Elwood Brehmer

CP: Efficiencies, discoveries leading ‘renaissance’ on North Slope

ConocoPhillips Alaska employees have a big round target to hit that company leaders believe is the key to staying competitive. And it’s not a buried treasure map that points right to where the next exploration well should be drilled — although with the company’s recent success indicates they might have one of those, too. “It’s just math,” ConocoPhillips Alaska President Joe Marushack said during an Aug. 9 meeting with Journal and Anchorage Daily News staff. The target is $40 per barrel, and making the math work so all of the company’s operations in the state are profitable at or below that key price point. Particularly on the North Slope, where costs are unavoidably higher than in most other oil basins worldwide, the company has focused on making sure it can withstand the inevitable ups and downs of oil markets, Marushack emphasized. That $40 breakeven has been hit at ConocoPhillips’ large existing Alpine and Kuparuk River oil fields, but also applies to all of the greenfield projects it’s working on as well. Alaska Vice President Scott Jepsen said the $40 focus revolves around remaining competitive with Lower 48 unconventional oil plays for investment dollars within the company. Jepsen described the massive and ever-growing shale oil basins in Texas and North Dakota as “the center of gravity” for the oil business, noting those plays are “attracting tens of billions of dollars of investment this year.” Making $40 oil profitable keeps Alaska operations competitive, but he added that some of the oil being pulled from Texas is now done so for less than $30 per barrel. The continued emphasis on cost is also a way to prepare the company for what its leaders believe will be ever more wild market swings. While oil has momentarily steadied in the $70 per barrel range, few seem to believe it will stay there for long. “Our chairman (Ryan Lance) said the higher the price of oil the greater the crash is going to be so we’ve got to be able to survive that volatility,” Jepsen said. The new mindset is also a far cry from just a few years ago, when companies Slope-wide were discussing the need for $70 oil just to break even on new discoveries. “2015 was a very, very scary time for us so we did an awful lot to reduce our cost — as did everyplace else we that we produce — and we were very successful at reducing our costs and we’ve got to be able to maintain that,” Marushack said. Part of those savings are coming from doing more tests on pipelines and equipment that previously would have been routinely replaced regardless of its condition. Jepsen said the company is also able to recoat the inside of existing oil lines to extend their working life without wholesale replacement, a technological improvement that has been adopted on a large scale in the last five years. Further advancements in compressed seismic exploration allow the company to gather far more, and better, data than ever before for the same cost to inform geologists on where to drill. Marushack added that some equipment redundancies have been engineered out of the company’s equipment as well without sacrificing reliability. However, getting to $40 still meant cutting its Alaska workforce from about 1,200 employees in 2015 down to 970 today. Its contracted labor force has also shrunk by about 35 percent over that time, he said. “At $110 oil you’re focused on getting every barrel you possibly can,” Marushack observed about the lack of cost emphasis when prices were high. The refocus on efficiency, combined with the emergence of Nanushuk formation plays on the western Slope, leads ConocoPhillips Alaska leaders to believe up to 400,000 barrels per day of new oil could be produced from the Slope by 2025. Much of that would come from their fields, particularly the Willow prospect with potential for up to 100,000 barrels per day with a $4 billion to $6 billion development cost. The Bureau of Land Management announced the start of a scoping period Aug. 7 as the first step toward developing an environmental impact statement, or EIS, for the Willow development. Two projects now in permitting — Hilcorp’s offshore Liberty and Oil Search’s Pikka — should be big drivers, too, along with other, smaller projects. They see it as a “renaissance” on the North Slope, Marushack said. “We think it’s really incredible what’s happening,” Jepsen added. “It’s not just us. If you look at what’s happening, there’s a lot of stuff that — it’s not just a concept or it’s not just an exploration prospect — people are actually doing stuff; they’re in the permitting stages and this stuff is going to happen.” For ConocoPhillips, bringing much of that newly-found oil online will mean developing projects near the Native Village of Nuiqsut, which is located just east of the company’s work in the National Petroleum Reserve-Alaska and very close to its Putu and Stony Hill Nanushuk discoveries made this past winter. Early estimates on each of those have been pegged at about 20,000 barrels per day. The company employed a series of significant steps to mitigate the impacts of drilling its Putu exploration well, just about three miles from the village last winter. The biggest measures were centered on eliminating diesel exhaust from the drilling rig and pad operations, which was upwind from the village of about 400 residents. ConocoPhillips powered the rig and pad with low-emission generators placed farther from Nuiqsut and monitored air and water quality near the village before, during and after the work was done. By all accounts the work went well, and such mitigation is also likely to be needed as the prospects are developed. Marushack said the company listened to the concerns of Nuiqsut residents and did its best to address them. Residents’ concerns led ConocoPhillips to postpone exploration drilling the previous winter. “We believe we’re going to have to continue to engage with the village, not only with Kuukpik, but with the village and listen to what they say and then try to figure out where there’s some things that they could participate in,” he said. Kuukpik Corp. is the village corporation for Nuiqsut. The Putu well was drilled with one of its rigs. Marushack noted that a portion of the royalties from oil produced in the NPR-A by law must go to mitigating the impacts of development in area communities. ConocoPhillips is also one of the largest donors to Stand for Alaska, the campaign organized to oppose Ballot Measure 1, which aims to strengthen requirements for development projects in salmon habitat. Jepsen said the company isn’t exactly sure what direct impacts the proposed fish habitat permitting law changes would have on its operations, but the primary concern is with a new, public permitting process that could open avenues for lawsuits that don’t exist now. “If the initiative goes forward I could see a very lucrative path for those organizations that are opposed to oil and gas exploration on the North Slope to pursue something that can slow us down,” Jepsen said. The initiative’s advocates, led by the nonprofit Stand for Salmon, stress that their primary goal is not to stop projects, but rather to codify in law best practices — and prevent them from being eroded by political forces — that are employed by Fish and Game in its habitat permit adjudications today. The ballot initiative would also add public notices and comment periods to one of the few state public resource-use permits that currently does not have such requirements. Jepsen added that while much of the company’s work has little if any impact on anadromous fish habitat, its most common work that could be slowed is the annual building of ice roads that use water from area lakes. Jepsen emphasized that those water draws are done in close concert with the Department of Fish and Game and are based on decades worth of data. ^ Elwood Brehmer can be reached at [email protected]

Education College launched with aim to produce more Alaskan teachers

Alaska’s higher education leaders are overhauling their operations in an effort to ultimately improve the outcomes of the state’s youngest students. The University of Alaska System debuted its College of Education this month, which system President Jim Johnsen hopes will provide better structure to teacher education programs statewide and eventually help the UA produce more homegrown teachers to fill vacancies in school districts statewide. “I can’t say it enough, teachers are the single most important job in our state and in our society,” Johnsen stressed in an interview. “The touch or touched every single person in our state and their purpose, more than any other occupation in our society, is to support our people and to advance our people.” Individuals with a solid educational background add to a skilled workforce, are more culturally aware, earn higher incomes, are less likely to be incarcerated and live healthier lives, Johnsen added. School districts across Alaska have collectively had to look Outside for up to 70 percent of their new teacher hires each year, according to Johnsen. UA College of Education Executive Dean Steve Atwater said more specifically, the system’s three main campuses in Anchorage, Fairbanks and Juneau — where the new Education College is located — graduate roughly 225 new teachers each year while school districts have to fill between 700 and 1,000 vacancies. Atwater joined the UA System in 2014 after five years as the superintendent of the Kenai Peninsula School District and time as a high school teacher and administrator in the Lake and Peninsula School District in Southwest Alaska. Johnsen and other state education officials have long noted that it not only costs districts more to bring in teachers from Outside, but many of those transplants don’t stick around long either, particularly in rural districts. Often, they simply don’t acclimate to living in remote parts of the state. While virtually unquantifiable, the whole challenge of keeping teachers is largely believed to be a fundamental issue underlying why Alaska’s students are routinely near or at the bottom of national performance indices for core subjects. “Especially in rural Alaska, they have a very high turnover rate so there isn’t this level of knowledge, awareness, commitment, particularly to communities — unique communities — across the state that would make these teachers more effective in those communities,” Johnsen elaborated. UA officials also regularly cite statistics that indicate up to 50 percent of otherwise high-performing Alaska high school graduates need remedial coursework once they enroll at a UA campus. Johnsen and Atwater believe a centralized College of Education will help the state university produce more homegrown teachers who better understand the state and are more able to adapt their instruction to what their students need, which should translate into better student outcomes. UA leaders have set a goal of producing 90 percent of the teachers Alaska school districts need to hire each year by 2025. The men emphasized that the schools of education at UA Fairbanks and Anchorage will not go away just because the college is in Juneau at UA Southeast. The teacher education programs will remain at all three campuses and hopefully be strengthened through increased coordination, more consistent standards and the elimination of redundancies, according to Johnsen. “There’s no effort to undue existing programs at the university; we’re not trying to narrow the focus or number of opportunities,” Atwater reiterated. There is capacity for more students in the existing teacher education programs; and if those classes can be filled the universities will happily hire more faculty to provide more classes, he said. The specific changes to the overall teacher education strategy will be led by the UA Teacher Education Council, a 12-member advisory body that Atwater chairs with representatives from each of the main campuses. The council doesn’t have the authority to eliminate programs — that power is held by the Board of Regents — but its recommendations will go through the channels of the system to become policy, he said. Atwater said the system’s traditional teacher education programs are strong and generally need to be grown. However, an initial change that could be made is consolidating the two master’s level education technology programs in Fairbanks and Juneau. He said each has about a dozen students. “Neither program is very well attended or enrolled and why do we have two? That’s low-hanging fruit conversation we can have,” he described. “Does it make sense to keep going independently from one another or should we combine them and just have one?” Johnsen has spent the last several years implementing the system’s Strategic Pathways initiative, an effort to similarly overhaul and streamline mostly administrative operations to save money while improving results during lean budget years. He said four years of cuts by the state Legislature to the system’s General Fund budget have amounted to a cumulative cut of about $165 million on a system-wide budget that peaked at about $922 million in 2014. In addition to the direct budget cuts, enrollment has fallen nearly 15 percent over the past four years, according to UA data, which has reduced tuition revenue. Legislators added about $10 million to the UA budget for fiscal year 2019, a little more than $1 million of which will go to the College of Education, according to Johnsen. He noted that school districts in Alaska generally spend $20 million per year recruiting teachers from outside. “If we can spend $1 or $2 (million) more each year and at some point bring that $20 million number down that makes a ton of sense,” Johnsen said. Some of the budget increase will also go to the system’s marketing and recruitment programs to attract more students, which have been scaled back significantly as well. Part of that will be pushing the post-baccalaureate program that is an avenue for those already with a college degree to quickly become a teacher. “In a year a person can have a degree in teaching if they come in with a baccalaureate degree; they can have a master’s degree and be a full-time teacher in one year,” Johnsen described. “It’s a super-cool program that we really want to expand.” When it comes to producing more homegrown teachers, Johnsen said the college is employing the national Educators Rising program. Very similar to the wildly successful Alaska Native Science and Engineering Program, known as ANSEP, in Anchorage, Educators Rising targets middle and high schoolers interested in teaching and enables them to earn college credits while in high school. It gives them a direct and cost-effective means to achieve their career goals. Atwater added that teaching is currently a career path in about 25 school districts and UA officials want that number to continue to grow. “We’ll have a much higher number of high school kids who are thinking in terms of becoming a teacher more seriously and actually taking some introductory-type classes to get them the real sense of what that’s about rather than just waiting for them to come and hoping they’ll enroll in a teacher prep program,” Atwater said. He continued by emphasizing that elevating teaching at a societal level could intrinsically help recruitment in Alaska. In other places around the world teachers as doctors are revered in the United States, he said. “The profession of teaching has to be viewed as really important or actually the most important thing and we as a state need to give the teaching profession the esteem that will draw kids to it,” Atwater said. ^ Elwood Brehmer can be reached at [email protected]

Feds approve Donlin mine plan in unique joint decision

One of the world’s largest gold prospects is one big step closer to becoming one of the world’s largest gold mines after federal agencies issued a first-of-its-kind decision Aug. 13 in Anchorage.  U.S. Army Corps of Engineers Alaska District Commander Col. Michael Brooks and Assistant Interior Secretary Joe Balash signed a joint record of decision to finish the environmental impact statement for Donlin Gold’s proposed open-pit mine and approve a right-of-way across federal land for a natural gas pipeline that will fuel the mine’s large power plant.  The record of decision generally approved Donlin Gold’s preferred construction plan for the gold mine near Crooked Creek in the upper Kuskokwim River drainage. More specifically, it approved the project’s Clean Water Act Section 404 wetlands fill permit application — applications the Corps adjudicates for the Environmental Protection Agency. Donlin’s permit allows for the disturbance of roughly 3,500 acres of wetlands, according to the EIS documents.  Donlin General Manager Andy Cole said the record of decision is the result of more than 20 years of thorough planning.  “I think it clearly demonstrates that the project has a track record of engineering excellence and a strong culture of safety, environmental stewardship and community engagement, all values that will remain constant,” Cole said. “We believe that Donlin Gold can be a model of responsible mine development with the potential to generate meaningful benefits for our Native corporation partners and communities throughout Alaska for many decades to come.”  The EIS was initiated in December 2012.  Donlin spokesman Kurt Parkan noted that nearly 400 meetings were held on the company’s proposal, with about 350 of those led by the company and another 50 or so by the Corps of Engineers.  However, the world-scale mine that would extract upwards of 33 million ounces of gold over an initial 27-year life is only part of the overall project. Substantial support infrastructure for the mine would also be built, including a 312-mile, 14-inch natural gas pipeline from near Beluga on the west side of Cook Inlet to the mine site to provide a fuel supply for the 227-megawatt power plant at the mine site. Donlin’s plan also calls for a 30-mile access road from the Kuskokwim to the mine as well as expanding the Bethel barge dock and constructing additional fuel terminals in Dutch Harbor.  Donlin Gold leaders acknowledge the project is more sensitive to gold prices than even other Alaska prospects simply because of its associated infrastructure costs.  Gold was trading for nearly $1,200 per ounce on Aug. 14.  “It’s safe to say that the price of gold currently is too low,” Parkan wrote in an email.  Donlin Gold estimates the mine and associated infrastructure that includes a natural gas pipeline from west Cook Inlet and fuel storage all the way in Dutch Harbor, will cost $6.7 billion based on its plan from a 2011 feasibility study.  Donlin Gold is owned by Canadian-based Novagold Resources Inc. and Barrick Gold Corp.  Brooks said at a signing ceremony held at the Corps’ Alaska headquarters on Joint Base Elmendorf-Richardson that the joint Donlin decision — the first of its kind in the nation — is the last major permit he will approve. Brooks handed over command of the Corps Alaska District Aug. 14; he said he is retiring after 25 years of service.  Corps officials emphasized that the record of decision was made into an event less for the decision rendered than for the fact that it was the product of multiple agencies reaching a single conclusion.  “I think it is something to be celebrated that different parts of the federal government are working together to streamline these processes,” Brooks said.  Corps Alaska Regulatory Chief David Hobbie said in an interview that the public will be split on whatever decision an agency makes regarding a major project such as Donlin, adding that lessons learned from this EIS can be applied to similar projects in an effort to speed up the decision-making process.  “This really wasn’t about Donlin’s good, bad or indifferent; it’s about the joint record of decisions because the federal government came together and spoke with one voice. That’s good for the taxpayer, right? Even if they don’t like the decision, at least we made a decision,” Hobbie said.  A major aspect of “streamlining” such permitting is developing a good schedule initially and making sure all stakeholders, including the applicant, stick to it, he added.  The mine would be on land owned by The Kuskowkim Corp., the area Alaska Native village corporation and Calista Corp., the regional Native corporation, owns the subsurface mineral rights.  Calista CEO Andrew Guy said in an interview that the company supports Donlin largely because its leadership has come to trust the environmental review process despite the fact that some of its shareholders — and local tribal governments — oppose the project because of concerns it could harm subsistence resources, particularly salmon in the Kuskokwim.  “We selected certain lands for development purposes but we did not get into that for a long time, primarily because of concerns to the environment and our people’s reliance on subsistence to make a living. But we saw how (the National Environmental Policy Act) affected and impacted mining operations; we saw how NEPA really worked and that’s when our board and management decided that we’ve seen enough of the positive impacts that NEPA has on the process that, yes, now it’s time for us to fulfill (the Alaska Native Claims Settlement Act’s) mandate to provide the work and jobs to our shareholders,” Guy said.  He said that Calista shareholders would benefit not only through mineral royalty revenues to the company but also through work its subsidiary companies would do at the mine.  The Yukon-Kuskokwim River Alliance and the tribal government in the city of Bethel, Orutsararmiut Native Council, said in a statement they are “outraged” by the decision. The groups said the agencies ignored voices from the region and could hurt wildlife and subsistence hunters and fishermen.  Guy additionally stressed that Donlin would lay the groundwork for lower-cost energy and technology infrastructure by bringing natural gas and fiber-optic cable to the region. Calista, in concert with the state and federal governments, could eventually expand that infrastructure to nearby villages he said.  While the EIS decision is a milestone for Donlin, the project is far from being green-lighted.  In addition to the record of decision, the company still has to secure numerous other state and federal permits, among them approvals for water discharge, waste management and a tailings dam safety permit that will eventually require additional geotechnical drilling, according to Parkan.  After the permits are secured company leaders will reevaluate the project’s economics and begin the search for financing if the project pencils out.  Editor's note: This story has been updated from the original version to include Rick Parkan's comments about the current price of gold and its impact on the project. Elwood Brehmer can be reached at [email protected]  

Supreme Court parses, approves salmon habitat measure for ballot

The Alaska Supreme Court approved most, but not all, of the contentious ballot initiative aimed at strengthening the state’s salmon habitat protections in a decision issued Wednesday morning, meaning the initiative will be on the November ballot sans one key provision. The five-member court unanimously ruled that language in the proposed law change requiring the Department of Fish and Game Commissioner to deny permit applications for development in salmon habitat if the activity were deemed to have a “significant adverse effect” is an unconstitutional limitation on the Legislature’s authority to appropriate the state’s resources. That’s because the language would mandate the state to value anadromous fish habitat over other resources, according to the justices — a balancing act that the Alaska Constitution specifically reserves for the Legislature. “(W)here a project like a mine or a hydroelectric dam would permanently, and perhaps irreversibly, displace fish habitat, there is no reasonable interpretation under which that habitat would not suffer ‘substantial damage’ as the initiative defines it,” the 48-page opinion states. “If the habitat has been permanently displaced, it cannot be ‘likely’ for that habitat to be restored within a ‘reasonable period,’ because it will never be restored.” On Oct. 9, 2017, Superior Court Judge Mark Rindner overturned Mallott's Sept. 12 rejection of the initiative petition, which was based on the Department of Law’s determination that it is unconstitutional. The Supreme Court decision remands the case back to Rindner, who is to direct Mallott and the Division of Elections to put the initiative on the Nov. 6 ballots. Ryan Schryver, director of the nonprofit leading the initiative effort Stand for Salmon, said in a brief interview that the group is naturally disappointed that the court struck a small but significant provision of the law change. However, Schryver stressed the group is happy that, “The heart and soul of what we’re trying to do remains intact.” He said the initiative is still fundamentally about making sure the state’s economically and culturally important salmon resources are protected while assuring industry has clear and predictable development standards. Stand for Alaska, a counter-campaign supported by the state’s oil and mining industries as well as Alaska’s Native regional corporations with the exception of Bristol Bay Native Corp., which has taken a neutral stance on the initiative, said in a prepared statement that the courts decision to strike a portion of Ballot Measure 1 “validates just how flawed and poorly crafted the measure is.” “Even with today’s changes, this measure still replaces our science-based habitat management system with untested regulations that will result in job loss and kill current and future, vital projects,” the statement reads. “Stand for Alaska remains strongly opposed to the misguided measure that threatens our jobs, communities and way of life.” Justice Daniel Winfree agreed the “significant adverse effect” language needed to be struck for the initiative to comply with the Constitution, but he partially dissented with the overall ruling because he doesn’t believe it went far enough. According to Winfree’s dissenting opinion, there is not reasonable way to interpret the habitat protections and mitigation requirements that would not effect a resource appropriation. “Where the court and I diverge is with other (initiative) provisions that, while not explicitly prohibiting the Legislature from allocating anadromous fish habitat, would have the same practical effect,” he wrote. Stand for Salmon representatives insist the initiative would mainly codify best practices Fish and Game currently uses in evaluating development permits in salmon habitat and would protect those actions from being degraded by political influence. Stand for Alaska alleges the group is attempting to severely restrict, if not altogether stop, substantive development statewide. Attorney Valerie Brown, who argued on behalf of Stand for Salmon in front of the court, emphasized that provisions detailing what constitutes healthy salmon habitat remain intact after the ruling. Those provisions deal with water quality, maintaining stream flows and require any mitigation to offset unavoidable habitat damage be done within the impacted water body. “The habitat standards are a huge improvement over current law because they are actual standards Fish and Game must apply when they’re considering permits, so it’s definitely a step in the right direction,” Brown said. Currently, Title 16, the state’s anadromous fish habitat permitting statute, directs the ADFG commissioner to issue a development permit as long as a project provides “proper protection of fish and game.” The initiative sponsors contend that is far too vague and an update is needed to just define what “proper protection” means. In early 2017, Alaska Board of Fisheries chair John Jensen sent a letter to legislative leaders urging them to update Title 16 with opportunities for public involvement in permit application reviews and enforceable development standards. Brown also noted that other parts of the proposal dealing with public process were not impacted by the court’s decision. “One of the other provisions that will definitely go forward that is a huge leap forward over current law is the provisions for public notice and public comment on large projects that could cause a lot of harm to salmon habitat. This will be first time we have a chance to participate in those.” The fact that salmon habitat permits are one of the only environmental permits the state issues without notifying the public has been a rallying point for initiative supporters. While state Department of Law attorneys originally argued the provisions of the initiative were too intertwined to sever without wholly discarding it, Attorney General Jahna Lindemuth said in a formal statement that the court confirmed Law’s understanding of the powers and limitations of a citizens’ initiative in the state Constitution. “That limitation extends to the Legislature’s power to allocate the state’s resources — including fisheries and waters — among competing uses,” Lindemuth said. She also thanked the court for its unexpectedly quick ruling on the case, which will provide the Division of Elections additional time to prepare ballot materials in advance of the November election. The state had asked the court for a ruling by early September, just ahead of a deadline for the Division of Elections to have general election information ready to distribute to voters. The Wednesday morning release of the ruling also caught folks involved in the case by surprise. The court has historically handed down its opinions on Fridays, almost without exception.   Elwood Brehmer can be reached at [email protected]

Sullivan pushes back against partisan DC narrative

Sen. Dan Sullivan is adamant that news reports and sound bytes creating a perception of unprecedented partisanship on Capitol Hill ignore the underlying cooperation that continues in Congress. “Of course there’s some principled differences that you read about daily between Democrats and Republicans on key issues: resource development, ANWR, tax reform, health care, to some degree, but on some really big, important issues there’s a lot going on — that we’re getting done — and it’s bipartisan,” Sullivan said during an Aug. 3 editorial board meeting with the Journal and the Anchorage Daily News. For starters, he pointed to the National Defense Authorization Act, which lays out the spending plan for the Department of Defense each year. Sent to President Donald Trump Aug. 1, the $717 billion NDAA for the 2019 fiscal year that begins Oct. 1 passed the Senate on an 87-10 vote. The House approved it in late July on a vote of 359-54. It further reversed the sequestration cuts to Defense spending from 2010-16 and is an $18 billion increase over the 2018 bill. The bill includes a 2.6 percent pay increase for service members. Sullivan described it as “a generational shift that focuses more on China and Russia versus Al Qaeda and terrorism, although that’s still up there,” he added. The 2019 NDAA contains another roughly $300 million worth of military construction projects in Alaska, which brings the three-year running tally here to $1.3 billion, Sullivan noted. Most of money is headed to the Interior where work to add 28 new intercontinental ballistic missile, or ICBM, interceptors to Fort Greely’s existing missile defense system is ongoing. The interceptors are the country’s primary defense against ICBM threats from North Korea and Iran. Work is also continuing at Eielson Air Force Base near Fairbanks in preparation for the two squadrons of F-35 fighters scheduled to arrive at the base starting in 2020. More than 2,700 personnel will accompany the fighters, according to Defense reports, and preparing Eielson for the squadrons is estimated to cost a total of $453 million and generate more than 2,300 construction jobs in the state. Sullivan and Defense Secretary James Mattis toured Eielson and Fort Greely in late June. “It is smoking right now, which is great for the (Alaska) economy and for national defense,” Sullivan said of the construction activity at the Interior installations. In addition to the work at Eielson and Fort Greely, the Missile Defense Agency is in the midst of spending another $325 million over six years at Clear Air Force Station just south of Fairbanks. The money there is going towards installing a new power plant and missile detection radar system. Sullivan will be hosting the secretaries of the Army, Navy and Air Force as well as the new commandant of the U.S. Coast Guard following a four-day trip to 14 Western Alaska communities. He and Navy Secretary Richard Spencer will visit Nome and Adak as part of the Alaska congressional delegation’s continued push for the feds to assist in building a strategic “Arctic” port somewhere on Alaska’s west coast, he said. Sullivan also pointed to the NDAA as proof that Congress as a whole is finally warming on Arctic issues, as it provides the Defense Department the authority to contract for up to six polar-class icebreakers. A contract for the first DOD-funded vessel is to be awarded sometime in 2019 with construction of the second starting in 2022 and the rest coming on a one-per-year schedule. He acknowledged, however, that actually paying for the vessels will still be subject to the annual appropriations process, which has been bungled for years. “(Russian President Vladimir) Putin has called the Arctic the new Suez Canal and he’s going to own it with his 40 icebreakers. And they’re building 13 more and they’re weaponizing them; they’re making them nuclear-powered,” Sullivan said, noting China is also expanding its icebreaking fleet. “We’re clearly, clearly behind the curve, but the good news is Democrats and Republicans are starting to take notice and put things into law, which matters.” He also provided a little insight into the closed-door NDAA markup in the Senate Armed Services Committee, which he serves on. According to Sullivan, committee leadership from both parties were against his icebreaker provisions, fearing they would “gut” the Navy’s shipbuilding budget, but they survived with unlikely help. Sullivan admitted even he didn’t know how the vote would shake out after a spirited debate. “I asked for a roll call (vote) and it really was actually kind of funny because you just go to each member and there was completely no rhyme or reason — the chairmen of the committee voted against me, the ranking Democrat voted against me, some of my more hawkish Republican foreign policy allies voted against me and (Massachusetts Democrat) Elizabeth Warren voted with me and we won,” he recalled. If this year is any indication, there is reason to hope the icebreakers will be paid for, as the traditional process for funding the government is working again, for now, at least. Slow return to regular order Congress has passed seven of the 12 annual appropriations bills before August for the first time since 2000, another achievement which Sullivan noted requires bipartisanship as the bills need 60 votes to pass the Senate. He said newer senators, such as himself elected in 2014, have pushed particularly hard against further omnibus funding packages, which have become the norm in recent years and generate bipartisan disdain amongst rank-and-file legislators. “The only people in my view that like (omnibus appropriations) are the leadership, on both sides. Republicans and Democratic leadership — (Senate Minority Leader Chuck) Schumer, (Senate President Mitch) McConnell, (House Speaker Paul) Ryan, (House Minority Leader Nancy) Pelosi — because they negotiate the whole bill,” Sullivan commented. “I had no idea what was in the last one until I was given it and they said, ‘Here, you have 24 hours to read this;’ 2,400 pages, $1.3 trillion in spending and they’re like, ‘You have to vote for it,’ and I’m like, ‘No I don’t,’ so I didn’t.” Sullivan agrees with McConnell’s decision to cut the Senate’s August recess from the traditional five weeks down to one, a move fellow Alaska Sen. Lisa Murkowski has expressed unequivocal disdain for. Many in the Senate have complained about a simple lack of time to hear the spending bills or vote on presidential appointments, according to Sullivan, who dismisses that excuse. Murkowski said in June that she opposes cutting the recess because it’s difficult for senators from such far-flung states to meet with constituents — or family — on weekends during session when their colleagues can make a quick trip home. “My view is, well then let’s make more time. Sen. Murkowski says let’s work on weekends. I’m all for that but we also shouldn’t be taking a five-week recess,” Sullivan said. Coastal concerns As chair of the Senate Subcommittee on Oceans, Atmosphere, Fisheries and the Coast Guard, Sullivan is planning to hold a hearing on the causes behind Alaska’s numerous struggling salmon stocks shortly after the Senate reconvenes. He noted that salmon management is mostly a state issue, but the general belief that ocean conditions are playing a large role in poor returns — with little knowledge beyond that — makes it a federal concern as well. “There’s all kinds of theories but we need to get our arms around (poor salmon runs), which is really impacting a lot of people,” Sullivan said. National Marine Fisheries Service Administrator Chris Oliver, an Alaskan who served for nearly 20 years as the executive director of the North Pacific Fishery Management Council, will participate in the hearing, according to Sullivan, who added that he advocates for fully funding NOAA’s scientific research budget. Sullivan has been particularly focused on ocean acidification, which has the potential to disrupt shellfish fisheries as well as some species of plankton that are the diet foundation for numerous North Pacific fish stocks. Federal disaster declarations stemming from some of this summer’s weak sockeye and chinook runs are likely, he said. In June, Commerce Secretary Wilbur Ross allocated $56 million for Alaskans impacted by low pink salmon returns in 2016. That money was part of $200 million approved by Congress for nine fisheries disasters nationwide. Talking Trump Sullivan treaded lightly when asked if Trump’s routinely impulsive behavior and sharp denigration of his critics has contributed to damaging the country’s social discourse. He called the president “a true disruptor in a lot of ways,” while adding: “He’s kept a lot of campaign promises, even if a lot of people didn’t like those.” He emphasized a general need to be “respectful and civil” when addressing contentious issues. “I think that’s critical; and I’ve called the president out when I think that doesn’t happen,” Sullivan said. A supporter of many of the Trump’s policy objectives, Sullivan said he agrees with the president that the country’s trade deficit with China needs to be balanced, but he thinks the administration is taking the wrong approach. He said he calls the president directly when he has issues with policy or strategy, and the two have had multiple conversations about trade in recent months in addition to similar discussions with top Commerce officials in the administration. “I think on one hand these guys are raising the challenges, which I think is a long-term challenge in regards to China. But what I’ve been saying to them and him, very, very regularly, which is ‘look, you can’t have a tariff battle with every country in the world,’” Sullivan said. “You guys need to finish the NAFTA negotiations, which they’ve committed to me they’re going to soon; fix those issues with the Europeans and then, working together with our allies — these are our allies — turn to the general issue that China poses, all of us, together; that’s like two-thirds of the world’s GDP.” He said he specifically pointed to the 25 percent retaliatory tariffs China has imposed on U.S. seafood imports, which has hit Alaskan fish exports. In 2017 China imported $796 million worth of Alaska seafood, which accounted for nearly one-third of the state’s total seafood exports last year. “I’m like, ‘Mr. President, we’re having retaliation on a huge export market for me and my constituents and he and (Commerce Secretary) Wilbur Ross are saying, ‘Tell them we’re actually trying to open those markets for them in China,’ which I think they believe but it’s been a challenge,” Sullivan said. Still, he emphasized that major domestic policy victories on things such as oil exploration in the Arctic National Wildlife Refuge, regulatory and tax reform and judicial appointments and a strong national economy are all major positives. “Overall, as I think you can tell, I think things are going on a good path,” Sullivan summated. Elwood Brehmer can be reached at [email protected]

Division of Oil and Gas promotes North Slope SALSA sale

Attention oil explorers: State of Alaska officials have three flavors of SALSA they would like you to try. Painful puns aside, Department of Natural Resources officials for the first time have put together large chunks of available North Slope acreage that will each be auctioned off with a single bid during the state’s annual fall lease sales held by the Division of Oil and Gas. The three Special Alaska Lease Sale Areas, or SALSAs, are some of the only remaining swaths of unspoken-for acreage in the middle of one of the country’s preeminent hydrocarbon basins; and they come with a starter kit of data to inform drilling that any wildcatter should love. The idea to auction of tracts of leases via a single bid was borne out of discussions about how the state could use the massive amounts of 3D seismic data, well logs and other typically proprietary information that has become publicly available over the past few years. “You’ve got a whole bunch of treasure chests of gold in a dark forest and somebody’s wandering around aimlessly in the dark — here’s a flashlight. This might help you just a little bit. It’s a search tool that also focuses people around the particular areas that we want to promote interest in,” said Deputy DNR Commissioner Mark Wiggin. While the refundable oil and gas tax credit program the state started in 2003 ultimately grew into something that was just too expensive to continue — the Legislature killed it last year — part of the deal of the program was that the data gathered in part with the state’s assistance would become public after a 10-year period. And the state’s team of petroleum geologists and software experts has organized that information so it’s much easier to locate and use for anyone interested in exploring the Slope. “The 3D seismic data is kind of what got us rolling to find its highest use,” said Oil and Gas Geologist Kevin Frank. The three SALSAs, starting from the west, include the state waters of Harrison Bay on the Beaufort Sea at 66,430 acres; part of Gwydyr Bay and adjacent onshore areas near the manmade Northstar Island field totaling 23,040 acres; and an area of 30,720 acres dubbed Storms immediately south of Prudhoe Bay. Each is accompanied by a 3D seismic data set that has become public within the last four years. But wait, there’s more. The Division of Oil and Gas group also compiled all of the lease and land records for the SALSAs in addition to all the data available from exploration wells drilled in an around those areas into a “one-stop shop” of sorts for anyone who is sick of counting sheep to easily peruse. “There’s always a team of folks that are looking at things, so we’re trying to provide what would be important for a team that’s doing exploration. At some point you want to know what’s the underlying info for the lands and that’s what this and these tools get you,” Frank said. Much of the well data is from Alaska Oil and Gas Conservation Commission records, but a lot also comes from the state Geologic Materials Center. However, Frank added that there are also web links to any references made to exploration well tests in news articles — largely from the Journal’s friendly competitors at Petroleum News — or any other public reports. Cumulatively, the well data is presented in ways that indicate what geologic formation was targeted when the well was drilled, as well as whether or not mud and resistivity logs or core chips and analyses are available for a particular well. “You can imagine if you don’t know much about the Slope and you say, ‘Shucks, I don’t know where oil is;’ this says, that’s where oil is. We don’t know the reservoir quality but we know based on the reports something flowed to the surface,” Wiggin said. The vast majority of the well information is free, but DNR is charging what Wiggin describes as a “handling fee” for the seismic data. That’s because the state officials have spent significant amounts of time verifying the quality of the seismic data and money on new hard drives and servers to hold it. The data set to one seismic shoot ate up 278 terrabytes of hard drive space, according to Wiggin. Frank described the seismic information as “like the free puppy” that comes with the occasional vet bill. He noted that the tens of thousands of dollars in fees to access the 3D seismic should be compared against the tens of millions of dollars it would cost to shoot the areas and obtain the data. A 162 square-mile seismic set shot over Harrison Bay in 2006 can be accessed for about $32,256, for example. “Put your Visa number in and boom, you’ve got a seismic shoot,” Wiggin remarked. The final requirements for bidding on the SALSAs are still being hashed out; they’ll be released in a public notice later in August, according to Frank, but the bids will be taken and opened as part of the regular North Slope and Beaufort Sea sales. Neither Frank nor Wiggin were willing to say whether or not they have any expectations for the SALSA bids — Harrison Bay is in the part of the Slope that has become a hotbed for large Nanushuk formation oil finds. “We’re ready to be surprised anywhere different folks see different things and that’s kind of the beauty of how this whole thing works,” Frank said. All of the SALSA information is available through the Document Library tab on the Division of Oil and Gas homepage. Elwood Brehmer can be reached at [email protected]

Scoping starts for ConocoPhillips’ Willow development

ConocoPhillips’ westward push on the North Slope took reached another milestone Aug. 7 when the Bureau of Land Management began asking for public input as it drafts permitting documents for the company’s proposed multibillion-dollar Willow oil development. The remote Willow prospect is west of the existing North Slope oil fields in the National Petroleum Reserve-Alaska. Largely a Nanushuk formation-focused play, ConocoPhillips announced its discovery in January 2017 after the company drilled two exploration wells the previous winter. Company leaders said during a July 16 investor presentation that appraisal wells drilled last winter indicate Willow likely holds between 750 million to 1.1 billion barrels of oil and pegged development of the isolated resource at $4 billion to $6 billion. The company has estimated it could produce up to 100,000 barrels of oil per day. With a shallow conventional target zone in the 4,000-foot range, ConocoPhillips also believes it can produce from Willow for less than $40 per barrel, according to a release accompanying the presentation. ConocoPhillips’ initial development plan calls for a central processing facility and pad, up to five drilling pads with up to 50 wells each, access roads, an airstrip and a gravel mine within the NPR-A, according to BLM. The proposal also contemplates a temporary island in state waters to facilitate module deliveries via sealift barges. The company sent BLM a letter in May requesting authorization for the development, a BLM release states. The federal agency will be drafting an environmental impact statement to evaluate the master development plan for the massive project and as such is asking the public what should be studied in the EIS. “Analyzing the proposed Willow prospect in a single (master development plan) EIS will result in a quicker and more efficient process for the approval of applications for permits to drill. Public input on this project is important and we look forward to hosting public meetings and listening to the comments people may have,” Acting BLM Alaska Directory Karen Mouritsen said in a prepared statement. Audubon Alaska issued a statement emphasizing that Willow is near the “globally-important Teshekpuk Lake wetlands complex, one of the most ecologically important habitats in the entire Arctic.” The 2013 NPR-A Integrated Activity Plan — the land-use plan for the entire 23 million-acre reserve — precludes oil and gas leasing and development in much of the northeast portion of the reserve to protect the area surrounding Teshekpuk Lake and the caribou herd and waterfowl that use it and are important subsistence resources for many North Slope residents. Audubon Alaska also notes the master development plan EIS is subject to an Interior Department directive issued by Trump administration officials to limit the review to one year and the EIS to 150 pages. “We urge the agency to go slow, think carefully, and adhere to the Integrated Activity Plan,” Audubon Alaska Policy Directory Susan Culliney said. “Using a hastened (National Environmental Policy Act) timeline for this massive development project will only gloss over the science and lead to a faulty decision. The complex and sensitive Arctic ecosystem deserves more consideration than can possibly be achieved through a quick and dirty fast-tracked analysis.” Public scoping meetings will be held in the North Slope communities of Anaktuvuk Pass, Atqasuk, Nuiqsut and Utqiagvik as well as Fairbanks and Anchorage, but meeting times have not been announced. ConocoPhillips is expected to bring its roughly $1 billion Greater Mooses Tooth-1 project in the reserve online this fall. When it does, it will be the first oil production from the NPR-A with an expected peak rate of 30,000 barrels per day. Its Greater Mooses Tooth-2 project is now in permitting and is also projected at 30,000 barrels per day at peak rate. Elwood Brehmer can be reached at [email protected]

State, feds agree to revise roadless in Tongass

State and federal officials inked an agreement Aug. 2 that could lead to scaling back the U.S. Forest Service’s long-debated Roadless Rule in Alaska. The memorandum of understanding signed by Department of Natural Resources Commissioner Andy Mack and Interim Forest Service Chief Victoria Christensen lays the foundation for the agencies to reopen the Roadless Rule on the prospect of working towards an Alaska-specific rule that could allow for more access to large swaths of federal lands that have ostensibly been off-limits to logging or other developments and activities since the early 2000s. Approved in early 2001 by former President Bill Clinton, the Roadless Rule prohibited new road construction on roughly 58 million acres of undisturbed national forest lands across the country. The “no new roads” edict has since been continuously challenged in court, particularly by western states that contend it has arbitrarily curbed logging and other activities on Forest Service territory and conflicts with the agency’s multiple-use land planning mission. In 2015, the U.S. 9th Circuit Court of Appeals upheld an Alaska U.S. District Court decision to overturn a 2003 exemption to the Roadless Rule for the Tongass National Forest put in place by George W. Bush’s administration. Alaska Division of Forestry Director Chris Maisch said the MOU to examine revising the rule was borne out of Gov. Bill Walker’s petition to Agriculture Secretary Sonny Purdue for a full, statewide exemption to the Roadless Rule. The MOU is focused in the 17 million-acre Tongass National Forest, according to Forest Service spokeswoman Dru Fenster, which encompasses the vast majority of Southeast Alaska and is by far the largest national forest in the country. At 5.4 million acres, the Chugach National Forest in Southcentral is the second-largest national forest, but its timber is much less suitable for large-scale commercial logging. The members of Alaska’s congressional delegation lauded the MOU in formal statements, insisting it is a big step towards getting “forest management and the economy of Southeast Alaska back on track,” as Sen. Dan Sullivan put it. “As I have said many times before, the Roadless Rule has never made sense in Alaska,” Sen. Lisa Murkowski said Aug 2. “I welcome today’s announcement, which will help put us on a path to ensure the Tongass is once again a working forest and a multiple-use forest for all who live in Southeast. “I thank Secretary Purdue for recognizing the need for economic relief in these communities and look forward to continuing to work with the administration, state officials, Sen. Sullivan and Congressman Young to see this process through to the finish line.” Murkowski chairs the Senate Appropriations subcommittee that covers the Forest Service budget and has inserted language to exempt Alaska from the Roadless Rule into recent budget bills for the agency. Those provisions have ultimately been stripped from the spending bills the president has signed. Specifically, the MOU directs DNR and the Forest Service to establish a State-Forest Service Executive Steering Committee to carry out the agreement. The Forest Service will lead development of an environmental impact statement to analyze the effects of prospective management changes to the Tongass, while the state will form a public advisory group of representatives from Southeast tribes and Alaska Native corporations as well as conservation groups and the timber, mining, tourism and commercial fishing industries. Colorado and Idaho are the only other states to have their own Roadless rules, but those came only after years of study and court challenges. Forest Service officials said they plan to have the Alaska EIS complete within 18 months, in part to keep stakeholders engaged in the process. Forest and fishing advocates criticized the agreement, claiming it will put some of Southeast’s largest industries at risk. Trout Unlimited, which has pushed for permanent protections for dozens of critical salmon-bearing watersheds in the Tongass — its Tongass 77 campaign — contends the fishing and tourism industries rely on unspoiled wilderness in the region provided by the Roadless Rule and currently support 26 percent of all the jobs in Southeast Alaska in addition to contributing about $2 billion per year to the region’s economy. TU Alaska Policy Director Austin Williams stressed in a formal statement that revising the Roadless Rule in the state would mean throwing out the 2016 Tongass Management Plan, which took more than four years to finalize. The Tongass Plan calls for a transition to strictly young-growth timber harvest in the forest over 16 years, a period Murkowski and timber industry leaders argue is much too short to provide an adequate timber supply for Southeast’s few remaining sawmills. “The current Tongass Forest Plan, which includes protections for roadless areas, was monumental and was perhaps the first time a diverse set of stakeholders successfully came together around a common vision for how to move forward on the Tongass and leave the timber wars behind,” TU Alaska’s Williams said. “The overwhelming majority of Alaskans that participated in that process voiced a desire for increased protections for important fish and wildlife habitat. Rather than flushing that hard work down the drain, we should look for lasting solutions that protect the remaining roadless areas.” Forest Service Associate Deputy Chief of Forest Systems Chris French acknowledged in an interview that any substantive changes in how the Roadless Rule is applied to the Tongass at the end of the EIS process will likely require another EIS to at least amend the Tongass Management Plan accordingly. French said the MOU provides “a wide open space” for forest managers to consider changes in how the rule is used. “It basically allows us a lot more flexibility in how we approach apply the protections of roadless that you see in the 2001 Roadless Rule,” he said. Any rule changes could apply to the 57 percent of the Tongass that was designated as roadless in 2001. About 35 percent of the Tongass has been granted “wilderness” protection by Congress and as such will not be impacted by any changes to the rule. The remaining roughly eight percent is set aside for other opportunities, according to Forest Service officials. “We don’t know what we’re going to propose yet. We don’t know what we’re going to hear at this point. We really want to start from the space of allowing folks to speak their mind; allowing folds to contribute their ideas — come to maybe some solutions — give us some proposals and all that will be considered as we go forward,” French said. Alaska Forest Association Executive Director Owen Graham said in an interview that the organization had been pleading with the Forest Service to revise the rule, but also lamented the fact that easing the land-use restrictions likely won’t change on-the-ground work for several years. “Just removing the Roadless Rule won’t let us cut one more tree because the Roadless Rule is in the forest plan,” Graham said. He has been critical of the 16-year transition to young-growth-only harvests in the current Tongass Management Plan, insisting most young-growth areas in the forest are at least 30 years from maturity. Graham said prematurely harvesting young-growth stands can necessitate cutting over twice the acreage to achieve similar harvest volumes, as stands of smaller trees simply do not offer the same amount of usable timber as mature or old-growth stands. “You have to have this economy of scale,” he said. Graham also noted that old-growth trees provide opportunities for Alaska mills to produce specialty and value-added products while lower-grade, young-growth logs from the Tongass are almost always exported to Asian markets for processing. State Forester Maisch said he doesn’t foresee old-growth harvests from the Tongass going away anytime soon, but also noted new technologies such as cross-laminated timber could open up new value-added opportunities around young-growth for Southeast mills. Maisch also stressed flexibility in management as a driving interest for the state to revise the Roadless Rule, saying the rule’s impacts go beyond traditional forest uses. “It’s about community access; it’s about energy; it’s about have the ability to be adaptable and flexible so we can make changes as technology changes,” Maisch said. “For example, cell towers and the need for cell towers in locations that are not so easy to do that in around communities right now. Hydro (power) is another good example. It’s difficult to build some of those types of utility infrastructures without having roads to support it for both construction and maintenance.” Additionally, French said Purdue’s vision of the Tongass as “a working forest” — as the USDA secretary said during a July trip to Prince of Wales Island with Murkowski — is not strictly limited to logging. “We also understand that industry is changing and the values that Alaskans hold for these lands is something that is changing as well and we recognize the importance that folks see with roadless. We also recognize the needs that other user groups and industry have for these lands. We want to be able to consider all of that,” French said. Elwood Brehmer can be reached at [email protected]

Gov, Meyer unfazed by China’s tariff threat on LNG

Gov. Bill Walker and Alaska gasline officials insist China’s immediate threat to slap an import tariff on U.S. liquefied natural gas should not impact the long-term viability of the $43 billion Alaska LNG Project. On Friday, the Chinese government announced a proposal to put a 25 percent tariff on roughly $60 billion of U.S. goods the country imports, including U.S. oil and natural gas. The potential tariffs are the latest move in a tit-for-tat trade dispute initiated by President Donald Trump earlier this year that has slowly been escalating through the summer. The face-off between the economic superpowers is in sharp contrast to the trade-focused trip Trump and Commerce Secretary Wilbur Ross made to Beijing last November. That trip culminated in a ceremony in which some of the largest companies from each country signed trade deals before Trump and China President Xi Jinping. Among those at the Nov. 8 deal-signing event were Walker and Alaska Gasline Development Corp. President Keith Meyer, who signed a nonbinding joint development agreement with Chinese oil and gas giant Sinopec, the Bank of China and China Investment Corp. to advance the prospect of the three state-owned Chinese companies buying from and investing in the Alaska LNG Project. Specifically, the agreement, or JDA, contemplates Sinopec buying up to 75 percent of the LNG produced from the project in exchange for the Bank of China and China Investment Corp. financing up to 75 percent of the project’s development costs. AGDC officials have said the Trump administration’s prior tariffs on Chinese steel would at worst have a nominal effect on the project. Exactly how a 25 percent tariff on U.S. LNG would impact the economics of Alaska LNG is unclear — it certainly wouldn’t be good — but the policy battle of today doesn’t upend the fundamental benefits of the project, according to Walker. “Alaska’s vast reserves of natural gas can satisfy market demand for nearly a century, and short-term trade tensions do not change this long-term value proposition. Alaska LNG would be the largest job-creating infrastructure project in the country, and would generate billions of dollars in revenue,” Walker said in a statement from his office. “My team and I will continue to work with the Trump administration to ensure that Chinese and U.S. officials strike a fair compromise so that Alaska’s natural gas reaches the market.” China is in the midst of a major transition away from coal to cleaner burning natural gas for electric generation. The country is expected to become the world’s largest importer of LNG next year. AGDC officials said in a corporate response to questions from the Journal about the potential impact of the LNG tariff that the project “will continue to present a win-win opportunity for both countries.” Meyer has often noted that exporting LNG to China would be a big step towards resetting the trade imbalance with China that Trump is focused on. “The Alaska Gasline Development Corp. believes the current trade tensions between the United States and China will be resolved well in advance of Alaska LNG exports to China. The Alaska LNG Project represents a multigenerational project that matches China’s 100 years of natural gas demand with Alaska’s 100 years of supply on the North Slope,” the AGDC statement reads. AGDC also notes it is progressing definitive purchase agreements with other prospective LNG buyers across the Asia-Pacific region. Though the Alaska LNG Project and the Prudhoe Bay and Point Thomson gas resources that would fuel it are currently planned for 25 years of exports, it is believed the project will spur subsequent gas exploration and development because there would finally be an avenue to get North Slope gas to market. Walker and Meyer met with Jinping in April 2017 when the Chinese president stopped in Anchorage on his way home from a meeting with Trump in Florida. It was that evening-long dinner and discussion that spurred the eventual framework deal around Alaska LNG, the governor has said. Elwood Brehmer can be reached at [email protected]

Sinopec drops interest in managing AK LNG construction

A Chinese oil giant is still in line to be a major buyer from, but not builder of, the $43 billion Alaska LNG Project. Alaska Gasline Development Corp. President Keith Meyer said Sinopec Corp. is still interested in 75 percent of the LNG produced from the project, but is no longer being considered as a construction manager for Alaska LNG. Gov. Bill Walker and Meyer signed a non-binding joint development agreement, or JDA, with Sinopec, the Bank of China and China Investment Corp. Nov. 8, 2017, in Beijing in front of President Donald Trump and China President Xi Jinping. The framework agreement set the foundation for further negotiations over LNG purchases, project financing and possible construction involvement by the government-owned Chinese companies. Sinopec is generally considered the world’s largest oil and gas company. The JDA also set a soft May 31 deadline for setting the parameters of involvement in the project by the Chinese consortium with advanced negotiations leading to a Dec. 31 deadline for final agreements. Meyer said Sinopec officials originally expressed interest in being a major participant in the four-year-plus Alaska LNG construction effort through its engineering and construction subsidiary, but that possibility was mostly nixed after a Chinese delegation spent a week in Alaska reviewing technical documents and examining the 807-mile pipeline route from the North Slope to Nikiski both from ground and the air. Meyer and other AGDC officials met with the Journal and Anchorage Daily News in a July 26 editorial board meeting. “(Sinopec) has never built an LNG plant and they do not have any Arctic pipeline (experience) — they’ve got a pipeline they built that is longer than ours; it’s got a higher altitude than ours, but it’s not this permafrost stuff,” Meyer said. Sinopec officials have since indicated they would be open to a subcontractor role in final design and construction, according to Meyer. “We said that’s fine because quite frankly it probably would have been a little more of a problem to fit them in than to not fit them in,” he added. Numerous legislators have expressed concerns over the prospect of Sinopec being a major player in Alaska LNG construction if the project moves forward, fearing the company could bring its own workforce and displace Alaskans wanting to work on the project. Some legislators have said they would be hesitant to partner with companies backed by a government with a litany of human rights violations but they would be comfortable with simply selling LNG into China — issues also raised by members of the public during recent AGDC board of directors meetings. The Bank of China and China Investment Corp., which manages the country’s sovereign wealth fund, are also potential Alaska LNG debt financiers and equity investors, respectively. From now until the end of the year the focus with will be on hashing out terms for the definitive, bankable LNG sale and purchase agreements. Meyer said though unlikely, he could see a scenario in which Sinopec agrees to buy LNG from the project without China Investment Corp., or CIC, participating, but investment without LNG is very unlikely. “The way it was originally contemplated CIC was really brought in as the equity investor and they’re supposed to be just like the Permanent Fund, completely independent of (Sinopec’s) decision and isn’t tied to the off-take. We were looking at Sinopec as just the off-take. It’s only been recently that Sinopec is sort of saying well, wait a minute, maybe we should be the investor, not CIC,” Meyer said. “We would be indifferent to that. Our focus is more on the total amount they might own or control.” Meyer and other project officials have long stressed AGDC will retain a majority ownership in the project regardless of its equity partners. The Bank of China’s lending to the project has been envisioned as a share of project financing equal to Sinopec’s capacity purchase amount. The Bank of China or other lenders would loan to a project company set up by AGDC under non-recourse project loans. Customers would then pay into the project company’s escrow account, which would pay operations and maintenance costs first and then the senior project lenders. The banks would lend based on the “sanctity of the commercial contracts,” according to Meyer. “If the customer stops paying the bank can step into those contracts, but we’re keeping the bank short of stepping into those underlying assets,” he said. “We want Bank of China to look at their sister company, if you will, they’re both owned by the state, as the credit support.” ^ Elwood Brehmer can be reached at [email protected]

Alaska remains potential source for critical rare earth elements

Rare earth elements really aren’t that rare; they’re just rarely mined. Many in Washington, D.C., particularly those in the Defense Department, see this as a major looming issue. That’s because the Mountain Pass mine just on the California side of the border with Nevada southwest of Las Vegas closed in 2015 when its operator went bankrupt. It was the last producing rare earths mine in the country. The nation’s supply of these 17 often hard-to-pronounce metals now comes from France, Estonia, Japan and China, according to the U.S. Geological Survey. Most troubling for some is the fact that China dominates the world’s rare earth elements supply. Sen. Lisa Murkowski remarked during a Senate Energy and Natural Resources Committee hearing she held July 17 on domestic mineral security that China has leveraged its dominance in rare earth production in the past and could do it again at a time when the country is in a tit-for-tat trade dispute with the U.S. “My concern, among many concerns, is if China ultimately responds to tariffs by restricting our supply of rare earths, or any number of other minerals, the U.S. could be in serious trouble. We’ve heard testimony in the past about the dangers of the concentration of supply from a handful of countries that control the supply chain,” said Murkowski, who chairs the Energy and Natural Resources Committee. “I’m hopeful that we aren’t about to experience those dangers firsthand and will continue to urge action to reduce this significant vulnerability.” In 2010, China placed an embargo on all rare earths the country was exporting to Japan in retaliation for actions against the crew of a Chinese trawler Japanese officials contended was fishing illegally in the country’s waters. China’s dominance in rare earth markets can make pricing and production data hard to obtain, but it is generally believed the country currently produces roughly 90 percent or more of the world’s rare earths. Murkowski also noted her state could go a long way towards alleviating the country’s dependence on imported rare earth elements, and there is still movement toward development in Ketchikan by Nova Scotia-based Ucore. In December President Donald Trump issued an executive order directing federal agencies to prioritize strategies to reduce U.S. dependence on imports of critical minerals. In May the Interior Department responded with a list of 35 minerals deemed “critical” for their economic importance which also have domestic supply vulnerabilities. The entire rare earths group made the list along with other more common metals such as aluminum, tungsten, cobalt and others. Rare earths are essential in the production of cell phones, hard drives, automobile catalytic converters and medical and military technologies. USGS Alaska Research Geologist Doug Kreiner said in an interview that rare earths are so vital to modern-day products because there are no known substitutes. Heavy rare earths — such as europium, terbium, and ytterbium with a greater atomic weight — are used in products that rely on high-temperature magnets. More common lighter rare earths are used in a plethora of applications including LED displays, according to Kreiner. And demand for them will continue to grow as the world moves towards more hybrid and electric vehicles with high-performance lithium-ion batteries that also contain rare earths, he said. Rare earths in Last Frontier As seems to be the case with most mineral commodities, Alaska holds its own rare earth resources. The most notable deposit is the Bokan Mountain prospect that Nova Scotia-based Ucore Rare Metals Inc. explored until 2015. The prospect on southern Prince of Wales Island is approximately 40 percent heavy rare earths, according to Ucore, which are the hardest to come by. Overall, it holds roughly 5 million tons of ore with rare earth concentrations of 0.65 percent, according to the company. Kreiner said rare earths occur across the state but the viability of mining them other places is largely unknown simply because they haven’t been explored. “Bokan Mountain is the only quote-unquote deposit in Alaska. So whether it’s a deposit or an occurrence is really an economic definition. Basically, it becomes a deposit when it’s concentrated to the point that it can be extracted,” he said. Ucore also holds rights to the Ruby rare earths prospect just north of the Yukon River in the Interior region along the Dalton Highway. Kreiner said concentrations of rare earths aren’t often related to deposits of other commonly mined metals, but they can at times be detected in precious metal ores. The Ruby batholith is in the Ray Mountains, which has large sheets of loose sediments up to 325 feet thick that contain rare earths. Heavy minerals are more concentrated in lower terrain between the Ray Mountains and the Fort Hamlin Hills to the east, according to Ucore. There are other potential rare earth belts extending from near Nome on the southern Seward Peninsula north and east to the southern flank of the Brooks Range as well as in the Porcupine River drainage of Northeast Alaska, Kreiner said. Another large rare earth belt runs from the upper Tanana River west and south through the Alaska Range to the Kuskokwim River basin in Western Alaska. “The hot spots that were identified in our analysis, whether or not they’re prospective we really don’t know because there just hasn’t been a lot of work done out there,” he said. “Geologically speaking I think there are a lot of areas that are prospective for rare earths in the U.S. I think it’s a matter of the geology and finding the systems that are economically exploitable.” Kreiner added that he attributes the lack of domestic rare earths production simply to the recent nature of their demand. “Rare earth elements are a relatively new focus given the applications, particularly high-end technologies and medical science, defense mechanisms and the sort,” he said. Focus shifts for Ucore A 2015 collapse in rare earth prices put Bokan Mountain exploration and development on hold, Ucore Vice President Randy MacGillivray said in an interview, but that hasn’t stopped the company’s work in Alaska. Ucore has shifted its focus to developing a rare earths separation plant that the company plans to locate in Ketchikan. “We know there’s a qualified workforce in Ketchikan and we have a lot of Alaskan support, both from the state and federally, so honestly Ketchikan is a great choice for us on multiple levels,” MacGillivray said. Ucore’s plan is to construct the metal refinement plant, estimated at $25 million, over the next couple years and get it up and running sometime in 2020. Ketchikan’s coastal location allows for easy transport of feedstock via shipping containers and further makes sense given its proximity to Bokan Mountain, according to MacGillivray. “(The plant) will be a significant step forward to being able to ultimately build the mine on Prince of Wales Island because a segment of that construction would have already been financed and constructed; so it’s an enhancement to the project for sure,” he said. In 2014 the Legislature authorized the Alaska Industrial Development and Export Authority to finance up to $145 million of the development costs at Bokan, which Ucore has pegged at about $220 million overall. MacGillivray said AIDEA could be involved in financing the plant, which the company is calling its “specialty metals complex.” Ucore also has a pilot rare earths separation facility just outside of Salt Lake City. The company initially plans to start processing 1,000 to 2,000 tons of ore concentrate per year — eventually ramping up to double the processing quantities. MacGillivray said the concentrate would likely be re-leached in Ketchikan before being subjected to molecular recognition separation technology at the facility. “We would then produce individual oxides and we are currently looking at the potential to produce individual rare earth metals at the facility, which would be a value-added product,” he said. The plant is likely to start with about 10 employees and the workforce could grow to about 25 as production grows. Ucore leaders are currently in early-stage discussions with officials at mines that have byproduct ore containing rare earths but are focused on other metals as well as looking at direct sourcing options, he said.

Permanent Fund Corp. earns $5.1B in 2018 fiscal year

The Permanent Fund continued its rapid growth during the 2018 state fiscal year by gaining $5.1 billion, or 10.7 percent, and nearly reaching $65 billion in value. The state fiscal year ended June 30. Alaska Permanent Fund Corp. CEO Angela Rodell said Alaskans could take pride in the returns the corporation is achieving for the Fund — even if many are at the same time frustrated with how it is being used. This spring the Legislature and Gov. Bill Walker approved Senate Bill 26, which called for the state to make a draw of 5.25 percent of market value, or POMV, on the Fund’s Earnings Reserve Account to drastically pay down the state’s ongoing budget deficits and pay dividends while at least temporarily ending their three-year debate over how to best employ the Fund’s earning power. The 2019 draw approved in SB 26 was calculated to a roughly $2.7 billion deposit from the Earnings Reserve to the General Fund that was split for the dual purposes. About $1 billion will go toward paying dividends of $1,600 per eligible resident with the remainder to the state budget. “As the state begins a program of relying on the Fund in new ways, APFC’s ability to add value and secure compelling investment opportunities while diversifying and controlling risks has never been more important,” Rodell said in a formal statement. The Permanent Fund Board of Trustees had long advocated for instituting a POMV approach to using the Fund’s earnings because it is a proven way for the state to generate revenue for government services while providing key predictability for Fund managers. Strong market returns have bolstered the Fund the past couple years; it gained 12.6 percent in 2017. Its 8.9 percent five-year return is 2.1 percent above the corporation’s passive benchmark return goal of 6.8 percent for the period and about 2.4 percent above the APFC Board of Trustee’s return objective of 6.5 percent. Specifically, the Fund ended the 2018 fiscal year with a total value of $64.9 billion with $46.1 billion in principal — $40.2 billion of constitutionally protected deposits and $5.9 billion in unrealized income — and another $16.4 billion of net income in the Earnings Reserve Account. The ERA also held $2.4 billion in unrealized gains, according to APFC. The Fund’s $7.3 billion private equity portfolio led the strong performance with a 32.7 percent return for the year. Public equities, the largest portion of the Fund’s investments at $26.9 billion, returned 11.7 percent in 2018 and have averaged 9.5 percent returns over the past five years. This story has been corrected to accurately reflect the growth in the Permanent Fund. The original version incorrectly stated the Fund grew by $6.3 billion in fiscal year 2018. Statutory net income, which flows to the Earnings Reserve Account, was $6.3 billion, while the overall value of the Fund grew by $5.1 billion. Elwood Brehmer can be reached at [email protected]

Alaska Air Group earnings rebound in second quarter

Alaska Air Group rebounded from a relatively tough start to the year by turning a $193 million profit in the second quarter amid escalating operating costs. Leaders of the parent company to Alaska Airlines and regional carrier Horizon Air are finishing up work to rebalance the company’s operations and finances after purchasing former West Coast competitor Virgin America for roughly $4 billion in a deal that closed in December 2016. While Alaska Air Group was still in the black in the first quarter, the $4 million profit was its smallest quarterly return in more than six years. The $193 million netted in the second quarter — adjusted upward to $206 million when ongoing merger-related costs, fuel hedging and other special items are included — compares to a $293 million net in the second quarter of 2017. The net income translates to $1.56 per share. Alaska Air Group Inc. stock closed trading July 25 at $58.76 per share before the earnings report and rose 10.2 percent to close July 26 at $64.76 per share. The company paid a 32 cents per share dividend in the second quarter and has repurchased $25 million worth of shares this year. CEO Brad Tilden said during a July 26 call with investors that about 85 percent of the work to integrate Virgin America into Alaska Airlines is behind the company, which is starting to return its focus to improved margins. “Our team has been resilient and has secured a number of important accomplishments that have laid the foundation for our long-term growth and success. As we sit here today, we believe we’ve now passed through the inflection point of the merger,” Tilden said. “And while we have a lot of work ahead of us to lean out our cost structure and river revenues higher, we feel very good about the plan we’re putting in place, and I’m optimistic about our future.” He highlighted the company’s smooth April 24 transition to a single passenger service system for Alaska and Virgin, which handles bookings and other customer services, as well as a June agreement to bring the airlines’ dispatchers under a single collective bargaining agreement. Tilden said Air Group now has 93 percent of its unionized payroll under single union contracts. “This is extremely important for any airline, but especially at Alaska, where we have such a unique culture that drives our success,” he added. Getting back to the numbers, the second quarter profit was on the back of $2.1 billion of operating revenue, or 3 percent year-over-year growth on 7.8 percent capacity growth. Year-to-date revenue was up 4 percent to just shy of $4 billion, while operating expenses up 17 percent for the quarter and 15 percent for the year cut the company’s operating roughly in half versus the first half of 2017. The company’s labor costs are up 17 percent year-to-date and the company has paid out $77 million in incentive and performance pay, compared to $58 million in the first six months of last year. The company’s workforce is also up nearly 12 percent for the year to more than 21,400 full-time equivalent employees, according to the earnings report. Fuel costs — a fundamental cost for any airline — have increased $201 million, or 29 percent so far in 2018, despite the company’s continual fuel hedging. Tilden said the group’s airlines are currently paying about $1 more per gallon over what they were paying in February 2016 when oil prices bottomed out at less than $30 per barrel. “It may be that the early 2016 prices were unusually low, but it’s clear that we have higher costs and we need to be focused on actions that help us recover these higher costs,” Tilden said July 26. According to Chief Financial Officer Brandon Pedersen, Alaska Air Group has hedges on half of its planned fuel consumption for the rest of 2018, at an average “strike price” of $67 per barrel of oil. Overall, the company has generated $375 million in free cash flow while spending $425 million on capital investments so far this year, Pedersen said. Alaska Air Group held $1.6 billion in cash on June 30. Looking ahead, Pedersen said company executives expect third quarter nonfuel costs to grow another 5 percent on 6 percent capacity growth. However, the company is scaling back its growth plans for 2019 from 4 percent to 2 percent added capacity because of fuel costs and current industry capacity levels in Alaska’s markets, he said further. “We’re solidly in returns improve mode, and 2 percent growth helps us get there because it will improve our ability to manage fares in a way that will help cover the cost increases we’ve seen,” Pedersen said during the investor call. “Like our 4 percent plan before it, the 2 percent plan lets us leverage the considerable growth that we’ve had over the last five years but demonstrates, once again, that Alaska is willing to right-size capacity when needed.” Alaska Airlines and Horizon have also largely overcome on-time performance challenges experienced during the merger — and in Horizon’s case due to a pilot shortage — with 83.4 percent of the airlines’ flights arriving on time so far this year. That is a 7.4 percent year-over-year improvement, according to its June operational report. “At Horizon, our on-time performance is the best in the regional industry and our pilot staffing pipeline is full,” Tilden said. He also noted that J.D. Power ranked Alaska Airlines as the “Highest in Customer Satisfaction Among Traditional Carriers” for the 11th straight year during the quarter. Elwood Brehmer can be reached at [email protected]

ConocoPhillips posts biggest quarterly profit since 2014

This spring turned out to be ConocoPhillips’ best quarter in nearly four years as the oil major reported a profit of more than $1.6 billion in its second quarter earnings report released Thursday morning. The $1.6 billion of net income was accomplished on the back of more than $9.2 billion in revenue for the quarter. The last time ConocoPhillips had a higher revenue quarter was the fourth quarter of 2014 when it brought in $11.8 billion but still lost $39 million overall. The last time the company managed better quarter earnings was the third quarter of 2014 when oil prices averaged $97 per barrel and it netted $2.7 billion. In Alaska, ConocoPhillips had a second quarter profit of $418 million, compared to $445 million in the first quarter and a $167 million profit a year ago. The company paid $291 million in taxes and royalties to the State of Alaska during the quarter, according to spokeswoman Natalie Lowman. The companywide profit translates to earnings of $1.40 per share, compared with second quarter 2017 adjusted earnings of 14 cents per share. The company paid a dividend of 28.5 cents per share last quarter, which it announced July 11 it will pay again in the third quarter. The adjusted earnings per share of $1.09 beat Wall Street expectations of $1.08 per share. CEO Ryan Lance said in a formal statement that the company is now positioned for high performance during industry cycles by focusing on free cash flow generation. “We’re benefiting from higher oil prices, but also driving underlying cash flow expansion. In accordance with our priorities, we’ve differentially allocated excess cash towards debt reduction and distributions, while continuing to grown our diversified, low cost of supply resource base,” Lance said. “Since we launched our disciplined strategy almost two years ago we’ve met or exceeded all our key strategic milestones. We achieved our debt target 18 months ahead of plan; we’ve outperformed on our target payout to shareholders; we’re executing or operating plan and remain committed to our disciplined approach to the business.” ConocoPhillips repurchased $600 million worth of stock during the quarter and increased its 2018 repurchase plan by 50 percent to $3 billion. It additionally paid down $2.1 billion of debt and hit a $15 billion debt target mentioned by Lance while ending the quarter with $4.1 billion in cash and short-term investments. BP and ConocoPhillips announced a deal July 3 that ostensibly amounted to a trade, in which ConocoPhillips will acquire BP’s 39 percent stake in the large, North Slope Kuparuk River oil field and BP will add 16 percent ownership in the U.K. Clair field, which it operates. The deal will give ConocoPhillips 93 percent ownership in Kuparuk, which it operates and produces roughly 140,000 barrels of oil per day. It is also expected to be a cash-neutral transaction for both companies, according to a statement from BP. ConocoPhillips also made capital investments totaling $581 million in Alaska out of its worldwide capital spend of nearly $2 billion during the quarter. The company has put $844 million towards its Alaska projects so far this year, according to the earnings report. ConocoPhillips’ crude production in the state averaged 170,000 barrels per day during the quarter, down slightly from 174,000 barrels per day in the first quarter of 2018 but just more than the 169,000 barrels per day it extracted a year ago. It announced July 16 that the six exploration and appraisal wells drilled on the North Slope last winter added up to 1.4 billion barrels of oil and gas to its resource portfolio. ConocoPhillips’ Alaska oil and gas production accounted for 15 percent of its worldwide production for the quarter; its $418 million net income in the state accounted for 25 percent of its overall quarterly profit. Elwood Brehmer can be reached at [email protected]

Christening for Tazlina; funeral for Juneau Access

The Alaska Department of Transportation has pegged Aug. 11 for christening the M/V Tazlina as the newest state ferry. The 280-foot Tazlina and its twin sister ship the M/V Hubbard, known as Alaska class ferries or day boats, are destined to start service in Lynn Canal next May, a mission they were specifically designed for. But it’s in winter when the benefits of the Tazlina and Hubbard will be fully realized, according to DOT spokeswoman Aurah Landau, when smaller ferries that are less costly to operate are currently tasked with making the Lynn Canal runs. “The new Alaska class ferries are bigger boats than some of the small boats running in Lynn Canal. They should be able to run in the kind of weather that sometimes forces ferry trip cancellations. These boats are bigger, they’re longer, deeper, heavier, so they can handle much higher winds and seas,” Landau said. “So bringing those boats online should offer much more reliable service in Lynn Canal. The Tazlina and the Hubbard are not only the largest vessels ever built in Alaska — at Vigor Industrial’s Ketchikan shipyard — they are also the first state ferries built here as well. Vigor Alaska Development Manager Doug Ward said the $101 million contract price agreed to in 2014 still stands, but added there is still a lot of work to do on the Hubbard, which is scheduled for completion next spring. The completion is a few months behind the original target to have both ships done by this October. “This is a big project, but we managed to get through the thing and the Hubbard is coming along really well. A good part of the structural steel work is complete now,” Ward said. Meanwhile, Landau said the Alaska Marine Highway System is still waiting to hear back on its request for a waiver from the Buy America Act for a $222 million, 330-foot ferry to replace the aging Tustumena. The federal law requires steel and other primary components for American vessels be sourced domestically even if no one in the country is producing them. The state has been waiting to hear back from the FHWA on the waiver for more than a year. “We’re just waiting for the Buy America waiver to come back and then we can begin the bid process. (The waiver) will affect if we have to go back and redesign and it will affect construction costs and abilities,” Landau said. Once the vessel, which has been designed, goes out to bid it should be ready for service after a few years of construction, she added. State ferry construction is eligible for federal money similar to highway projects, but accepting the funding means bidding must be open to all shipyards nationwide. The state self-funded the Tazlina and Hubbard in an effort to make sure they could be built in Alaska. Ward said it is too early to say whether or not Vigor, which owns other shipyards in the Pacific Northwest, will bid on the Tustumena replacement project or even if it could be built in Ketchikan at all, given it will be a much larger vessel than the Alaska class ferries. “We’re going to look at (the Tustumena replacement) and of course we won’t know until we see the request for proposal,” Ward said. Feds close out Juneau Access The Federal Highway Administration has closed out the controversial Juneau Access road project as state transportation managers prepare to christen the first of two new ferries that will serve as the primary road link of the future to the capital city. The Alaska Department of Transportation announced July 19 that FHWA Alaska Division Administrator Sandra Garcia-Aline signed a record of decision affirming Gov. Bill Walker’s decision to not have the state extend the Glacier Highway up to 50 miles north of Juneau. In 2016 Walker chose the “no action” alternative from seven options evaluated in the environmental impact statement, or EIS, for the long-running Juneau Access Improvement project, largely in response to the $3 billion-plus budget deficits the state was facing at the time. In May the Legislature moved $21 million left over from other DOT projects to Juneau Access. Landau said the money will sit in the project account at least for the time being. “It can remain in the account until acceptable alternative concepts are proposed and agreed upon by stakeholders, (or) the Legislature can always make a change to the funding status,” Landau said. The annual budget shortfall was reduced to about $700 million this year but Walker said the project still faced several challenges in a prepared statement. “Improving Juneau access continues to be a priority for us. But the practicality of this project — a road extended to a yet-to-be-built ferry terminal through more than 40 avalanche zones, with a history of litigation — that makes it difficult to justify these kinds of expenditures as we focus on a sustainable fiscal future for Alaska.” In 2006 the FHWA identified the 50-mile Glacier Highway extension amongst several other road options up either side of Lynn Canal as its preference for the project. That decision was eventually thrown out in U.S. District Court after a group led by the Juneau-based Southeast Alaska Conservation Council sued the federal agency contending the original Juneau Access EIS did not adequately evaluate other options and environmental impacts of the chosen plan. The State of Alaska appealed the decision and eventually lost the case in the 9th Circuit Court of Appeals, which led to the drafting of a supplemental EIS. Former Gov. Sean Parnell’s administration again selected the 50-mile highway extension in 2014 while the supplemental EIS was in draft form, but Walker reversed the state’s choice during development of the final supplemental EIS. Republican gubernatorial candidate Mike Dunleavy criticized Walker’s decision in a press release from his campaign that alleges not building the road leaves Juneau — the only state capital outside Hawaii inaccessible by land — without a sustainable transportation plan. “Alaska continues to rank at the bottom of the states in economic performance. We need to get our state moving and we need leadership that will work to create jobs and economic prosperity,” Dunleavy said in a formal statement. “Juneau Access is a project which will employ hundreds of Alaskans in the construction phase, and provide lasting economic opportunity.” Landau said all of the alternatives reviewed in the Juneau Access EIS have sufficient capacity to meet current transportation demands in and out of the northern end of the city, but noted every mode of transportation has inherent factors that can limit expressed demand. The Glacier Highway extension was estimated to cost $680 million in the final EIS and record of decision signed in June. That is roughly a $100 million increase in the expected cost from previously published versions of the EIS. Because it is a project eligible for federal funding, FHWA could have funded up to about 90 percent of the construction costs, as is common for highway projects nationwide. However, the project would not actually link Juneau to either Haines or Skagway — the communities at the northern end of Lynn Canal — as the road would dead-end about 20 miles south of Skagway. Shuttle ferry service between Haines, Skagway and a new ferry terminal at the end of the highway would increase daily ferry capacity, but many objected to that plan because it would leave ferry passengers who are traveling without a vehicle more than 50 miles from Juneau at the new terminal. The existing Auke Bay ferry terminal just north of Juneau would have been closed under that plan. ^ Elwood Brehmer can be reached at [email protected]

State officials cite costs, complications of initiative

State agency officials attempted to predict the impacts to the state of a pending fish habitat ballot measure during a July 20 Senate State Affairs Committee hearing. Ballot Measure 1, known as the “Yes for Salmon” initiative, would bolster the Department of Fish and Game’s statutory requirements for approving development activity permits in anadromous fish habitat areas as well as the department’s authority to enforce the stipulations of those permits. Championed by the Anchorage-based nonprofit Stand for Salmon, the initiative is scheduled to be on the general election ballot in November depending on the outcome of an Alaska Supreme Court ruling to determine its constitutionality. Gov. Bill Walker’s administration has argued that the measure is an unconstitutional usurpation of the Legislature’s authority to appropriate resources. The court is expected to rule on the constitutional question by early September to provide the Division of Elections time to prepare accurate materials for voters. On a high level Ballot Measure 1 would establish two tiers of permit application reviews. “Minor” habitat permits could be issued quickly and generally for projects deemed to have an insignificant impact on salmon waters. “Major” permits for larger projects such as mines, dams and anything determined to potentially have a significant impact on salmon-bearing waters would require the project sponsor to prove the project would not damage salmon habitat. 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 initiative also states that mitigation measures to offset the impact at the development site may not be done by enhancing or preserving habitat on other waters, which is a practice allowed now and is what’s proposed for the Donlin mine project. On one level, Ballot Measure 1 would cost the state about $3 million per year in the near term to implement its changes, according to estimates in an Office of Management and Budget report. Not surprisingly, much of that would be in Fish and Game’s budget for developing updated regulations and guidance documents. ADFG Commissioner Sam Cotten said it would likely cost the department $1.3 million per year over five years to implement the law changes. The Department of Transportation, which is one of the most frequent applicants for fish habitat permits, would need another roughly $950,000 per year to comply with the more stringent fish habitat requirements, according to department leaders. The departments of Environmental Conservation and Law would each need up to an additional $450,000 per year to possibly broaden water quality standards currently required for discharges in fish spawning areas and enforcing new civil penalties for violating fish habitat permit terms. DOT Environmental Program Manager Ben White said the department would need to add a handful of hydrologists and hydraulic engineers to its current environmental permitting team. “We are committed to environmental stewardship as a department and really work very hard, in this particular instance, to support healthy salmon populations,” DOT Commissioner Marc Luiken said to the committee. While projecting fiscal impacts is an exercise agency staff are accustomed to — it is done for the majority of proposed legislation — the Republicans on the committee in opposition to the initiative posed increasingly speculative scenarios they are concerned about the initiative impacting while questioning administration officials. Walker, who is running for reelection, has expressed his opposition to Ballot Measure 1 as a policy while the Department of Law is challenging its constitutionality. At the same time, Civil Law Division Director Joanne Grace said the Department of Law has advised Walker’s commissioner’s to remain objective on the initiative. Emily Anderson, an attorney for Stand for Salmon, said the discussion in the hearing was premature because agency officials were asked to outline the impacts of the potential law change before the Supreme Court, which could also amend the initiative, has made its decision. Rather than wholly approving or rejecting the initiative, the Supreme Court could strike specific provisions of the proposal it feels are unconstitutional and allow the remainder of it to appear on the ballot if the general intent of the sponsors remains intact. Sen. John Coghill, R-Fairbanks, asked if language in the initiative that would extend fish habitat permit reviews into the riparian area near the shoreline of a water body could be used to preclude development in entire floodplains, such as the one his hometown is built on. Sen. Cathy Giessel, R-Anchorage, questioned whether fire departments could be prevented from filling their tanker trucks from salmon streams and if DOT would not be allowed to use rip-rap when dealing with emergency flood and erosion situations that can occur, particularly along Alaska’s large glacial rivers. Agency officials largely obliged the speculation, acknowledging there is a possibility the circumstances raised could be impacted because of the vague language of the initiative. DOT’s White said the agency could be forced to find alternatives to traditional rock rip-rap for erosion control and that temporary stream diversions — often used in culvert and bridge work — could be challenged. Habitat Division Biologist Ron Benkert said in an interview that Fish and Game already discourages the use of rock rip-rap when other bioengineered solutions such as root wads or other forms of woody vegetation can be used for erosion control, noting that in the most critical areas and emergency situations the department concedes to the use of rip-rap at the request of DOT and others. He also said large, fast rivers such as the Matanuska that regularly cause significant damage are primarily migration corridors for salmon and other species that use headwaters and tributaries for spawning and rearing, so the impact of bank stabilization efforts to critical habitat is limited most times. “Really high velocity — it’s just not a great place for fish to hang out,” Benkert said. Anderson said the initiative makes no changes to the ability for officials to respond to emergencies. She stressed in response to other concerns about the purview of the habitat permits that the initiative is limited to freshwater, as is the case today. Anderson said during an editorial board meeting with the Journal and Anchorage Daily News on July 19 that the initiative is primarily aimed at solidifying scientific best practices and guidelines Fish and Game currently uses in regulation and law to insulate the permitting process from political influence. Initiative sponsor and commercial fishermen Mike Wood has said the objective of the campaign is to fortify the state’s fish protections while the Environmental Protection Agency is scaling back its wetlands protections in the state, for example. Currently, Title 16, the state’s anadromous fish habitat permitting statute, directs the ADFG commissioner to issue a development permit as long as a project provides “proper protection of fish and game.” The initiative sponsors contend that is far too vague and an update is needed to just define what “proper protection” means. In early 2017, Alaska Board of Fisheries chair John Jensen sent a letter to legislative leaders urging them to update Title 16 with opportunities for public involvement in permit application reviews and enforceable development standards. The law now does not allow for public comment nor does it require Fish and Game to issue a public notice indicating the Habitat Division is adjudicating a permit application. The Kenai Peninsula Borough Assembly also unanimously passed a resolution in 2016 supporting an update to Title 16 to further protect fish habitat. DNR Project Management Associate Director Kyle Moselle said in response to questions that the vast majority of the permits DNR and DEC issue for large development projects already require public notice and comment periods, which would be a fundamental addition to the anadromous fish habitat permit process under the proposal. Giessel said in an email that the public should be included in matters involving public resources and that is why the comment periods and notices are required for other land and water use and quality permits. “If the issue surrounding this initiative is one of requiring an opportunity for Alaskans to comment and be involved on fish habitat permits, that is one matter. But proposing an up or down, take it or leave it, wholesale rewrite of our fish laws in November is another thing altogether,” Giessel said. It was also unclear from the hearing when existing developments with fish habitat permits already in hand would be subject to the new permitting system. Benkert said in an interview that while the department feels this is a “gray area” in the law, generally an existing operation would be grandfathered in until additional authorizations are needed for expansion plans or a fish habitat permit renewal. Most fish habitat permits are valid for two- to five-year periods before they need to be renewed. “It’s kind of a check so we can just come back and see if what we had permitted five years ago is still actually being done,” Benkert described. Stand for Salmon’s Anderson said worries about renewing permits for existing facilities “have been blown out of proportion” and re-upping authorizations should not be more difficult under the initiative. “There’s a whole class of facilities that never had a fish habitat permit and won’t require one; (they) are not only not affected by this but never will be affected by this,” she said. “Then there’s a whole class of facilities that did require a fish habitat permit but that habitat is no longer in existence, therefore you don’t need a new fish habitat permit and it never will be contemplated because there is no fish habitat left to get a new permit for.” White also said DOT is concerned the initiative could lead to more National Environmental Policy Act reviews for work now deemed to have a de minimis environmental impact because it prohibits Fish and Game from allowing activities that have a “significant adverse effect” on fish habitat. DOT regularly conducts work that has some impact on fish habitat, according to White. He said in an email that the concern specifically relates to many of the projects the department executes that are at least partially funded with federal money. Anderson and other initiative supporters insist it is not intended to prohibit unavoidable small or temporary impacts as many fear, which is why it calls for “minimizing” impacts if avoiding them is not practical. She also strongly contended that White “is just wrong” in his characterization of how it could lead to more projects being subject to NEPA and DOT is conflating the state and federal permitting systems. “NEPA is triggered by a federal action that would have significant adverse effects. It is not triggered by state laws,” Anderson said. Elwood Brehmer can be reached at [email protected]

State defends claim for $160M in back taxes

State attorneys issued a wholesale rebuttal July 18 in responding to a lawsuit brought by three companies that work on the North Slope against the state Revenue Department over how detailed portions of the state’s oil tax laws are applied. ExxonMobil, Hilcorp Energy and SAE Exploration, a seismic imaging company, sued the Department of Revenue in state Superior Court June 8 alleging Tax Division officials are using an unenforceable guidance document to improperly collect upwards of $160 million in oil production taxes. The state’s 14-page response, signed by Assistant Attorney General Katherine Demarest, admits the advisory bulletin in question issued by Tax Director Ken Alper in March 2017 interprets oil tax law and acknowledges the companies sued in the proper venue, but in line-by-line fashion flatly denies the rest of the complaint. ExxonMobil and Hilcorp contend the state informally adopted the six-page advisory bulletin as a regulation packet and subsequently applied to collectively increase their fiscal year 2018 oil production taxes by about $110 million and to collect another roughly $50 million plus interest in retroactive taxes since 2014. The state’s filing rejects the allegation that tax regulations “incorporate” the advisory bulletin, but rather asserts that it “interprets statutes” as allowed by state law. State attorneys also contend that one or more of the plaintiffs may lack standing in the lawsuit and that the state’s sovereign immunity may by applicable to this case. They request the case be dismissed and the state be compensated for the costs of its defense. SAE, which holds refundable tax credits earned through its seismic shoots, planned to sell those credits to producers, which in turn could use them against their tax liability. Limiting the amount of credits the producers can apply to their production taxes has in turn hampered SAE’s ability to sell its credits and reduced their market value, according to the original complaint. The advisory bulletin explains that use of the sliding scale credit prevents a company from using tax credits to take their production tax liability below the 4 percent gross minimum tax floor. The sliding scale credit, which starts at $8 per barrel when oil prices are less than $80 per barrel and steps down to nothing at extremely high prices, is used as a way to install progressivity into the production tax for oil produced from the state’s large, legacy fields such as Prudhoe Bay and Kuparuk River. However, if a producer were to forgo the per-barrel credit or use a fixed $5 per barrel credit for “new” oil production, the new oil credit and others could reduce a production tax liability to less than the 4 percent floor, according to the bulletin. The companies insist that Revenue’s own regulations allow taxpayers to choose the order in which credits are applied. The state’s filing does concur with that assertion, but additionally “denies that such an option relieves taxpayers of the duty to accurately report and pay tax,” the filing reads. The companies argue further that a 2011 advisory bulletin, issued under former Gov. Sean Parnell’s administration, stated that North Slope producers could reduce their liability below the minimum tax by using new oil or other credits. The Legislature and Parnell administration overhauled the oil and gas production tax system in 2013 with Senate Bill 21, which survived a voter referendum to repeal it in 2014. The current oil production tax law has since been modified twice at the behest of Gov. Bill Walker in 2016 and House Democrats last year. Elwood Brehmer can be reached at [email protected]

AK LNG leaders navigate trade battle with China

The $43 billion Alaska LNG Project is in a rather unique spot when it comes to the United States’ trade relations with China. It was a central piece of a Nov. 9, 2017, meeting between President Donald Trump and China President Xi Jinping in Beijing, a ceremony at which numerous deals totaling roughly $250 billion in potential trade between the countries were announced. That day Gov. Bill Walker and Alaska Gasline Development Corp. President Keith Meyer signed a joint development agreement with the state-owned Chinese companies Sinopec, China Investment Corp. and the Bank of China; it was one of a select group of trade pacts chosen to be signed in front of the two presidents. Although nonbinding, the JDA has been touted as the early stages of a foundational deal to support the gasline as it calls for selling up to 75 percent of the project’s LNG’s production capacity to Sinopec in exchange for a like percentage of the needed financing. It could represent billions of dollars per year of Alaska LNG exports to China, which would be a significant step towards rebalancing trade between the two countries. However, business relations between Beijing and Washington, D.C., have been on a well-publicized downhill path since. AGDC leaders acknowledge the 25 percent tariff the Trump administration levied on Chinese steel imports this spring could impact the viability of sourcing the steel for the project’s 800-mile, 42-inch natural gas pipeline and other components such as pipe racks. Reuters reported July 16 that the Trump administration recently rejected a request for a waiver from the 25 percent tariff on Chinese steel by Plains All American Pipeline LP, despite the fact that the company signed a contract for the steel to be used in a 550-mile Texas oil line last year prior to the tariffs taking effect or even being announced. At the same time, state gasline officials note that prefabricated modules and other constructed units that would make up large portions of the North Slope gas treatment plant, the Nikiski LNG plant and the pipeline compressor stations are exempt from the new tariffs, for now, at least. Many such components will have to be sourced internationally if the Alaska LNG Project is built because there simply are too few, if any, U.S. manufacturers. Additionally, cost savings are often available in world markets versus domestically sourced materials, according to AGDC Vice President Frank Richards. During a July 11 project update to legislators, Richards highlighted that China has not included U.S. LNG in its retaliatory tariff measures as part of the tit-for-tat trade dispute. It seems unlikely that LNG, or any energy form for that matter, would be hit with such a tariff as such a move would ultimately increase prices for Chinese consumers at a time when the government is making a major push away from coal for electric generation to cleaner fuels such as natural gas. “We feel that we have high visibility. China wants clean, efficient natural gas; Alaska has it; the U.S. wants to produce and export it, so we feel that we are in a good position as a project and as Alaska, too, to not hopefully be impacted by that (trade dispute),” Richards said. He added that AGDC learned in early July that there are pipe manufacturers in Arkansas and Illinois capable of rolling 42-inch steel pipe; AGDC previously didn’t know if sourcing the primary gasline steel from the U.S. was even possible. As for Alaska LNG’s end product, AGDC Commercial Vice President Lieza Wilcox told legislators asking about financial risks in the project that if China does puts a tariff on imported LNG, the downstream sales contracts will be structured so the additional tariff cost is borne by the LNG buyer. “Once the contract is concluded the price is not going to be discounted for tariffs,” Wilcox said. She — as other AGDC leaders have since the November announcement — emphasized that the Alaska LNG Project is well regarded in the trade circles of both countries and said it has the opportunity to “continue to be a force for good in the continuing discussions about trade.” Elwood Brehmer can be reached at [email protected]

ConocoPhillips raises reserve totals at Slope discoveries

ConocoPhillips believes its recent winter exploration campaigns on the North Slope have added up to 1.4 billion barrels of oil and gas resources to its portfolio, company officials said in a July 16 presentation to investors. The estimate is largely derived from the results of the six exploration and appraisal wells the company drilled into its western Slope prospects last winter, which built on the work of two wells drilled in the federal National Petroleum Reserve-Alaska in early 2016. The 2016 drilling led to ConocoPhillips’ Willow oil discovery — a shallow, Nanushuk formation-focused prospect — with an early oil estimate of up to 300 million recoverable barrels announced in January 2017. Company leaders said July 16 that four more wells drilled into Willow early this year indicate the field could hold between 500 million and 1.1 billion barrels of gross resources that will cost between $4 billion to $6 billion to fully develop, with first oil potentially in the 2024-25 timeframe. It was also noted that roughly 75 percent of the company’s prospective acreage in the area is yet to be drilled. With a conventional target zone in the 4,000-foot range, ConocoPhillips also believes it can produce from Willow for less than $40 per barrel, according to a release accompanying the presentation. “Alaska provides competitive investment opportunities and will generate profitable growth from diversified investments with significant exploration upside,” CEO Ryan Lance said in the release. “We are proud of the value we create for the State of Alaska through the revenues we generate, the jobs we create and the community investments we make. Our shareholders realize the advantages of (Alaska North Slope)-priced oil, competitive cash and earnings margins from our operations and our years of expertise and sound stewardship. We plan to continue to strive to safely unlock the energy potential of this world-class oil province for years to come and play an active role in Alaska’s economic future.” ConocoPhillips Alaska leaders have previously said Willow could produce at rates up to 120,000 barrels per day with standalone processing facilities, an investment the company is now leaning towards. The Putu and Stony Hill wells the company drilled this year on state leases south of the Nanushuk discovery in the Pikka Unit collectively hold another 100 million to 350 million barrels, according to ConocoPhillips. Production from those prospects has been pegged at up to 20,000 barrels per day each. ConocoPhillips is also expected to bring its roughly $1 billion Greater Mooses Tooth-1 project online sometime late this year. Located just east of Willow in the NPR-A, GMT-1 is expected to produce up to 30,000 barrels per day at its peak. The company is also in permitting with the Bureau of Land Management to develop its Greater Mooses Tooth-2 prospect, which is generally a mirror and just to the south of GMT-1. Elwood Brehmer can be reached at [email protected]

Board rejects emergency petition over pink salmon hatchery production

The Valdez Fisheries Development Association can move ahead with its plan to increase its pink salmon production after the Alaska Board of Fisheries rejected an emergency petition from groups led by the Kenai River Sportfishing Association who oppose the plan. The seven-member board ultimately decided the issue does not constitute an emergency on a 4-3 vote during a Tuesday afternoon meeting in Anchorage. Board members Israel Payton of Wasilla, Reed Morisky of Fairbanks and Orville Huntington of Huslia voted in favor of the petition meeting emergency criteria for consideration. Those voting against were chair John Jensen of Petersburg, Alan Cain of Anchorage, Robert Ruffner of Soldotna and Fritz Johnson of Dillingham. The petition was signed by KRSA Executive Director Ricky Gease and 18 individuals representing Lower Cook Inlet commercial fishing interests, the Chitina Dipnetters Association, the Kenai River Professional Guide Association, the Fairbanks Fish and Game Advisory Committee, among others. It urged the board to reverse a previously approved increase of 20 million pink salmon eggs by the Valdez Fisheries Development Association this year for expanding future hatchery-produced harvests. KRSA first submitted the petition May 1. The first version was signed by nine sport and personal use fishing groups, sans the Lower Cook Inlet commercial representatives. The board subsequently voted to a 3-3 tie on the issue during a May 14 teleconference meeting. The petition alleges that increasing the number of hatchery produced salmon poses a threat to wild salmon stocks as the hatchery fish compete with wild salmon for food while they are collectively rearing in the ocean. It highlights that a sampling study found up to 70 percent of pink salmon returning to some small Lower Cook Inlet streams in 2017 were found to be from Prince William Sound hatchery stocks. “In addition to the straying issues of PWS hatchery-origin pink salmon observed in Lower Cook Inlet, recent scientific publications (building on past published reports and internal Alaska Department of Fish and Game reviews) have provided cause for great concern over the biological impacts associated with continued release of very large numbers of hatchery salmon into the North Pacific Ocean, including the Bering Sea and the Gulf of Alaska,” the petition states. Fish and Game Commissioner Sam Cotten wrote to a letter to Gease June 14 in which he denied the petition via authority delegated to him by the Board of Fisheries, but noted two board members had already requested a special meeting to discuss the matter. Fish and Game officials as well as board chair Jensen said at the Tuesday meeting that emergency findings are rare; there must be an unforeseen event that threatens a resource or an instance where action would lead to a loss of harvest opportunity that couldn’t be had in the future. “I don’t think taking eggs is an emergency,” Jensen said. Gease said in an interview that the state has policies in place that make it illegal to transport salmon between regions, but the department is passively allowing it to happen by approving increased hatchery production when the fish are known to stray. “It seemingly now is OK that there is no standard for hatchery fish straying,” Gease said. Valdez Fisheries Development Association leaders could not immediately be reached for comment in time for this story. Morisky said he feels instances where 70 percent of the fish spawning in a stream have strayed from hatchery stocks constitutes an emergency and allowing an egg take that will lead to more hatchery fish could threaten wild salmon stocks, the health of which Fish and Game is required to prioritize above other salmon. Payton said the potential issue of hatchery fish competing with wild salmon for food in the ocean is of particular concern to him. “I do think there is a potential threat to the wild stock resource here,” Payton said. Fish and Game Commercial Fisheries Division Director Scott Kelley said the Valdez-area hatcheries originally wanted to take an additional 70 million eggs and increase the total egg take to 300 million from 230 million, but the department agreed to a phased approach of increases in 20 million-egg increments in 2016 and 2018. It’s an approach that is commonly used with hatcheries across the state, according to Kelley. “That’s why we ease in — test the waters, literally,” he said. Kelley noted recent wild stock returns of pink salmon to Prince William sound in 2013 and 2015 — pinks typically return in two-year high and low abundance cycles — were among the most prolific on record. Board member Johnson of Dillingham said the egg take is supposed to happen in three days, adding the board is already scheduled to take up hatchery issues during an October 15-16 work session in Anchorage. It was also emphasized at the meeting that the department, in conjunction with hatchery groups, is working on a long-term study to flesh out theories of how hatchery salmon from Prince William Sound and Southeast Alaska do or don’t impact wild fish stocks. Cain, of Anchorage, said the issues of how hatchery salmon interact with wild salmon are very important but the petition didn’t meet the board’s threshold for an emergency. Elwood Brehmer can be reached at [email protected]

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