long time and I’ve got to say that we’ve been pretty blessed to keep going like we’re doing,” Billy said. “One thing I like to say is — like I tell my hands, I said, ‘You know, you don’t talk bad about nobody; you don’t talk bad about our competitor, you know.’ To me, it’s bad karma to do that. Just keep your nose clean and do your job.” Elwood Brehmer can be reached at [email protected]

Siemens-led consortium plans to test old Houston well for gas

A pair of Alaska Native organizations and a multinational industrial technology firm believe they can find the missing link to the natural gas supply chain for Fairbanks in an old exploration well near Houston. Knikahtnu Inc., an Alaska Native village corporation, in a partnership with Siemens Government Technologies and the Knik Tribe, has applied to lease about 6,200 acres north of Big Lake from the Alaska Mental Health Trust Land Office on the prospect that the tract holds commercial quantities of natural gas. The consortium presented a competing plan to the Alaska Industrial Development Authority’s Interior Energy Project to supply LNG to the Fairbanks area via rail to the Interior Gas Utility Board of Directors in late August. Siemens representatives told the IGU board they are in talks with multiple Cook Inlet gas producers and believe they can secure feedstock gas for $5 per thousand cubic feet, or mcf, of gas, which would be significantly cheaper than the gas price Southcentral gas and electric utilities have been able to secure on much larger volume contracts. However, contracting for gas on favorable terms for the Interior could also be challenging because it is for a relatively small demand, likely starting at a little more than 1 billion cubic feet per year range and growing as Interior residents and businesses sign up for gas. As a result, the partners are also looking to source their own gas — giving them control over the feedstock cost — which could cut the cost of the biggest variable in the supply chain in half, they contend. AIDEA and IGU currently have a three-year supply contract with Hilcorp for $7.72 per mcf, while the Knik-Siemens proposal before the IGU board lists a “conservative” feedstock price of $4 per mcf for their own gas supply. Getting additional natural gas supplies to the Interior has long been seen as a way to reduce at times crippling home heating costs, but supply chain and conversion expenses, combined with a relatively small gas market, have challenged the economics of making it happen. The gas could also go a long way towards improving the air quality that often reaches unhealthy levels during winter in the Fairbanks area if it is cheap enough to get residents who currently burn wood or heating oil to convert their home systems. Knikahtnu owns roughly 3,000 acres near Houston and the Alaska Railroad tracks that would be the site of a Siemens modular LNG plant, and, Knikahtnu leaders hope, eventually an industrial park fed by the gas. The Knik Tribe is part of the plan on the premise that the Tribe is eligible for federal funding streams that could help improve the economics of the project. Knikahtnu CEO Tom Harris said in an interview that the Mental Health Trust parcel and surrounding area has been explored for oil for nearly 50 years, but drillers kept finding gas. “If you look at the drill history there’s been a significant amount of gas there,” Harris said. There are coal seams in the area that are gradually being pushed downward in a geologic action called subduction with every one of the frequent, often unnoticed earthquakes that occur in Southcentral, Harris described. The subduction leads to “natural fracking” and coal bed methane production, he said, and that led the group to believe it is worth investigating further. That’s where the Mental Health Trust land comes in. Harris estimated it would cost $3 million to $5 million for each new well in the area, but the parcel the consortium wants to lease for 10 years — at $10 per acre per year — already holds the Northern Dancer-1 well. Trust Land Office Executive Director Wyn Menefee said the Northern Dancer well drilled by now bankrupt Storm Cat Energy in 2006 was cased but never tested. “It’s basically closed, but it’s not plugged and abandoned so it can be reopened and tested,” Menefee said. Prior investigations into coal bed methane in the Big Lake-Houston area were met with resistance by residents who didn’t want industrial activity in and around neighborhoods, Menefee said, so it never materialized. In this case, however, the trust parcel is far enough away from populated areas that the “urban interface problem” shouldn’t arise again, he said. Menefee added that there’s no telling whether or not the group will be successful, given the fickle nature of oil and gas exploration, but the lease application says the partners must either bring the well into production or finally plug and abandon it. “There was enough interest to drill the well the first time; sure the finances for the company didn’t work out. Right now, with Knikahtnu considering it, (if) certain things come together — the location, the potential resource, proximity to transportation infrastructure — all of those things start working well together,” he said. Harris commented that if the state Legislature had fully funded the Mat-Su Borough’s half-finished and now stalled rail spur to Port MacKenzie, the whole Knik-Siemens proposal would be moot because the rail would go right past the existing LNG plant now owned by IGU. ^ Elwood Brehmer can be reached at [email protected]

North Slope bustling with projects of all sizes

With the aid of stabilized oil prices, North Slope operators are ramping up activity on prospects in all stages of development. In all, industry observers note that the numerous projects beyond simply the exploration phase could incrementally add nearly 400,000 barrels of production on the Slope. ConocoPhillips is leading the way with startup of its roughly $1 billion Greater Mooses Tooth-1 oil project scheduled for later this year, other projects in permitting and plans for another robust winter exploration season. The oil major is focused on the western edge of Slope activity; most of its greenfield work is in the federal National Petroleum Reserve-Alaska. When production commences at GMT-1, it will be the first commercial oil to flow from federal Slope acreage. GMT-1 is expected to peak at up to 30,000 barrels per day. However, the company has also identified additional potential for oil on the southern flanks of its large Alpine and Kuparuk River fields on state lands. Plans are to drill into the Cairn and Putu prospects in the remainder of 2018, ConocoPhillips Alaska Vice President Scott Jepsen said Sept. 10 during a joint meeting of the House and Senate Resources committees. The Cairn prospect in the southwest corner of the Kuparuk field will be drilled from an existing drill site and the third Putu well — after a main well and sidetrack were drilled last winter and found oil — will target another nearby area identified by a seismic survey, according to Jepsen. Located just about three miles from the Native Village of Nuiqsut, the first Putu well and sidetrack were drilled from an ice pad near the community after ConocoPhillips agreed to extensive impact mitigation protocols. The third well will be spud from the CD-4 drill site in the Alpine field. Overall, the company plans to drill between six and eight exploration and appraisal wells this coming winter and additionally conduct at least that many tests on wells in its 100,000-plus barrels per day Willow prospect in the NPR-A utilizing two drilling rigs, Jepsen told legislators. “As we move into the (February-April) exploration season we want to focus really on Willow. We’re going to be drilling some horizontal wells out there to better understand what the productivity might look like for the type of wells that will be used to develop it,” he said. ConocoPhillips initiated permitting for Willow, which could cost up to $5 billion to fully develop, in August with the Bureau of Land Management. Jepsen said Willow alone could add several thousand construction jobs and several hundred permanent Slope jobs once it is complete. The company is also likely to sanction its Greater Mooses Tooth-2 project this year as well, presuming it receives a favorable record of decision from BLM in the coming weeks, Jepsen added. The company recently increased its peak production estimate for GMT-1 from 30,000 to 38,000 barrels per day. Pikka, Oil Search: Meanwhile, the U.S. Army Corps of Engineers continues to work on the final environmental impact statement for the Pikka project, also from the Nanushuk formation, which Australian producer Oil Search took over from Armstrong Energy in July and has estimated production of 120,000 barrels per day. Nanushuk, 88 Energy: A consortium of small independents led by Australian-based 88 Energy is planning to drill an exploration well into the Nanushuk formation near the Putu wells and other successful Armstrong Energy exploration wells early next year as well. Mustang, Brooks Range Petroleum Corp.: Brooks Range Petroleum Corp. has also promised state Division of Oil and Gas officials that its Mustang oil project on the west edge of Kuparuk should begin producing around the New Year, according to regulatory filings with the state. Brooks Range has opted for small-scale, modular production facilities to expedite the long-delayed project, which has the potential to produce up to 6,000 barrels per day until permanent facilities are installed, at which point the production could double. Nikaitchuq, Eni: Just to the east and a little offshore from Alpine, Italian major Eni is in the midst of a four-well exploration program based from the company’s Nikaitchuq development. Eni started drilling the first long-reach well in December 2017 from its manmade Spy Island dill site in state waters. The wells are targeting prospects identified underneath federal waters further offshore. In 2017 the Bureau of Ocean Energy Management approved the company to drill up to four wells — two main bores and two sidetracks — through March 2019. According to documents filed with BOEM, the main wells in the Nikaitchuq North project were planned to depths of about 7,500 feet and 8,300 feet with the offshoots extending more than 20,000 feet to reach the targeted areas in the federal leases. An Eni spokesman declined to provide details on the progress of the drilling, but said via email that the company intends to resume drilling at the start of 2019 to reach the target depths. The approvals from BOEM give the company flexibility to re-enter the well bores for appraisal drilling and tests if needed. The company currently produces about 20,000 barrels of oil per day from the Nikaitchuq field. On Aug. 29 Eni also revealed it has acquired about 350,000 acres of state leases south and east of Prudhoe Bay from Caelus Energy. A release announcing the deal states “Eni will apply its business model and experience through a fast-track exploration with a short time to market of the potential new discoveries;” however, a spokesman said the company does not plan to conduct any seismic surveys or exploratory drilling on its new acreage this coming winter. Hilcorp, Milne Point and Liberty: Back onshore, Hilcorp Energy is almost done installing production facilities at its $400 million Moose Pad project in the Milne Point Unit. As soon as the facilities are complete Hilcorp will begin lots of drilling and first oil from the Moose Pad is expected in the first quarter of next year, according to Hilcorp Alaska spokeswoman Lori Nelson. The project has space for up to 70 wells and production is expected to peak at 16,000 to 18,000 barrels per day. Hilcorp also has an ongoing polymer flood pilot project at Milne Point in hopes of increasing recovery of heavy, viscous oil. Adding polymers to injected water increases the water’s viscosity and helps it “push” oil out of the reservoir more effectively by preventing the heavier oil pool from dispersing and comingling with the water as easily. “Experts have estimated that polymer use on the Slope could enhance recovery from an average rate of 15 percent up to 35 percent,” Nelson wrote. Hilcorp’s major Slope project — a 50-50 partnership with BP — is awaiting a record of decision after BOEM released the offshore Liberty manmade island oil development EIS Aug. 23. Liberty is expected to peak at up to 70,000 barrels per day. “I don’t think we’ve seen this much potential activity in decades,” Jepsen commented of the North Slope to legislators Sept. 10. In Cook Inlet, where Hilcorp is the dominant operator, the company is within weeks of wrapping up its $75 million-plus cross-Cook Inlet oil pipeline project, Nelson wrote in an email. She said the pipeline being converted from a gas pipeline to an oil line should be operational early in the fourth quarter. The project will extend the life of oil production in the Inlet and eliminate the need for Hilcorp to transport oil via tanker from its west Cook Inlet facilities to the now-Marathon refinery in Nikiski. Elwood Brehmer can be reached at [email protected]

Candidates talk ballot measure, funding capital projects at forum

With everyone in Alaska’s crowded gubernatorial race for more oil and less crime, the candidates are trying to highlight what separates them in the final two months before the Nov. 6 election. The candidates took the stage together during a lunch forum held by the Anchorage Chamber of Commerce Sept. 10. Democrat candidate and former U.S. Sen. and Anchorage Mayor Mark Begich set himself apart from independent Gov. Bill Walker, former Republican state Sen. Mike Dunleavy and Libertarian candidate Billy Toien by noting he is the only one in the crowded field supporting Ballot Measure 1, which would overhaul the state’s permitting requirements for development projects in salmon habitat. Resource industry and development groups oppose the measure, contending it would add unnecessary time and cost burdens — if not outright stop some projects, particularly large mines — to a regulatory process that has worked well for decades. Ballot Measure 1 sponsors, led by the nonprofit Stand for Salmon, insist the voter initiative would largely codify in law best practices already used by the Department of Fish and Game’s Habitat Division and insulate science-based permit evaluations from political influences. They also note the initiative would add public notice and comment period requirements to what currently is one of the only public resource-use permits the state issues without such input. Begich said the Alaska Supreme Court stripped the proposed law change of its most prescriptive language Aug. 8, when the court removed an outright prohibition on permitting substantial damage to salmon habitat, calling it mostly a “right to know” measure after the ruling. “If there’s going to be a megaproject the public gets to be involved from a state perspective; they get to have comments,” Begich said. Dunleavy said he “doesn’t know what’s going to become of Alaska” if policies such as Ballot Measure 1 are enacted because it will hamper the state’s ability to approve projects and create jobs. Toien’s message was similar. Walker noted that he is still opposed to the measure even after the Supreme Court removed the provision it deemed unconstitutional for usurping the Legislature’s authority to appropriate state resources.. He more generally characterized the voter initiative process as a “blunt instrument,” and said that the new requirements would add a new layer of unwanted permitting uncertainty. “If there’s improvements that need to be made, let’s have that discussion in the proper forum and that forum is in the committee rooms in Juneau so everybody has an opportunity to weigh in and participate,” Walker said. Begich responded to that by drawing attention to the fact that legislators did not act on House Bill 199 — very similar to the ballot measure — last session, but did pass House Bill 44 when it became clear another voter initiative aimed at tightening legislative pay and per diem allowances was gaining steam. The Alaska Constitution allows a legislative action to nullify an initiative if the intent of the change is substantially similar to that of the voter proposal. “The back-and-forth the governor talks about is a great idea, but where were these guys when the debate was supposed to be happening?” Begich questioned. “Why weren’t they talking about this? Instead, 45,000 people (who signed the Ballot Measure 1 petition) got a little upset about it. That’s how the initiative process works.” A question as to how the candidates feel the state should deal with the aging Anchorage port — which despite decaying dock infrastructure is still the entry point for the vast majority of goods entering the state — also illuminated how they plan to tackle the state’s broader capital project and deferred maintenance issues. It’s generally accepted among state politicians that the $100 million to $150 million the state has spent from the general fund on capital budgets in recent years is unsustainably low, particularly as the state’s deferred maintenance bill approaches $2 billion. In this case, it was Dunleavy who departed the most from his main competitors, though they all stressed the obvious need for rebuilding the docks. Port officials have said the reconstruction project will likely require more than $500 million in new money to complete. The Municipality of Anchorage is currently attempting to recoup some of the more than $300 million in federal and state funds used on the failed expansion project in a lawsuit against the U.S. Maritime Administration that was tasked with supervising the effort that was halted in 2010. The former Wasilla legislator said the main question is whether the money should come directly out of the state’s General Fund for the city-owned port. He wants to see if private investors would be interested in putting money into the port. “I believe that there are equity funds and there are pension funds that would like to invest in the Port of Anchorage,” he said, using the former name for the facility. The Anchorage Assembly renamed it the Port of Alaska in 2017 to emphasize its importance to the state overall. Port Director Steve Ribuffo said in a 2017 interview that municipal officials have discussed the prospect of attracting private capital to fund the work, but noted that option would likely raise usage fees to cover investment returns — fee hikes that would invariably be passed on to Alaska consumers. On broader capital projects, Dunleavy said he would push for more thorough vetting of state-funded projects and wants to see municipalities share capital costs with the state, ideally on a 50-50 split whenever possible. Walker and Begich said they prefer voter-approved general obligation, or GO, bond packages as a means of growing the capital budget with low-interest debt, a way to fund construction that is common for local and state governments nationwide. Begich is floating a one-time, $2 billion-plus GO bond package that would be dispersed over six years. He said up to about $100 million in General Fund money the state already spends on direct capital appropriations could be used for annual debt service, meaning the plan would not require any new state money, stressing accountability in project success and a need to prevent legislators from slipping pet projects into the capital budget. “Deferred maintenance just alone for the State of Alaska is enormous and we just continue to close our eyes and hope it will magically disappear; that’s not how you do it,” Begich said. Walker noted the latest capital budget included $20 million for the Port of Alaska on the expectation the municipality, which settled several lawsuits against contractors who worked on the project for just less than $20 million in January 2017, would provide matching funds. He also said now that the state is using Permanent Fund earnings to greatly reduce annual deficits, which has also stabilized the state’s credit rating, it is time to revisit the $500 million biannual GO bond plan he submitted early in his tenure as governor but did was mostly ignored by the Legislature. The governor called the port the “tip of the iceberg” of capital needs across the state. “We have $1.8 billion of deferred maintenance that needs to be done across the state. It’s disappointing to me that the Legislature went through $14 billion of savings before we got to the SB 26 (Permanent Fund earnings) vote, which is unfortunate because that would’ve fixed literally every capital project across the state three times over,” Walker said. Toien, the Libertarian, stressed that all state departments and quasi-government agencies and funds need to be put through a “comprehensive financial audit” and all revenue streams need to flow into the General Fund to get the best, true assessment of the state’s fiscal situation before any money goes to the port or any other major project. Toien said he believes bringing “off-budget” revenues into the General Fund would also close the remaining roughly $700 million budget deficit that has been projected for the current fiscal year. “I’m the only one addressing the comprehensive finances of the state, not just the corner called the budget or the (Constitutional Budget Reserve) and it’s because it’s necessary,” he said of his plan for balancing the budget. Toien, in the unusual position of being the alternative fourth candidate in a race with an independent incumbent, closed his remarks with a pragmatic assessment of his situation. “If everyone threw their vote away and voted for me I would win,” he said to a collective chuckle from the crowd. ^ Elwood Brehmer can be reached at [email protected]

Suit against tax credit bonds bogs down over jury trial motion

A lawsuit challenging the constitutionality of a state law to pay off nearly $1 billion in oil and gas tax credits has slowed to a crawl as attorneys squabble over whether or not a jury should decide the matter. Former University of Alaska Regent Eric Forrer requested a jury trial July 19 in the public interest lawsuit he filed May 14 against Gov. Bill Walker’s administration with the Juneau District of state Superior Court. The request has resulted in each side filing multiple briefs in the debate over a trial, exemplified by the latest in the series filed by state attorneys Aug. 20 entitled, “Defendants’ Reply to Plaintiff’s Response to Defendants’ Motion to Strike Demand for Jury Trial”. That filing, signed by Assistant Attorney General Bill Milks, contends the issue at hand is a matter of the reading of law and therefore is not eligible for determination by a jury of 12. “This case is a facial challenge to a statute. A jury cannot determine what the words of a statute mean. A jury cannot determine what the words of the Alaska Constitution mean. Those are questions of legal interpretation solely within the authority of the judiciary,” Milks wrote. He continued to note that House Bill 331, the administration-sponsored legislation authorizing the bond sale that passed June 20, has not yet been implemented. The Department of Revenue has not sold any bonds yet. A bond sale was originally planned for sometime in August, but Deputy Revenue Commissioner Mike Barnhill said in June that the administration would hold off on marketing the bonds while the lawsuit progressed. Barnhill referred questions for this story to the Department of Law; officials there did not respond to requests for comment. Pushing ahead with the sale during the litigation would undoubtedly increase the state’s cost of borrowing greatly and damage the underlying economics of the plan to pay off the credits with borrowed money while not incurring additional costs. Under the plan, the companies and banks holding credit certificates would take a up to a 10 percent discount on the amount they are owed to get the money right away and thus insulate the state from borrowing costs. Forrer filed the lawsuit on the belief that such sale would violate the Alaska Constitution, which has tight sideboards on what the state can incur debt for and how it must be done. The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold. State corporations can also sell revenue bonds, but those are usually linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole. Legislative Legal Division attorneys in an April 13 opinion questioned whether the Alaska Tax Credit Bond Corp. — that HB 331 authorizes Revenue Commissioner Sheldon Fisher to set up — would truly have a revenue stream that could pass legal muster given it would rely on annual legislative appropriations to fund the debt payments. Administration officials contend the plan is legal because the 10-year bonds would be “subject to appropriation” by the Legislature, which the bond buyers would be aware of, and therefore would not legally bind the state to make the annual debt payments. Forrer’s attorney, Joseph Geldhof said in an interview that they are not trying to “slow roll” the legal process by asking for a jury trial to further delay a bond sale, but rather insisted the state’s attorneys have been “enormously uncooperative” and have not engaged in the typical case process. Geldhof emphasized that the Department of Law has not yet filed an answer to the original May 14 complaint or a July 19 amended complaint. “They won’t even admit, for example, that the tax credits are not a form of debt,” Geldhof said. What exactly the tax credits are and how they should be treated is one of several similar material facts that should be decided by a jury, according to Geldhof. He wrote in response to the state’s motion to strike the trial request that without an answer to the complaint or resolution of the facts in the cast that it’s too early for Judge Jude Pate to rule on the trial motion. The state has “steadfastly ignored” the insistence that there are factual issues to resolve in the case, according to the Aug 8 response to the state. Geldhof argued that if the facts of the case can be settled, both sides could move for summary judgment, but that hasn’t happened yet. Forrer wrote in an Aug. 9 affidavit that Revenue Commissioner Sheldon Fisher and other state officials have referred to the bonds as an “obligation” of the state as well as “subject to appropriation” and “revenue” bonds, thereby clouding how they should be viewed relative to constitutionality issues. Forrer also stressed that it’s unclear what entity would be responsible for repaying the bonds, the State of Alaska or the Tax Credit Bond Corp., which could go a long way towards determining what would happen to the state’s credit rating if the Legislature eventually opted not to make the bond payments. “Representatives of the state have not explained how, if the credit of the state is at risk, the faith and credit of the state is not implicated under HB 331,” Forrer wrote. “In fact, the bill does not include express language stating that the faith and credit of the state will not be pledged.” Judge Pate has not yet ruled on the state’s June 25 motion to dismiss — based on the failure to make a claim for relief. Geldhof made a request for oral arguments on the state’s motions to dismiss and the opposition to a jury trial Aug. 23. Regardless of the outcome in Superior Court, the case appears primed for an appeal to the Alaska Supreme Court. Elwood Brehmer can be reached at [email protected]

ExxonMobil signs gasline agreements with state

Two out of three ain’t bad, but there is still a lot of work ahead for the Alaska Gasline Development Corp. The state agency in charge of putting together the $43 billion Alaska LNG Project signed a gas sales precedent agreement with ExxonMobil on Sept. 10, meaning two of the three major North Slope natural gas holders have now agreed to key gas pricing and volume terms with AGDC. Those exact terms are confidential, but Gov. Bill Walker said in a formal statement the agreement “means Alaska is one step closer to monetizing the North Slope’s vast and proven natural gas resources.” ExxonMobil operates the Point Thomson gas field and holds a 62 percent stake in the unit (with BP owning nearly all of the remaining share), which sits east of Prudhoe Bay on state land near the edge of the Arctic National Wildlife Refuge. The company also holds a 36 percent interest in the Prudhoe Bay field. With roughly 28 trillion cubic feet of gas available from Prudhoe and another 8 tcf in Point Thomson, ExxonMobil has rights to nearly 15 tcf of North Slope gas. “This precedent agreement is good for Alaska and ExxonMobil and represents a significant milestone to help advance the state-led gasline project,” ExxonMobil Alaska President Darlene Gates said in an AGDC release. “As the largest holder of discovered gas resources on the North Slope, ExxonMobil has been working for decades to tackle the challenges of bringing Alaska’s gas to market.” The announcement with ExxonMobil means ConocoPhillips is the only major North Slope producer to not yet sign a preliminary gas deal with AGDC. BP and AGDC reached a similar agreement in early May on binding price and volume terms; however, there are numerous finer financial and technical points to be addressed before final gas sales agreements are signed. ExxonMobil’s gas sales precedent agreement — like BP’s — calls for gas to be sold into to the large North Slope gas treatment plant that would be the start of the 807-mile gas pipeline and LNG export project. AGDC spokesman Jesse Carlstrom said the state-owned corporation is actively engaged in similar discussions with ConocoPhillips. Department of Natural Resources Commissioner Andy Mack said in an interview that final gas sales agreements would likely be signed nearly in concurrence with a final investment decision on the overall Alaska LNG Project. “It brings the firepower and brand name of ExxonMobil to the project,” Mack said as AGDC officials begin their major push to attract third-party investors to the project. In a separate but related development, Mack and Attorney General Jahna Lindemuth also signed what is being called a “letter of understanding” with ExxonMobil and BP Alaska leaders on Sept. 10 to suspend key provisions of the 2012 Point Thomson Settlement Agreement as they work on Alaska LNG. The letter removes the requirement for ExxonMobil, as the Point Thomson operator, to move forward with a plan to expand production at the field in a way that doesn’t jive with feeding the LNG project. Before ExxonMobil signed the letter with the state, the 2012 Settlement Agreement signed by then-DNR Commissioner and current Sen. Dan Sullivan required the company to make a final decision on how to increase production at Point Thomson by Dec. 31, 2019. Specifically, it prescribes that the company choose to either increase production at Point Thomson to more than 50,000 barrels per day of natural gas liquids, or condensates, and pipe up to 920 million cubic feet of natural gas per day into Prudhoe Bay, or simply grow condensate production to 20,000 barrels per day and reinject the gas into the Point Thomson reservoir. The current Point Thomson facilities have a production capacity of about 10,000 barrels of condensates and 200 million cubic feet of gas per day. However, the technical challenges of producing gas from and reinjecting into the ultra-high pressure field have hampered ExxonMobil’s production ability. A third, untenable option would be for ExxonMobil and BP to relinquish the leases back to the state, but that would seem unlikely given they spent upwards of $4 billion between 2012 and 2016 to develop the gas field in accordance with the settlement. In July 2017, ExxonMobil submitted a long-range development plan to the Division of Oil and Gas outlining plans to pipe gas more than 60 miles to Prudhoe for injection into the oil field to aide in oil recovery. That plan was initially rejected, but eventually approved by state regulators. Despite that, the Point Thomson development was always meant to feed a large gas project. Some former state officials and Alaska LNG experts have questioned the economics of piping Point Thomson gas to Prudhoe. Mack characterized all the settlement alternatives other than a major gas project as “suboptimal” for the state and the companies, noting the prospect of moving and injecting gas into Prudhoe is not as attractive as it seemed in 2012. With the Sept. 10 letter, the state retains the ability to reinstate the 2012 Settlement provisions at any time, Mack said, stressing that the preferred option is for the companies to help the state be successful with the Alaska LNG Project. “The whole idea is to redirect the (Point Thomson) project back to major gas sales,” he said. If at some point state officials decide Alaska LNG is not going to be successful or ExxonMobil backs away from it, the settlement provisions can be brought back with a 30-month window for the company to comply. Mack said the extra time — versus the 16 months between now and the end of December 2019 — is to allow ExxonMobil to restart its Point Thomson expansion engineering team and work out other related issues with the state. The engineers that have been working on that project will hopefully be put towards advancing the Alaska LNG Project, he said. Mack added that the gas sales precedent agreement and the letter “are definitely related,” noting the signing of the former is a significant show of commitment by ExxonMobil to the state-led LNG project. “This is another critically important step, but there’s many more steps in this process,” Mack said. Elwood Brehmer can be reached at [email protected]

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