Elwood Brehmer

Optimism for 90-day session begins to fade

The optimism that this year would be different than the previous three is starting to wear off just four weeks into the legislative session. Most legislators are still saying, at least publicly, that they are confident this year’s work can be done in 90 days and not drag into June or July as has become the norm during the continuous political battle over how to fix the state’s multibillion-dollar deficits. However, Democrat House Speaker Rep. Bryce Edgmon said he is predicting more of the same ahead given unwavering opposition from Senate Republicans to his caucus’ proposed budget fixes. “I see more gridlock and I see more stalemate coming up,” Edgmon said during a Feb. 13 press briefing. While he said he also started the session with optimism that the Legislature would reach a long-term fiscal plan in its allotted time, his pessimistic comment was in response to what came out of a Senate Majority press conference a day earlier. Republican Senate President Pete Kelly said Feb. 12 that he would like to see the House Majority’s tax proposals “in the garbage can.” During a January talk in Anchorage with Edgmon about their respective priorities before the start of the session Kelly said the talk of a broad-based tax would be met with “mocking laughter” from Senate leaders. For his part, Edgmon said the House Majority is willing to compromise and discuss the appropriate amount of future Permanent Fund dividends, government service levels and a draw from the Permanent Fund earnings to pay for government. He said well before the session that the House coalition would not again push for an income tax this year after the Senate wasted little time voting down the tax the House passed last session. “I think to draw those sharp lines sand this early in the session does not lend to compromise,” Edgmon added. Other prominent officials in the capitol have said they do not see a quick resolution to the session as each side’s stance on how to resolve the deficit has not materially changed. Republicans have continued stressing that further budget cuts and maximizing a sustainable draw from the Earnings Reserve of the Permanent Fund could balance the state’s finances without the need for a personal income tax. According to Kelly, lawmakers need to start changing their rhetoric away from emphasizing a fiscal crisis because the state now has enough revenue to close the budget gap in a few years. “Now with oil prices and production we’re in the grasp of a balanced budget,” he said. Republican Majority Leader Sen. Peter Micciche said based on Gov. Bill Walker’s budget proposal for a roughly $4.6 billion unrestricted General Fund budget, the Legislature could get within $300 million of balancing the budget this year based on higher than projected oil prices and production that is inching upwards as well. “With just a buck or two (of higher oil prices) in the next couple years we’ll be balanced,” Micciche said. His assertions also presume the Senate-passed version of Senate Bill 26, which would set a 5.25 percent of market value, or POMV, draw from the Earnings Reserve for three years and drop the draw to 5 percent thereafter. However, the governor’s budget does not include funding for the state’s annual oil and gas tax credit obligation because his administration is proposing to sell bonds to fully pay off the credits in an $800 million lump sum now that the program has ended. Without passing the credit-bonding legislation or finding some other resolution, the Legislature will likely be forced to add at least $206 million — the statutory minimum formula payment — to the budget. Micciche has also said the Department of Health and Social Services needs to focus on Medicaid utilization as a means to substantively curb the state’s ever-growing health care bill. Homer Rep. Paul Seaton, Finance co-chair and one of three Republicans caucusing with the Democrat-led House Majority, acknowledged Feb. 13 that there is going to be a draw from the Earnings Reserve this year, as the $2.4 billion in the state’s savings accounts are not likely to cover the deficit alone. Additionally, administration and nonpartisan Legislative Finance officials insist the Constitutional Budget Reserve, which will have approximately $2.1 billion at the start of next fiscal year, should always hold at least $1 billion, ideally more, to cover expenses in an emergency and for cash flow management. Democrats have noted future budgets would have to increase by more than $100 million per year to keep up with inflation at current service levels while Senate leaders insist the Legislature can beat inflation with further cuts. Rep. Les Gara, D-Anchorage, introduced legislation to increase the key base student allocation formula by $100 per student Feb. 9. He contends K-12 education has lost $90 million of funding since 2015 through cuts and the impacts of inflation.

House committee approves increase in spill penalties

Legislation to increase penalties for fuel and oil spills is on the move in the House. The House Resources Committee sent House Bill 322 to the Finance Committee Feb. 12 for consideration. The bill, drafted primarily by Resources co-chair Rep. Andy Josephson, D-Anchorage, would double most penalties the Department of Environmental Conservation can levy against spillers of oil, fuels and other hazardous substances including vessel waste water. Josephson stressed throughout the Resource Committee’s series of lengthy meetings on it that the primary impetus behind HB 322 is bringing spill penalty amounts into the 21st century. In some cases the fines haven’t been changed since they were implemented in the late 1970s. “If we don’t update the law we’re stuck in 1977 forever and the cost of cleanup exceeds the amount the (Spill Prevention and Response Division) takes in,” Josephson said before voting to advance the bill Feb. 12. HB 322 moved on a 5-4 party line vote with Democrat support and Republican opposition. Reps. George Rauscher, R-Wasilla, and Dave Talerico, R-Healy, objected to increasing the fines on the fear that upping the penalties could discourage individuals or companies from reporting spills to DEC, regardless of the fact that notifying the state of such an accident is currently required by law. That in turn could lead to unnecessary environmental damage from unreported spills not being adequately cleaned up, they argued. Rep. Chris Birch, R-Anchorage, questioned the subjectivity of how DEC officials determine when and at what amount to levy fines against spillers. Spill Prevention and Response Director Kristin Ryan said she doesn’t feel the issuance of penalties for spills is subjective because the department decides whether or not to impose a civil fine based on a list of criteria set in law by the Legislature, including if the spill was caused or prolonged by a decision that the economic benefit of not complying with prevention requirements led to the spill or pushed a company or individual to delay cleanup. Ryan added that she could not think of a time when a homeowner had been fined for a spill — of fuel oil, for example — based on the economic benefit consideration under her watch. For private individuals, she said the cleanup cost usually amounts to “a penalty in itself.” However, the current penalty schedule is outdated and doesn’t allow DEC to recover its costs as the Legislature says it should, according to Ryan, particularly in the case of large spills. “The amount that we’re restricted to charge for a penalty is very low,” she said. “For those few instance where we have a substantial release we really would be limited in recovering and penalizing, frankly, the company for the release that harmed the environment.” HB 322 would double the per-gallon penalties for non-crude oil spills greater than 18,000 gallons on state lands or in state waters. Those penalties have not been adjusted since 1977. The penalty for a large spill into an anadromous water body would go from $10 per gallon to $20 per gallon. That same penalty, if adjusted for inflation would be $39.70 per gallon today, according to Josephson’s office Legislators supporting the bill repeatedly noted the fines from the 1970s would be roughly quadruple the current amount if adjusted for inflation, while the bill just doubles them. Amendments by Rep. Justin Parish, D-Juneau, to increase those penalties to match inflation were rejected. The penalties for large crude spills — enacted in 1989, the same year as the Exxon Valdez grounding — would be doubled as well, which would bring them in line with inflation, according to Josephson’s office. The current penalties for large crude spills are $8 per gallon for spills less than 420,000 gallons and $12.50 per gallon for larger releases. DEC collects roughly $150,000 in penalties during an average year with no exceedingly large spills, according to Ryan. The department expects HB 322 would add about $75,000 per year to that figure. Birch characterized the bill as “a solution in search of a problem” given DEC reports a longstanding downward trend in the number of spills reported to the department each year. The number of spills has fallen from an average of about 2,500 per year in the late 1990s and early 2000s to generally less than 2,000 per year since 2010, according to DEC. There were 2,046 spills in 2017 totaling 271,000 gallons; more than 188,000 gallons of which was non-crude oil such as refined fuels. About 1,600 gallons of crude oil were spilled last year. Those figures do not include natural gas released from Hilcorp Energy’s Cook Inlet pipeline leak discovered early last year. DEC did not calculate a gallon amount for the gas leak, according to Ryan. The department also did not issue a penalty against Hilcorp for the leak that lasted more than two months because the company reported it as soon as it was discovered and did what it could to mitigate environmental damage she said. Large sheets of “pan ice” prevented divers from safely reaching the punctured subsea pipeline until the ice cleared in early spring. Alaska Oil and Gas Association CEO Kara Moriarty testified against the bill, noting that crude oil spills accounted for less than 2 percent of the overall volume of spilled substances in the state in the last three years. Oil and gas companies spend between $1.8 million and $8 million per year on spill prevention and response equipment and training and thus DEC is not often required to spend large amounts of its money to respond to industry spills. “The same cannot be said for non-oil industry facilities,” Moriarty said. The bill would also classify water produced from oil wells as crude in the event of a spill as long as the water contains a small amount of oil, which Moriarty also testified against. She said “produced water clearly does not cause the same level of damage as pure crude” and the amount of actual oil in the water can be calculated. Ryan contended that the water produced from North Slope wells — the percentage of water increases as the oil field ages — is saltwater that has been found to be as toxic as crude when spilled, is difficult to clean up and therefore should be considered in the total spill volume for determining a penalty. The Resources Committee did remove a provision of HB 322 that would have required trucking companies hauling crude to have a DEC-approved spill prevention and response contingency, or C-plan, before transporting oil. The state requires oil and gas producers, Alyeska Pipeline Service Co., which oversees the Trans-Alaska Pipeline System and oil tanker activities out of Valdez, and other tanker vessel operators to have a C-plan. There currently is no similar state requirement for trucking companies hauling crude, however. Alaska Trucking Association Executive Director Aves Thompson said federal Department of Transportation regulators mandate C-plans for crude haulers and state approval would be unnecessarily duplicative. The committee ultimately cut out the state approval of C-plans, but HB 322 would now require the companies to submit the federal C-plans to DEC so the state has them on file for reference in the event of a spill. Home spills On the flipside of the spill penalty debate around HB 322, Gov. Bill Walker’s administration introduced a bill to remove DEC’s requirement to recover all of its costs from homeowners in the event of a heating oil spill. House Bill 305 would specifically remove the requirement for DEC to bill homeowners seeking technical assistance for a spill of home heating fuel presuming the homeowner does what they can to clean up the spill as quickly and completely as possible. Ryan said currently the department is mandated by law to recover its costs in the event a DEC technician visits a home heating oil spill site to provide technical assistance, for example, but does not actually take part in the cleanup. The homeowner is still responsible for the cleanup costs, she added, and homeowner’s insurance does not usually cover spill cleanup. “The cost recover, in our opinion, is somewhat duplicative in this scenario,” Ryan testified Feb. 9. HB 305 remains in the House Resources Committee. Its mirror, Senate Bill 158, was scheduled to be heard in Senate Resources Feb. 14 at the time of this writing. Elwood Brehmer can be reached at [email protected]

88 Energy adds to winter exploration program

A small Australian company will soon be adding to what is turning out to be a robust exploration season on the North Slope. 88 Energy received regulatory approval from the Division of Oil and Gas Feb. 5 to drill two exploration wells in a remote portion of the southern North Slope near the upper Kuparuk River. Working under its operating subsidiary Accumulate Energy Alaska Inc., the company plans to drill and test the Bravo-1 and Charlie-1 oil exploration wells by April 30, according to its exploration plan submitted to Oil and Gas. The wells will each be drilled to a depth of 11,000 feet and target the Seebee geologic formation, which has been found in nearby prior exploration wells drilled by other companies and that ConocoPhillips is producing from in the Kuparuk River Unit to the north, the company says. Accumulate’s work plan includes building 32 miles of ice road west from its Franklin Bluffs drilling pad adjacent to the Dalton Highway and about 35 miles south of Deadhorse. The company has drilled two wells on the Franklin Bluffs pad since late 2015, Icewine-1 and -2, targeting the unconventional HRZ shale play, which 88 Energy describes as “a prolific source rock” in the Brookian geologic formation. The Brookian sequence of formations contains the shallow Nanushuk formation and the Torok sands, which have been the source of multiple large oil discoveries by Armstrong Energy, ConocoPhillips and Caelus Energy in recent years. The belief is the HRZ shale holds similar potential to the Nanushuk and Torok plays if it can be effectively fracked. Icewine-2 was drilled last spring and production tests are ongoing. The Bravo and Charlie wells are in addition to five exploration and appraisal wells ConocoPhillips is drilling this winter on its acreage in the National Petroleum Reserve-Alaska and around the Colville River Unit, as well as an exploration well by Glacier Oil and Gas in the eastern Slope Badami field and two more long wells drilled by Italian major Eni into federal territory from its manmade Spy Island drill site in the state-controlled Nikaitchuq Unit. Accumulate plans to use Doyon Drilling’s Arctic Fox rig, which it also contracted to drill the Icewine wells. 88 Energy also began a nearly 180 square-mile 3D seismic program Feb. 7 on its large swath of acreage west of the Dalton and in the general area of the Bravo and Charlie wells, according to a Feb. 14 press release. The seismic shoot, expected to about 45 days, is intended to further evaluate the conventional oil potential and could lead to further exploration drilling in early 2019, 88 Energy Director David Wall states. 88 Energy, through its partnership with Houston-based independent Burgundy Xploration, holds rights to roughly 475,000 acres of contiguous state leases south of the developed area of the North Slope. 88 Energy also holds a 100 percent interest in about 15,500 acres south of the Point Thomson gas field and adjacent to the western edge of the Arctic National Wildlife Refuge. BP drilled the Yukon Gold-1 well in the area in 1994 and hit oil at several depths of the 12,800-foot well but did not develop it, according to 88 Energy. Elwood Brehmer can be reached at [email protected]

ISER: recession hitting downstream industries

A pair of new reports from the University of Alaska Anchorage indicate job losses are slowing but Alaska’s recession might not be over and current state spending levels might not be out of line when other factors are considered. Alaska’s recession didn’t officially start until sometime in the latter half of 2015, but economic contraction in the state seemed almost inevitable when oil prices began falling about a year earlier in August 2014. The lag was simply the time it took for oil companies and the State of Alaska to change spending habits and start budgeting for the new circumstances. Alaska’s workforce peaked at about 353,100 workers in June 2015 and in the two subsequent years lost 9,250 jobs, or 2.6 percent of total employment, according to the UAA Institute of Social and Economic Research, or ISER. More specifically, statewide employment declined by more than 6,800 jobs between June 2015 and June 2016 and again fell by more than 2,400 jobs in the following year to June 2017. The June-to-June tracking helps reflect the impact of state budgets on the economy, as the state fiscal year and its corresponding budget appropriations start July 1. The state Labor Department estimates Alaska lost about 3,600 jobs overall in 2017. Unsurprisingly, the initial job losses were predominantly in the closely tied oil and gas, construction and professional and business service sectors. Alaska’s construction and professional service industries rely heavily on spending by North Slope oil companies to generate their work. According to ISER, the natural resource and mining sector — oil and gas — lost 3,260 jobs from June 2015 to June 2016. The following year the industry lost 1,280 jobs. Overall oil and gas employment was down 26 percent from 2014 to 2017. Similarly, Alaska contractors shed about 1,650 jobs in the 12 months following June 2015 and another nearly 1,200 jobs the following year. Professional and business service companies — largely engineering, architecture, law and other consulting firms — shrunk by 1,660 jobs in 2015-16 and 600 in 2016-17, ISER estimates. The construction and professional service have been hit doubly hard during the recession as state capital spending mirrored the oil price decline. Alaska’s oil revenue-driven capital spending boom peaked in fiscal year 2013 at nearly $2.1 billion in unrestricted General Fund revenue. The litany of projects that money supported also led to ample work for small construction and design firms. By 2016 state-funded capital projects had dried up with an unrestricted General Fund capital budget of just $127 million that year. And though it takes several years for capital appropriations to flow to the projects and through the economy, construction industry analysts say the state spending downturn is now being felt. The job losses have been sharp, but are moderating, as ISER notes in the pragmatically titled study published Feb. 5, “What Do We Know to Date About the Alaska Recession and the Fiscal Crunch?” However, study author, ISER Economist and Assistant UAA Professor Mouhcine Guettabi wrote that the relative health of other industries provides evidence the recession is maturing rather than outright ending. “(The) accommodation and food services, leisure and hospitality and information (sectors) were still positive in 2016 but lost jobs in 2017, while retail trade lost twice as many jobs in 2017 as it did in 2016,” Guettabi wrote. “The fact that these few last sectors have lost jobs in 2017 means that as expected, the recession has spread to the sectors most sensitive to a household’s finances which have been affected due to the initial round of losses and the uncertainty of what is to come.” The only sectors to add jobs both years were health care and local government. Health care jobs grew by 2,350 over the two-year period tracked by ISER. Local government employment could represent “considerable future downside” if state community assistance and pass-through funding programs are targeted in additional state budget cuts, according to Guettabi. The Anchorage Economic Development Corp. is projecting the consumer spending contraction will result in 2018 job losses in the leisure and hospitality and retail sectors worse than they were in 2017 for Anchorage. At the same time, AEDC is forecasting oil and gas employment in the city to be flat this year, with construction and professional and business services losing about 200 jobs each — far fewer than recent years. AEDC expects the recession at least in Anchorage, which is a bellwether for the state, will peter out late this year or early in 2019 provided a solution to the state’s budget deficits is reached this year. AEDC and numerous other Alaska economists have attributed the recession in large part to the state’s ongoing multibillion-dollar budget deficits. Budget cuts have led to a loss of about 1,700 state government jobs in the period measured by ISER, in addition to the private industry impacts of the capital budget reductions. Lawmakers’ inability to reach agreement on how to close the last roughly $2.5 billion of the deficit has curtailed private investment as well because business leaders don’t want to take risks until they know what state taxes and other aspects of Alaska’s financial lands will look like for years to come, AEDC CEO Bill Popp and others insist. To that end, Guettabi concludes that based on other studies and previous recessions the uncertainty surrounding the state government’s long-term budget situation is costing Alaska somewhere between $200 million and $600 million per year in private investment. “The decline in spending due to policy uncertainty would indicate that waiting is not a costless option. In fact, the losses due to uncertainty are important and similar in magnitude to the ones the economy would experience due to a tax or further government cuts,” Guettabi wrote. Government spending comparison Critics of Alaska’s government spending routinely argue the state’s budget is way higher on a per-capita basis than the rest of the country. Budget defenders rebut that the critics are ignoring Alaska’s uniquely high cost of living, to which government is not immune, and providing services to more than 200 communities not accessible by road justifies most of the state’s expenses. Which is it? ISER’s brief report titled, “How Does Alaska’s Spending Compare?” published Feb. 9, concludes the answer is somewhere in between. According to ISER, the state and local governments spent $19,946 per person in 2015. The national average at the time was $8,811. Without the unusual expenses of Permanent Fund dividends and oil tax credits — each unique to Alaska — the spending dropped to $16,363 per Alaskan. However, when adjusted for cost of living differences, Alaska was down to $12,733 per person. That $12,733 is still well above the national average but seems to fall in line with other oil producing states with small, rural populations; Wyoming spent $14,564 and North Dakota was at $10,845 per resident on an adjusted basis. The report notes that the state and local spending figures include federal grant money, which Alaska gets at twice the rate of the rest of the country, and is very difficult to parse out. In 2016, Alaska received federal grants totaling $4,374 per person, compared to the national average of $2,067 per person. Federal money accounted for $3.4 billion of the state’s total $10.3 billion 2018 fiscal year budget. ^ Elwood Brehmer can be reached at [email protected]

Senate Republicans reject Walker pick for District E seat

It’s back to square one in the process to replace former Mat-Su Sen. Mike Dunleavy. Senate Republicans announced early Feb. 14 that they rejected Gov. Bill Walker’s appointment of Matanuska-Susitna Borough Assemblyman Randall Kowalke, a Republican from Willow, to fill the Senate District E seat. Walker stirred the political pot Feb. 9 when he picked Kowalke because he was not one of the three individuals local Republican Party representatives selected for the governor to pick Dunleavy’s replacement from. Dunleavy resigned from the Senate in early January to focus on his campaign for governor. “We believe the people of District E should be given an opportunity to fill the seat with a candidate they support through the traditional process, which is designed to respect the will of the voters,” Senate Majority Leader Peter Micciche, R-Soldotna, said in a Feb. 14 Senate Majority release. “The seat does not belong to us in the Senate, or the governor. The seat belongs to the people of District E.” Walker said when made the pick that Kowalke “is the best person to represent this district” because of his background in local government, his work in Alaska’s resource development industry through former leadership positions of the Resource Development Council and the Alaska Support Industry Alliance and volunteer work. The pick was met with disdain by Republican leaders in the Legislature who questioned why he would go outside the party’s wishes. Republican legislators have emphasized they do not have any objections to Kowalke’s qualifications, but rather wanted Walker to stick with tradition when making the pick. “The Mat-Su held a very public process to come up with those names and the governor ignored them,” Senate President Kelly said during a Feb. 12 press briefing. Other than being from the same political party, the governor is not obligated to pick any particular individual when filling a vacant seat, but the selection must be confirmed by a majority of the given party in the body. Dunleavy, who was kicked out of the Majority caucus last year for voting against the operating budget, praised the Senate decision. “I recognize and congratulate my former colleagues in the Senate that are standing in firm support of the long established process by which individuals selected to replace open senate seats represent the wishes of the people of that district,” Dunleavy said. “This isn’t a question of what is statutorily allowable, but rather what is right.” Kowalke was one of 11 people who applied with the party to fill the seat after Dunleavy resigned but the Republicans chose Todd Smoldon of Willow, Tim Braund of Sutton and Rep. George Rauscher, who currently serves in the House. Rauscher congratulated Kowalke on the appointment when the announcement was made and said he’s interested in hearing about Kowalke’s vision for the district. Kelly and Micciche sent a letter to Walker Feb. 13 asking him to rethink his pick. “We believe that the people who elected Senator Dunleavy should be given an opportunity to temporarily fill the seat with a candidate they support by providing you with a new list unless you decide one of the original three choices will suffice,” they wrote. “In our view, this is about process and not a partisan issue,” Kelly and Micciche continued. Walker doubled down on his choice in a quick response letter, noting that the state Constitution does not require the governor to choose from a party’s preferred list and the tradition of selecting names from a list is only in the bylaws of the Democrat and Republican parties. “While I appreciate your concern for the Republican Party’s selection process, I am a non-partisan governor and my decisions are not based on the wishes or demands of any one party,” Walker wrote to the Senate Republicans. “Rather, my appointment of Mr. Kowalke was based solely on my sincere desire to make the best decisions for all Alaskans, including the residents of Senate District E. Mr. Kowalke is a respected leader in his community and an elected member of the Matanuska-Susitna Borough Assembly with broad support.” According to Walker, he received more support for Kowalke from Mat-Su residents and elected officials than for all the other applicants combined. Recommendations for Kowalke came from Senate Majority members as well, which Walker said he took “very seriously.” “I have no intention of delaying the selection process by requesting additional names from the Republican party while my current appointment is still pending,” he concluded. “Should the Senate Republicans choose to reject Mr. Kowalke’s appointment, I will forward another name for consideration pursuant to requirements in the Alaska Constitution and state law.” Walker did not choose from the list individuals recommended by Democrats in House District 40 to replace Dean Westlake who resigned before the session because of multiple sexual harassment allegations. He instead chose NANA Regional Corp. executive John Lincoln to replace Westlake, who was confirmed by House Democrats. Elwood Brehmer can be reached at [email protected]

BP bounces back from 2016 with $3.4B profit in 2017

While BP Alaska leaders are celebrating the success of stemming production decline from the aging Prudhoe Bay oil field despite belt-tightening in the industry, the company’s global executives on Feb. 6 celebrated the announcement of a $3.4 billion profit in 2017. The $3.4 billion in earnings last year comes after the London-based oil super major managed to net just $115 million in 2016. The entire industry was boosted by a gradual return to oil prices of about $70 per barrel by the end of the year, but the fact that BP’s settlement payments related to the 2010 Deepwater Horizon oil spill have started to shrink also helped the company. It paid out $6.9 billion in spill payments in 2016 and $5.2 billion in 2017, according to the fourth quarter earnings report released Feb. 6. “2017 was one of the strongest years in BP’s recent memory,” CEO Bob Dudley said in a formal statement. “We delivered operationally and financially, with very strong earnings in the downstream; upstream production was up 12 percent; and our finances rebalanced. And we did all this while maintaining safe and reliable operations.” However, the company netted just $27 million in the fourth quarter after a $1.7 billion profit in the third quarter. That was primarily due to non-operating expenses accounted for in the quarter, according to the report. Operating cash flow — excluding the Deepwater Horizon payments — was up substantially from $17.6 billion in 2016 to $24.1 billion last year. Operating cash flow for the quarter was $6.4 billion, up 42 percent year-over-year. In Alaska, the year was more mixed for BP. The company held Prudhoe oil production at roughly 280,000 barrels per day for the third straight year, which Chief Upstream Executive Bernard Looney called “a fantastic example” of the BP’s ability to optimize work while cutting drilling during a time of low prices during a conference call with investors. Looney further noted the progress the Alaska Gasline Development Corp. has made on the $43 billion Alaska LNG project, which would begin selling the roughly 35 trillion cubic feet of natural gas combined at Prudhoe Bay and Point Thomson. BP executives have said the North Slope gas reserves are the company’s largest non-producing asset in its portfolio. “In Alaska, the fiscal changes potentially around what has been achieved with the Trump administration around gas, which many people might have thought of as a big stranded asset, may actually come to light in terms of commerciality,” Looney said. In November, AGDC and Gov. Bill Walker signed a nonbinding agreement with three large Chinese companies to advance the gas project in front of President Donald Trump and China President Xi Jinping in Beijing. BP has also assisted AGDC in a behind-the-scenes role on the Alaska LNG Project since the state-owned corporation took it over at the start of 2017. While Dudley touted the BP’s safe operations in 2017, the company allegedly had near misses in Alaska during the year that pushed its state leaders to call for a “reset” of its safety culture in the state. Buzzfeed reported in October, based on leaked internal BP Alaska emails, that the company had at least five incidents during the year that put employees at significant risk and resulted in workers being sent to unscheduled safety training. Also, in April, a BP oil well failed at Prudhoe due to permafrost melting around the well, spraying about 100 gallons of oil onto the drilling pad. The incident caused the company to review all of its wells for a similar design — a few were found and shut in — and pushed state regulators to require all Slope operators to perform a similar review late in the year. BP’s Alaska-specific financials are reported each year in the company’s annual report, which is expected to be published in late March. Elwood Brehmer can be reached at [email protected]

AEDC: recession fading despite ongoing state financial issues

Anchorage is pegged to lose about another 1,000 jobs this year, but the analysts that track the numbers closely believe it could be the last year of a shrinking economy in the city. Anchorage Economic Development Corp. CEO Bill Popp said during the group’s annual forecast luncheon Jan. 31 that the job losses this year will continue to be widespread amongst the various sectors of the city’s economy. However, the workforce reductions are expected to be smaller in almost every industry than what has been endured in the past two years of recession. Losing 1,000 more jobs in 2018 would equate to a 0.7 percent decline in the city’s overall workforce of about 151,000. For context, Anchorage lost about 2,100 jobs last year and more than 2,900 in 2016, the first year of the recession. Popp said the city’s ever-burgeoning health care industry was the outlier in 2017; it added roughly 800 jobs. The transportation sector was flat, aided by a busy Ted Stevens Anchorage International Airport, which was aided by tourists and cargo from a strong Lower 48 economy. “Who lost, last year? Everybody else; that’s the simple way to put it,” Popp commented. But the major job losses seen in 2016 in the linked oil and gas, construction and professional and business services — engineers, architects, lawyers, accountants, administrators and the like — sectors have moderated. In 2016 those three industries shed 3,100 jobs in Anchorage. In 2017 they lost a combined 1,400 workers. Overall, AEDC is projecting the recession will fizzle out sometime late this year or early next. Oil prices have stabilized of late and a batch of prospective developments on the North Slope should help revitalize Alaska’s central industry, which is largely headquartered in Anchorage. Aside from that, the tourism and transportation sectors are expected to remain strong. The job losses haven’t equated to a ballooning unemployment rate, however. Anchorage averaged 5.7 percent unemployment in 2017, which is still near full employment as economists calculate it. And Alaska as a whole was at 6.9 percent, which is the highest in the nation, but close to historical trends. The city is losing jobs but not adding much to unemployment rolls because many without work are packing up and heading south instead of collecting unemployment assistance, according to Popp. “People are leaving town for the Lower 48, some are for better opportunities,” he said. The national unemployment rate, at 4.4 percent, is as low as it’s been in more than a decade. As a result, AEDC expects Anchorage to lose another 1,500 residents this year and end 2018 with a population of 296,000. Anchorage’s population peaked in 2013 with 300,880 residents, according to the state Labor Department. This year, AEDC is predicting the interrelated oil and gas, construction and professional service industries will lose a total of 400 jobs — 200 each from construction and business services with oil and gas hopefully holding flat. Anchorage retailers are expected to shed about 400 jobs this year, the biggest projected loss in the sectors AEDC tracks, but Popp noted that estimate was reached before the January announcements that Sears and Sam’s Club would collectively close three large stores in the city. He added, though, that the Alaska Sears and Sam’s Club closings were part of larger, national trends for the iconic retailers and not wholly a result of Alaska’s economy or reductions to the Permanent Fund Dividend. There simply aren’t numbers to support the theory that cuts to the PFD by Gov. Bill Walker and the Legislature the past two years have translated to massive declines in consumer spending as some like to purport, Popp stressed. “The Permanent Fund (dividend) is an important part of our economy; it adds $600 million to our state’s economy. A lot of that Permanent Fund is spent on paying off bills, going into savings, paying for education; a chunk of it goes to paying for stuff but it is not the driver of our $1 billion-plus retail economy here in Anchorage,” he said, noting past formulaic declines in the PFD amount to not correlate to retail losses. Popp also said he’s hearing rumors that the Sears and Sam’s Club buildings could have new tenants shortly after the stores close — and possible reemployment opportunities for at least some of the workers losing jobs. “In Alaska we still love us some retail,” he quipped. “We like to get out and shop.” The leisure and hospitality industry, despite being buoyed in the summer by record numbers of tourists in recent years, is expected to lose about 200 jobs mostly due to locals’ belt tightening, literally and figuratively, a classic recession symptom. Restaurants are having a hard time drumming up business when tourists aren’t around, according to AEDC. “If you’ve been holding back on going out to eat at one of your favorite restaurants, I’d suggest maybe it’s time to go out and have a meal because we need to support this industry,” Popp encouraged the forecast attendees. On the flipside, the transportation and health care sectors should break the recession trend again, adding 100 and 600 jobs respectively in 2018, AEDC projects. Transportation will continue to benefit from strong economies elsewhere resulting in strong cargo trade and passenger numbers at the airport, while Alaska’s highest-in-the-nation health care costs continue to support growth in the sector. On health care, Popp emphasized that more jobs are always good, but he also said that if the state can manage to get its health care costs under control the industry’s workforce might take a hit in the coming years. Anchorage’s health care sector has added nearly 7,000 jobs since 2006, an increase of more than 40 percent. “As we start to address those (cost) issues it could impact the job base in health care,” Popp said. “So there’s issues we have to balance there as we try to come up with the solutions that are going to be necessary to make this less of a problem for businesses.” Health costs hurt business confidence AEDC found in its annual Anchorage Business Confidence Report that business leaders feel the cost of health insurance is one of the biggest impediments to growing their businesses. An interesting revelation from the business survey was that employers still feel a lack of professional and technical workers is an impediment to growth, even during a recession. It was fourth behind Alaska’s near-omnipresent issue of high energy prices. Popp said the skilled worker shortage is likely attributable to qualified candidates moving to the Lower 48 where jobs are readily available and the cost of living is lower. The biggest issue facing Anchorage businesses, according to the survey, is the state economy, and specifically what lawmakers will or won’t do to try and stabilize it. “Business needs certainty and state government is not giving that to the business community and until businesses can pencil out what their taxes are going to be, no one can say what they’re going to be — the Legislature and the governor can’t seem to come together to an answer — this uncertainty continues to keep money on the sidelines, hence the reason it’s the number one issue,” Popp emphasized. AEDC is one of many business organizations across Alaska that for several years has been advocating for the Legislature to pass a fiscal plan centered on using a portion of the earnings of the Permanent Fund to pay down the state’s ongoing multibillion-dollar annual budget deficits. Despite the challenges, Anchorage business leaders overall have changed their tune from markedly negative in 2017 to “kind of ambivalent” in 2018, as they see more positive economic indicators aside from the state’s issues. GCI co-founder and CEO Ron Duncan reiterated Popp’s sentiment on the state budget in a speech following the economic forecast. He characterized the state’s budget problems and resulting economic hesitance as “purely a self-inflicted problem” because political leaders in both parties have chosen to hold out for what they see as the perfect solution instead of employing the one tool a large majority of lawmakers already feel is necessary to solve the vast majority of the problem — earnings from the Permanent Fund. State economists generally consider the current recession in Alaska has primarily been caused by a sharp retraction in government and a lack of public confidence that the deficits will be resolved soon and for the long-term. “It’s hard to feel comfortable investing more in Alaska until we can see a path to fiscal stability,” Duncan said. “If we start using the earnings in a sustainable way before we drain away all of our savings then we have a chance to restore business confidence.” ^ Elwood Brehmer can be reached at [email protected]

Mallott, Sullivan meet with top Canadians on transboundary issues

Lt. Gov. Byron Mallott and Sen. Dan Sullivan watched Super Bowl LII together in Ottawa and spent time strategizing on their approach to the next day’s meetings. They were there to discuss issues as far-reaching as ocean debris, missile defense and the North American Free Trade Agreement with Canadian federal officials as well as provincial and First Nations leaders, according to Sullivan, but the priority topic brought up in every discussion was that of Canadian mines at the headwaters of rivers that terminate in Alaska. The state officials reviewed the meetings in a Feb. 5 call with Alaska press. From the outset, Sullivan said the fact that Mallott, a longtime Democrat leader in the state, and himself, a staunch conservative, were in lockstep on the transboundary rivers issue sent a “powerful message of unity and that this is a very important issue of concern for the people we represent.” At the heart of the matter are 10 mines in British Columbia that are either in operation or stages of exploration and development. Those mines or mineral prospects are mostly open pit projects focused on copper and gold recovery. The mine locations within the watersheds of the large Taku, Stikine and Unuk rivers that support large salmon fisheries are the primary cause for concern among Southeast Alaska commercial fishing and conservation groups that fear problems at the mines could damage or destroy the rivers’ fisheries. Mallott and Sullivan said they pushed four priorities they are seeking action on from Canadian officials — either at the federal or provincial levels. The Alaskans requested increased transparency in the permitting process for the mines and opportunities for Alaskan stakeholders to provide input when mine plans are being reviewed. They also asked for additional financial assurances or bonding requirements for the mine operating companies to protect Alaska fishing and tourism businesses that rely on robust fisheries in the rivers “if, God forbid, we had a Mt. Polley-type disaster that went into our waters,” Sullivan described. The 2014 Mt. Polley mine tailings dam breach spilled more than 6 billion gallons of wastewater into the upper Fraser River system in British Columbia. Mt. Polley mine operator Vancouver-based Imperial Metals Corp. opened the Red Chris copper-gold mine in the upper Stikine River watershed in 2015. Sullivan added that they also asked the Canadian government to join in funding baseline water quality studies and ongoing monitoring to track if the mines are impacting the rivers, a program which Congress started funding last year. Lastly, they insisted on immediate reclamation of the Tulsequah Chief mine that has been leaching acid rock drainage into the Taku River near Juneau since the mine was abandoned in 1957. A temporary water treatment plant was built in 2011 to deal with the leaching but it was quickly shut down in 2012, according to the Alaska Department of Natural Resources. Chieftain Metals Corp. is now proposing an underground mine at the Tulsequah site that is about 10 miles upriver from the Alaska border. The project received regulatory approval from British Columbia in 2012 but is awaiting financing. Sullivan said he thought the meetings were constructive but the transboundary issue is far from solved. “We put forward some specific requests and we’re going to press on those,” he said Feb. 5. “I think they’re legitimate requests; I think they’re reasonable requests but they’re requests for specific actions and we certainly hope our Canadian friends will work with us to follow up on it.” Mallott said the talks furthered the progress made by the Walker administration on the issue. In 2015, Gov. Bill Walker and British Columbia Premier Christy Clark signed a memorandum of understanding to promote economic development in concert with environmental protection. That led to a statement of cooperation signed by Mallott and British Columbia Environment and Mines ministers in Oct. 2016, which established a working group of state and provincial officials to discuss transboundary issues. Mallott said the meetings were important because the sides were able to discuss important policies that are outside of the nonbinding statement of cooperation. A possible referral of the issue to the International Joint Commission — strongly advocated for by Alaska Native and conservation groups — was not discussed in detail during the meetings but will be part of talks between the governments in the spring, according to Mallott. “The process involved for an IJC referral will continue to be discussed by the (federal) governments and we have asked them to do so,” he said. The International Joint Commission consists of five commissioners, two from Canada and three from the U.S., who review transboundary watershed issues. It was established after the 1909 Boundary Water Treaty, which at the time settled a battle between Montana and Alberta farmers who had dug competing canals to divert water from area rivers to their farms. According to its website, the commission has since settled more than 100 matters raised by the governments. An arbiter body, IJC can only get involved when called upon by both governments. In the U.S., the State Department makes that call. In November, Walker, Mallott and three members of the Alaska congressional delegation sent a joint letter to Secretary of State Rex Tillerson, urging him to help protect Alaska’s economic interests of fishing and tourism in Southeast by raising the transboundary mine issue in talks with his Canadian counterparts. Charles Faulkner, of the State Department’s Bureau of Legislative Affairs, responded with a letter Dec. 14, writing that the State Department and the Environmental Protection Agency have established a workgroup to coordinate actions and communicate concerns to Canadian officials. State Department officials in October also got a commitment from Global Affairs Canada to take up a bilateral review of potential gaps or shortcomings in cooperative agreements between the countries that deal with transboundary issues. “The Department of State will lead this review process with interagency and stakeholder input, with the goal of sharing its findings with Global Affairs Canada at the April 2018 IJC meetings,” Faulkner wrote. “We value your assistance and input in this effort. As Canadian support would be required for a joint IJC reference, we will continue to raise this issue in upcoming bilateral meetings.” The issue of mines in British Columbia potentially impacting fisheries in Alaska waters has been one Alaska officials have tried to tread lightly on despite calls for a much tougher stance by some Southeast groups. That’s because, for one, they do not want to strain what has historically been a strong relationship with British Columbia and Canada in general, as well as the facts that the state has little actual leverage in addition to a long history if mining and support for the industry. To the latter point, Sullivan said he emphasized that Alaska supports resource development in the meetings, but he believes the state has valid concerns given what could happen downriver from the mines. He and Mallott also said the issue of oil exploration in the Arctic National Wildlife Refuge coastal plain — one Canadian Embassy officials actively lobbied against in Congress during the tax reform debate — came up in the transboundary river meetings. Sullivan described it as “probably one of the more contentious issues of our meetings.” “There was a bit of an analogy between the Porcupine caribou herd and transboundary mining and I, at least in my response, said I rejected that completely,” Sullivan recalled. Canadian officials have opposed oil development in ANWR for the fear that it would impact the calving grounds of the caribou herd that migrates into the Yukon Territory and is relied on by there by First Nations people as it is by some Alaska Natives. In a December interview with the Journal, Sullivan contended that the only reason Canada opposes development in ANWR is because the country didn’t find any oil on its side of the border when exploratory drilling was done in the Yukon Arctic decades ago. In that interview, Sullivan said he told the Canadian ambassador to the U.S. to “stand down” or he was going to “do everything I can to screw your country.” The delegation in an October letter to the Canadian ambassador to the U.S. said British Columbia to that point had done “remarkably little” to consider their transboundary concerns and pointed to the Mt. Polley and the Tulsequah Chief mine as demonstrable indicators that “Canadian mining is not always carried out to the same safety standards as in the U.S.” Mallott said the state will follow through with consultation that is required under a 1987 treaty with Canada meant to ensure a healthy Porcupine caribou herd. The state is also working to develop an accord with the Yukon Territory to address climate change and economic development matters, according to Mallott. “We were very clear to say we’re supportive of the exploration that is now authorized in the 1002 area of ANWR but that we also wanted to work closely with particularly the indigenous people on both sides of the border as we proceed ahead,” Mallott said. Elwood Brehmer can be reached at [email protected]

Permanent Fund value hits $64B at fiscal year midpoint

It was a good news-bad news kind of day for Alaska Permanent Fund managers. While the Alaska Permanent Fund Corp. reported strong returns of 8.45 percent and a total Fund value of $64 billion in the first half of the 2018 fiscal year on Monday, domestic markets were also down sharply for the second consecutive trading day. The Dow Jones Industrial Average closed Monday at 24,345, down more than 7 percent from the start of Friday trading. However, from July 1, 2017, to Jan. 1 the public equities portion of the Fund’s investments produced an 11.9 percent return and outperformed the corporation’s investment benchmark. Roughly $28 billion, or 44 percent of the Fund’s total assets are allocated to public equities, according to the latest APFC financial report. The $64 billion highlighted in the report was comprised of $48.7 billion in the principal portion of the Fund and $15.3 billion in the Earnings Reserve income account. CEO Angela Rodell said in a release that she was particularly “pleased to see the quality and diversity of the portfolio’s investment returns across all asset classes. Double-digit performance returns have been achieved not only in public equities, but in APFC’s private equity and infrastructure holdings as well.” The private equity investments totaling $7.6 billion generated 13.9 percent returns in the first six months of fiscal 2018. Infrastructure and private credit allocations of $3.5 billion netted a 12.4 percent return for the period. Fixed income investments totaling $13.6 billion as of Dec. 31 generated a 2.6 percent return, the smallest performance return among the Fund’s major asset classes, according to the performance report. Overall, the 8.45 percent six-month return surpassed the corporation’s blended performance benchmark by nearly 1.3 percent and outperformed the APFC Board of Trustees return objective of inflation plus 5 percent by 3.1 percent. As of Friday, the Permanent Fund had an unaudited value of $65.2 billion. The Permanent Fund has more than doubled in overall asset value since ending the 2009 fiscal year at $29.9 billion following the market crash that spurred the Great Recession in the Lower 48. The Permanent Fund principal is protected from being spent by the amendment to the Alaska Constitution that established the Fund. Spending from the Earnings Reserve, however, requires a simple majority vote from both bodies of the state Legislature. To date, the only spending from the Earnings Reserve has been to pay out annual Permanent Fund dividends to residents based on a percentage of the Fund’s previous five-year performance. Gov. Bill Walker and House and Senate leaders have pushed to implement a percent of market value, or POMV, appropriation structure from the Earnings Reserve to pay down up to nearly $2 billion of the state’s ongoing budget deficits in excess of $2.5 billion. While the House and Senate both passed similar versions of the governor’s POMV legislation last session with annual draws in the 5 percent range, contingencies linked to the bill on how the Democrat-led House and Republican-led Senate want to close the rest of the budget gap have stalled reconciliation to this point. Both versions of the legislation would use a portion of the POMV draw to continue paying dividends, but likely at a reduced rate from the current formula. The APFC board of trustees has long supported a sustainable POMV draw to provide stability for the Fund and its managers. With the state’s traditional savings accounts dwindling, legislators will very likely be forced to pull from the Earnings Reserve— via a POMV or a dreaded ad-hoc appropriation — within the next two state budget cycles. Elwood Brehmer can be reached at [email protected]

CP rebounds, buys Anadarko Slope interests for $400M

ConocoPhillips reported its largest quarterly earnings in more than three years Feb. 1 when the company announced a profit of nearly $1.6 billion for the fourth quarter of 2017. In Alaska, ConocoPhillips reported adjusted earnings of $283 million for the quarter and $652 million total for 2017. It also purchased all of Anadarko Petroleum Corp.’s North Slope assets for $400 million. The companies have been joint bidders, with Anadarko in a minority position, on significant lease tracts in the eastern NPR-A and western state Slope leases in the past few years. Many of those areas are not currently unitized. Also on Feb. 1, Andeavor, formerly Tesoro Corp., announced it has agreed to purchase the Kenai LNG plant and marine terminal from ConocoPhillips for an undisclosed amount. ConocoPhillips had been publicly shopping the aging facility since November 2016 and in July said it was taking steps to mothball the facilities. The plant has not exported LNG since 2015, primarily because of global market conditions. ConocoPhillips’ adjusted earnings companywide were $540 million for the quarter, according to the balance sheet. Company executives attributed the roughly $1 billion boost from its adjusted earnings to its overall profitability for the quarter primarily to benefits from the corporate tax reform legislation passed in December and an arbitration settlement in Ecuador. ConocoPhillips was able to recalculate its deferred federal corporate tax obligation at the new, lower 21 percent tax rate compared to the previous 35 percent corporate rate, resulting in $900 million of benefits, a company release states. Regardless, the fourth quarter of 2017 was by far the best quarter ConocoPhillips has had since oil prices began falling in the third quarter of 2014, when it netted $2.7 billion. For the full-year 2017, ConocoPhillips still reported a loss of $855 million, compared to a $3.6 billion loss in 2016. In 2017, its average realized price was $39.09 per barrel of oil equivalent, which includes the price of natural gas, compared with $28.35 per barrel equivalent in 2016. “2017 was a very successful year by all measures,” CEO Ryan Lance said Feb. 1. “We accelerated our disciplined, returns-focused value proposition and delivered on our strategic priorities. We transformed our portfolio, strengthened our balance sheet, returned 61 percent cash flow from operations to shareholders through our dividend and (stock) buyback program, and achieved our operational milestones, including 200 percent organic reserve replacement.” ConocoPhillips paid down $7.9 billion of debt in 2017 to bring its year-end debt to $19.7 billion. This year, the company has already paid down another $2.25 billion of debt, according to Lance. The $1.6 billion in quarterly earnings was on the back of $8.7 billion in total revenues, compared to $7.2 billion in the last months of 2016. For the year, ConocoPhillips generated $32.5 billion in revenue versus $24.3 billion in 2016. The company’s Alaska production was up an average of 4,000 barrels of oil per day in 2017 to 167,000 barrels per day, according to the financial report. ConocoPhillips operates the large Kuparuk and Alpine oil fields and holds a 36 percent stake in Prudhoe Bay. In November, the company began producing from its 1H NEWS (Northeast West Sak) viscous oil project in the Kuparuk field, which has an expected peak production rate of 8,000 barrels per day. It also recently brought additional wells online at its CD-5 development in the Alpine field, which started producing in late 2015 and has significantly exceeded production expectations. Originally expected to produce up to 16,000 barrels per day, CD-5 is currently producing roughly 37,000 barrels per day with the new wells, according to ConocoPhillips. Anadarko buyout Anadarko is a silent partner in much of ConocoPhillips’ work on the North Slope, but much of that partnership appears to be coming to an end. The deal, subject to regulatory approval, has an effective date of Oct. 1, 2017, according to ConocoPhillips. It includes the Alpine oil field assets that produced an average of 63,000 barrels of oil per day in 2017, in which Anadarko holds a 22.45 percent stake, according to the state Division of Oil and Gas. Conoco also reported the deal will give it a 100 percent interest in approximately 1.2 million acres of exploration and development areas; that includes the Willow prospect in the National Petroleum Reserve-Alaska, which the company estimates could produce up to 100,000 barrels of oil per day if fully developed. According to Oil and Gas, Anadarko has a 22 percent stake in the Greater Mooses Tooth Unit in the NPR-A — the site of Willow and the two Greater Mooses Tooth oil projects — and a 24.62 percent interest in the adjacent Bear Tooth Unit, also in the NPR-A. Elwood Brehmer can be reached at [email protected]

Alaska Air Group nets $1B in ’17 as Virgin integration continues

Alaska Air Group Inc. reported profits of just more than $1 billion in 2017 after its first full year owning Virgin America, but is still managing challenges associated with its purchase of the former competitor. The Seattle-based parent company of Alaska Airlines also posted a $367 million profit for the fourth quarter of 2017, which compared to $814 million full-year 2016 and $114 fourth quarter 2016 profits. Alaska Air Group executives announced the quarterly and year-end results in a Jan. 25 conference call with investors. The income came on the back of $7.9 billion in operating revenue for the year, up 34 percent from 2016, and $1.9 billion in revenue for the fourth quarter, a 29 percent increase year-over-year. The profits translated into $118 million in annual performance bonuses, which were paid out Jan. 26 to Air Group’s 23,000 employees. “This is the ninth consecutive year in which we’ve proudly shared profits with our employees at levels that have averaged about one month of additional pay,” CEO Brad Tilden said. “This year’s payout averages 7.3 percent of pay for Air Group frontline employees.” Alaska Air Group stock stayed mostly flat after the earnings call, ending Jan. 25 trading at $62.07 per share. It peaked in early March 2017 at nearly $100 per share. The company repurchased $75 million of stock in 2017 and also announced an increase to its quarterly dividend to 32 cents per share Jan. 25. It’s the fifth time the dividend has been increased since it was started in 2013. While the airline company’s revenue expectedly grew after acquiring Virgin America in the $4 billion deal that closed Dec. 14, 2016, integrating Virgin into Alaska Airlines has not come without significant costs as well. According to a chart provided by Air Group that blends its premerger 2016 numbers with those of Virgin America for comparison against the 2017 financials, operating revenues were up 6 percent in 2017, but pretax income was down 21 percent from the blended 2016 figures at $1.3 billion. Higher oil prices caused fuel costs to rise $323 million, or 29 percent, but other non-fuel operating expenses were also up $426 million, or 9 percent. Tilden said the company’s earnings are under pressure from step function cost increases along with competitors adding capacity in Alaska’s markets — primarily Delta Air Lines out of Seattle. However, he noted that while Air Group has incurred most all of the costs associated with the extremely complex task of integrating working airlines, it is just starting to see the benefits. “Of the $300 million original synergy target, we expect to realize $65 million in 2018, consistent with our prior forecast. We continue to believe the revenue potential of the new Alaska network is substantial, and we expect synergies to reach $200 million in 2019,” Tilden said. “More important than the synergies, however, is the incredible platform that we’ll have to grow revenue and profit in the years ahead and create value for our owners, our customers and our employees, just as we have in the last couple decades.” Alaska Air Group plans to move to a single passenger service system on April 25, which will blend the Virgin America shopping, flight scheduling and airport check-in systems with Alaska Airlines, according to Tilden. The company received a single operating certificate for Virgin and Alaska from the Federal Aviation Administration Jan. 11. Tilden also noted that the airlines’ operations had been co-located at 22 of the 31 airports needing consolidation and the rest of that would be done in April. “We’ve made all aircraft delivery and interior decisions, and our first Airbus airplane came out of the paint shop yesterday with new Alaska colors,” Tilden added Jan. 25. Alaska Airlines for years had flown only Boeing 737s, of which it has 154, but it is now also flying 67 Airbus A320s, which company leaders have said it will continue to fly at least through 2021 when some of the Airbus leases begin expiring. On the financial front, the company lowered its debt-to-capitalization ratio from 59 percent to 51 percent during 2017. Chief Financial Officer Brandon Pedersen said the company is committed to having a debt-to-cap ratio in the mid-40 percent range by 2020, noting it is well-positioned if interest rates continue to rise because half of the company’s debt is fixed. Alaska Air Group’s debt-to-cap was down to 27 percent at the end of 2015 shortly before buying Virgin America. The company ended 2017 with $1.6 billion in cash after generating $1.7 billion in operating cash flow and spending roughly $1 billion on capital projects, which left Air Group with $670 million in free cash flow, minus integration costs, according to Pedersen. Operationally, Tilden said the company is focused on continuing on-time performance improvements made in the fourth quarter. Alaska Airlines had long been the top domestic carrier in on-time performance, the fundamental operational metric. However — even including Virgin America’s 2016 on-time figures for comparison’s sake — Alaska’s on-time performance fell from 87.3 percent in 2016 to 82.6 percent last year. As Tilden mentioned, there was significant year-over-year improvement in the fourth quarter, with 83.4 percent of Alaska flights arriving on time compared to just 76.1 percent in the latter portion of 2016. For Virgin America, the trends were similar but the numbers were worse. Overall, just 70 percent of Virgin flights arrived on time in 2017, but the airline managed an improvement to 82.5 percent in the fourth quarter. Finally, Air Group has reached joint collective bargaining agreements with Alaska and Virgin pilots and customer service agents and Tilden said management believes it is close to similar agreements with the flight attendant and maintenance technician unions. In early January the Seattle Times published a lengthy story detailing employee discontent at Alaska Airlines due to cost-cutting and merger-related actions. Elwood Brehmer can be reached at [email protected]

Oil tax bill gets chilly reception from industry

State Revenue Department officials say the oil production tax increase being debated in the House would not change bottom lines much at current market prices but company leaders stress it would further cement Alaska’s poor reputation in the oil and financial sectors. Tax Division Director Ken Alper testified to the House Resources Committee Jan. 26 that the proposal to raise the minimum gross production tax from 4 percent to 7 percent would increase the state’s tax take by 54 cents per barrel at oil prices of $70 per barrel. According to the state Revenue Department, Alaska North Slope crude sold for $70.57 per barrel when markets closed Jan. 29. That 54 cents per barrel extrapolates out to an additional $91 million per year to the state per year at current prices and production rates. Alper said the state can be expected to receive about $400 million in oil production taxes at $70 oil and again current production rates forecast for about 533,000 barrels per day. House Bill 288, the vehicle for the tax proposal sponsored by House Resources co-chair Rep. Geran Tarr, D-Anchorage, would become revenue-neutral at $72 per barrel, Alper projected, because that is the price at which the progressive net profits tax calculation would generate more revenue for the state than the gross minimum tax and by law automatically kick in. However, HB 288 would amount to an annual collective tax increase of $205 million to $256 million at average prices between $50 and $60 per barrel — where the delta between the current 4 percent and proposed 7 percent minimum tax would be realized. Alaska’s oil price-linked production tax is structured to act as a progressive net profits tax at higher market prices and as a gross tax that ensures the state makes some revenue at lower prices. Whichever calculation between the net profits calculation, with the per barrel credit that grows at low prices, and the simpler 4 percent gross tax is the one the state applies to tax North Slope oil. Currently, that “crossover” price, where the applied tax switches from the gross to the net tax calculation, is just less than $70 per barrel, according to Alper. The crossover price has been falling in recent years as companies have cut costs to stay in business while prices have been mostly less than $70 since late 2014. In fiscal year 2015, North Slope operators deducted on average $43.60 in lease expenditures per barrel from the net taxable value of their produced oil, according to the Revenue Department. Today, those lease expenditures have fallen to about $25 per barrel, Revenue estimates. “There has been more efficiency in the industry and that has made them money but that has also made us money because it lowers the breakeven price of a barrel of oil,” Alper said. Anchorage Republican Rep. Chris Birch said the Legislature should be focused on doing what it can to spur more industry spending and oil production because the state also gets at least 12.5 percent of all North Slope oil through its royalty share, which, particularly during periods of lower prices, makes the lion’s share of petroleum revenue. “The tax against the net is certainly worthy of discussion here but I think we need to not lose focus on the fact that anything we can do to encourage investment and production is going to have a much larger and significant impact on our state revenues,” Birch said during the Jan. 26 meeting. Industry representatives testifying Jan. 29 before the Resources Committee stressed the fact that HB 288 could be Alaska’s eighth oil tax change in the 12 years since it switched from a gross to a net profits-based system in 2006. Benjamin Johnson, CEO of BlueCrest Energy, a small company developing the Cosmopolitan oil field in Cook Inlet, said despite the fact that his company would not be directly impacted by HB 288, “the stability of Alaska’s taxing regime affects all companies.” Cook Inlet oil is taxed at a flat $1 per barrel, and HB 288 applies only to North Slope production. “We have to create an environment of confidence with global capital markets. So far Alaska has unfortunately gained the reputation of trying to squeeze the oil industry in any way it can,” Johnson added. “For the long-term good of Alaska I urge you not to support HB 288.” While Alaska’s constant oil tax debates and not keeping up with expected refundable oil and gas tax credit changes has left a black mark on the state in the eyes of oil financiers, Tarr emphasized HB 288 is largely a means to start closing the state’s $2.5 billion-plus deficits absent another compromise from the Republican-controlled Senate. Senate Republicans shot down a House-passed income tax last year. Senate President Pete Kelly, R-Fairbanks, said before this session that any other broad-based tax proposals would be met with “mocking laughter” and summarily dismissed in favor of further budget cuts. House Speaker Bryce Edgmon, D-Dillingham, has said his caucus won’t push for an income tax this year but hasn’t ruled out other revenue measures. On the other hand, state business leaders in sectors other than oil have pushed for the state to resolve its four years of large deficits in some manner to bring stability to local economies that have been in limbo as legislators tussle over what government services to cut and who should be taxed. HB 288 is an alternative to otherwise fruitlessly pushing for a deal with the Senate on individual taxes, according to Tarr. ConocoPhillips Alaska Vice President Scott Jepsen told the committee that despite the cuts made to the oil and gas tax credit program over the past two years the key provisions of the tax structure that took effect in 2014 with Senate Bill 21 — a change industry by and large supported — remain in place. “I can tell you from our company, that (keeping SB 21 in place) has helped when it comes to our investment decisions,” Jepsen said. He indicated that while those in favor of raising taxes on the industry often note royalty and production tax rates are higher in many oil states across the Lower 48, oil in those basins requires drastically less money to produce and because companies factor all economic elements into investment decisions meaning Alaska needs to have lower taxes to stay competitive. “I like to say the center of gravity for oil and gas investment right now is in the Lower 48 and particularly in Texas,” Jepsen said. He continued to say, “No surprise, we would recommend this committee not pass this bill and try to keep the competitive environment that we still have in place here in Alaska.” ^ Elwood Brehmer can be reached at [email protected]

EPA’s unexpected decision welcomed by Pebble opponents

Environmental Protection Agency Administrator Scott Pruitt’s unexpected Jan. 26 comments expressing his environmental concerns about the Pebble mine were welcomed by mine opponents and reflected in the stock price of Northern Dynasty Minerals Ltd., which is the sole owner of the prospective copper and gold project. Pruitt announced Jan. 26 that the EPA would not finalize the proposed withdrawal of the 2014 proposed determination to prohibit a large mine in the Bristol Bay region through its Clean Water Act Section 404(c) authority. The agency said in a statement that it has “serious concerns” about the impacts of mining activity in the Bristol Bay watershed and public comments in stakeholder meetings stressed the importance of the world’s largest wild salmon fishery. Pruitt said it would be disingenuous for the agency to not to offer an environmental position at this stage of the project. Vancouver-based Northern Dynasty’s stock opened trading on domestic markets down 19 percent Jan. 29 from its closing price of $1.52 per share Jan. 26. The EPA’s statement on the project was issued after East Coast markets had closed that day. Northern Dynasty’s stock price stabilized at about $1.18 per share, or down about 22 percent after several hours of trading Jan. 29. Northern Dynasty is also traded on the Toronto Stock Exchange. Pebble Limited Partnership filed its wetlands fill permit application with the U.S. Army Corps of Engineers Dec. 22. The application outlines plans to fill 3,190 acres of wetlands at the mine site. While not specific to any mine plan — a point Pebble and parent company Northern Dynasty minerals have stressed — the Bristol Bay Watershed assessment published by EPA in 2014 concludes a mine that would fill more than about 1,100 acres would be too damaging to fish habitat to allow. Pruitt emphasized in his statement that his decision “neither deters nor derails” the Pebble environmental permit application process now underway while at the same time he has heard from stakeholders on whether to withdraw the proposed 404(c) restrictions. “Based on that review, it is my judgment at this time that any mining projects in the region likely pose a risk to the abundant natural resources that exist there,” Pruitt said Friday. “Until we know the full extent of that risk, those natural resources and world-class fisheries deserve the utmost protection. Today’s action allows the EPA to get the information needed to determine what specific impacts the proposed mining project will have on those critical resources.” According to the Federal Register docket, just more than 1 million public comments have been submitted to the EPA on the proposal to withdraw the proposed 404(c) restriction, but it is currently unclear how many favor or oppose the action. With that in mind, Bristol Bay-area Native groups, lawmakers and fishing organizations considered Pruitt’s position — largely surprising given the Trump administration’s push to promote mining and infrastructure projects — a step in the right direction. United Tribes of Bristol Bay Executive Director Alannah Hurley said the group is happy Pruitt left the proposed veto “on the table,” but it will be several years before the EPA could invoke it under the terms of a May 2017 settlement of a lawsuit filed by the Pebble Partnership. Pebble sued the agency in 2014 alleging the EPA was biased in its proposed action after improperly colluding with anti-Pebble groups to reach its conclusion. A federal judge issued an injunction in late 2014 that stopped the EPA from finalizing the proposed restrictions against mining in the Bristol Bay watershed; settlement talks between the EPA and Pebble started late in the Obama administration and were ultimately concluded under Trump’s. Pebble CEO Tom Collier highlighted in the company’s response that the agreement the EPA reached with Pebble last year gives the company the assurance it can go through the federal permitting process without the worry of the agency finalizing the proposed preemptive prohibition on Pebble. “The (Corps of Engineers) has determined we have a complete application and has initiated a thorough, objective review of the Pebble project,” Collier said. “We intend to participate fully in the process and encourage al project stakeholders to do the same. “We believe we can demonstrate that we can responsibly construct and operate a mine at the Pebble deposit that meets Alaska’s high environmental standards. We will also demonstrate that we can successfully operate a mine without compromising the fish and water resources around the project. We look forward to having all of our detailed information fairly reviewed by the Corps of Engineers and other participating regulatory agencies through the longstanding, lawful permitting process.” Specifically, the EPA-Pebble settlement called for the agency to start the process of withdrawing the proposed mining restriction, which it did in July, but it does not require that process be finalized and because it is a proposal to remove a proposal with nothing final, Pruitt’s action set a tone but did not change anything formally. The settlement also does not allow for the EPA to resume restricting the development until a final environmental impact statement is published for the project or four years after the May 2017 settlement, whichever comes first. UTBB President Robert Heyano said Pruitt’s decision shows the power of a unified local voice even in times of highly partisan politics. “The United Tribes of Bristol Bay would like thank EPA Administrator Scott Pruitt, (Region 10) Administrator Chris Hladick and the staff at EPA for their work. The fight to protect our watershed from Pebble is far from finished. But today’s decision, and all those who worked tirelessly to get us here, will be celebrated,” Heyano said. Hladick, a former city manager of Dillingham, where the project is widely opposed, transitioned from heading the Commerce Department in Gov. Bill Walker’s administration to leading the Alaska-Pacific Northwest region of the EPA in December. Walker said told the Journal while campaigning in 2014 that he opposed development of Pebble but also was worried about the precedent the EPA’s preemptive push to prevent the mine could have on other development projects in the state. The governor told Alaska Public Media in October that he had not been convinced Pebble should move forward and the company had a high bar to clear to had taken appropriate steps to prevent potential damage to the fish and wildlife habitat — a stance Pebble deemed appropriate at that time. “I have spoken to Administrator Pruitt about the Pebble Mine Project many times in the past year, and I have shared with him my belief that in the Bristol Bay region we should prioritize the resource that has sustained generations and must continue to do so in perpetuity. I thank the Environmental Protection Agency and the Trump administration for listening to my input, as well as the input of thousands of Alaskans who oppose rescinding the EPA’s Bristol Bay (restrictions),” Walker said Jan. 26. California treasurer weighs in Meanwhile, California Treasurer John Chiang sent a letter Jan. 29 to leaders of First Quantum Minerals Ltd. urging them to stay out of the Pebble project. Chiang is also a trustee to the California Public Employees’ Retirement and California State Teachers’ Retirement systems. He wrote that the California pension funds believe sustainable business practices are fundamentally important to long-term value growth for sharheolders and therefore, First Quantum, a Canadian mining firm investigating whether or not to invest in Pebble, should not. “As a fiduciary of these funds, I cannot ignore the far-reaching economic implications and sustainability risks at play here,” Chiang wrote to First Quantum CEO Philip Pascall and President Clive Newall. “In my view, investment in the Pebble project presents undue risk not only to the long-term sustainability to the Bristol Bay region, but also to the value of our long-term investments in First Quantum Minerals, Ltd.” CalPERs, with a total market value of $362 billion, holds nearly 4.3 million shares of First Quantum as well as bonds in the mining company with a maturity value of $2.3 million, the fund’s latest annual report states. There are more than 689 million outstanding shares of First Quantum stock, according to the company’s 2017 annual report. First Quantum and Northern Dynasty announced a framework investment agreement Dec. 18 under which the former could invest up to $1.35 billion in Pebble to buy a 50 percent interest in Pebble Limited Partnership, the project operating company. First Quantum made an initial $37.5 million option payment to Northern Dynasty to support permitting costs shortly after the deal outline was announced, according to Northern Dynasty officials. The company is expected to make a decision on the overall agreement in the second quarter of this year. Chiang noted that he and then-City of New York Comptroller John Liu in 2013 expressed their concerns about Pebble to Northern Dynasty’s then-partner Rio Tinto, a mining major, and Rio Tinto divested its share of Pebble in April 2014. Northern Dynasty has said it will need a large investment partner to help fund mine permitting and development. Elwood Brehmer can be reached at [email protected]

Slope well review reveals no issues beyond those flagged by BP

An emergency engineering review of all North Slope wells ordered last October by state regulators did not reveal any significant issues but a regulation change is still likely. The Alaska Oil and Gas Conservation Commission issued the emergency directive to North Slope production and exploration companies Oct. 30 after it was determined a BP well at Prudhoe Bay Drill Site 2 that failed and sprayed about 100 gallons of oil last April did so largely due to its outer surface casing being set in the permafrost — and the permafrost thawing and subsiding. The commission, which regulates all of the highly technical subsurface oil and gas activities in the state, ordered all wells found to have similar construction to be shut in by Dec. 31. BP had previously plugged five producing wells at Prudhoe after its own review spurred by the April leak, according to a company spokeswoman. The hot fluids produced from a well can melt the surrounding permafrost, causing the thawed water to drain away and leading the ground to sink. That gradually puts the outer well casing under a compression load, which combined with other pressure and temperature affects, can cause the casing to fail, according to BP’s report to the commission on the well failure. AOGCC Commissioner Cathy Foerster said in a brief interview that every operator did the evaluation and reported back to the commission, which found there are no other wells with construction characteristics mirroring the failed well other than those previously reported and shut in by BP. ConocoPhillips, operator of the large Kuparuk and Alpine oil fields, has a handful of wells with casings set in the permafrost, but other elements of construction necessary for the failure to occur aren’t present in those wells, according to Foerster. According to AOGCC records, there are more than 3,700 wells on the Slope, of which, nearly 1,600 are active production wells. The rest are injection, disposal or idle production wells. Despite the good news from the well review, the commission is proposing a regulation change that would require the surface casings of all future wells to be set below the bottom of the permafrost to prevent history from repeating itself. “Just to make sure that after this set of commissioners and engineers are gone in the future it can’t happen again we’re going to prohibit setting that casing string in the permafrost,” Foerster said. No one showed up to testify at a Jan. 4 public hearing to discuss the regulation change. “Usually what we do is pretty boring and this is just another example of that,” Foerster added. Elwood Brehmer can be reached at [email protected]

Alyeska, Prince William Sound council clash over tug training

Alyeska Pipeline Service Co. is at odds with the advisory group that monitors oil tanker activities in Prince William Sound over how far Alyeska’s tugboat operators should have to go to demonstrate they can operate safely in poor weather and wave conditions. The Prince William Sound Regional Citizens’ Advisory Council board unanimously passed a resolution Jan. 18 insisting that oil tankers and their tug escorts should not be allowed to operate in the Sound if weather conditions deteriorate beyond what has been deemed safe for training. “If it is unsafe to train personnel, it is unsafe to transport oil. This position does not just apply to the incoming contractor, but sets the standard to which the council feels all future new contractors, equipment and crews should be held,” Advisory Council board President Amanda Bauer said. “We believe strongly that these standards are needed to ensure the economic and environmental safety of the communities and groups we represent.” The incoming contractor Bauer referenced is Edison Chouest Offshore, which Alyeska announced in June 2016 would be taking over tanker escort and spill response duties for Crowley Marine Services in July 2018 with a new fleet of tugs and spill response barges. Crowley has provided tanker docking services in Valdez since the startup of the Trans-Alaska Pipeline System in 1977. It added the Prince William Sound tanker escort and spill response to its work when those duties were first mandated in 1990, a year after the Exxon Valdez oil spill. Alyeska Pipeline Service Co. is owned by the “big three” North Slope producers BP, ConocoPhillips and ExxonMobil. It manages TAPS operations and oversees the associated oil tanker activities in Prince William Sound. The Prince William Sound Regional Citizens’ Advisory Council was formed after Congress passed the Oil Pollution Act in 1990 in response to the Exxon Valdez spill. The legislation mandated the groups be established for Prince William Sound and Cook Inlet. While the advisory bodies made up of technical experts and community representatives from their regions do not have enforcement authority, they are generally well respected for taking informed positions. The resolution specifies that the advisory council believes “it is unsafe to require crews to respond to a vessel emergency in Prince William Sound during adverse weather with inadequate or no training or experience in these conditions, and that new crews must receive training and experience in the full range of operating conditions in which they are expected to perform.” It continues to assert that it is reasonable and prudent to limit loaded tanker traffic through the Sound to the range of conditions in which the escort vessels and crews have been trained. Alyeska responded with a formal statement that it shares the advisory council’s commitment to protecting the environment, which it demonstrates each day in often challenging conditions, but the company strongly disagrees with requiring demonstrations in potentially dangerous and uncontrolled conditions. “It is entirely inconsistent with a strong safety and risk management culture and not an accepted or proven training method for operational proficiency,” Alyeska stated. “There are many ways to demonstrate the competency and proficiency of crews and vessels that don’t create the level of risk to human life and the environment that the RCAC is promoting.” Alyeska further insisted it is hiring an experienced contractor with state-of-the-art vessels and training that will meet or exceed “current requirements for safe operations as well as the very high standards we set for ourselves.” Alyeska spokeswoman Michelle Egan compared it to firefighters no longer setting fire to derelict buildings with limited safety parameters for live training events. Loaded oil tankers are tethered to tugs as they leave the Alyeska oil terminal port and are then released but still escorted until they clear Hinchinbrook Island and hit the open Gulf of Alaska. Inbound, empty tankers are not escorted to the port unless an escort or other assistance is requested by the ship’s crew, according to Egan. If an emergency occurs, the tugs could come alongside the tanker and re-tether to it to either take it under tow or stop it, Egan said. It is specifically practicing those emergency situations in bad weather with a loaded tanker that Alyeska objects to. “That’s where the real danger and risk occurs and it’s not a part of normal operations,” she said in an interview. “To do that part of it in those closure conditions, we do not. It’s showing that you can handle the emergency under those conditions that we think is too risky.” Advisory council Executive Director Donna Schantz said in a formal statement that the council agrees with Alyeska and the regulating agencies that crew safety is the first priority, but that doesn’t preclude additional training. “We believe that drills and exercises, including in adverse weather, are controlled events, as they can be stopped at any time that the risk to crews or vessels becomes unacceptably high,” Schantz said. Alyeska Ship Escort/Response Vessel Systems, or SERVS, manager Mike Day told the council in September during an update report on the transition to Edison that he hoped the new tugs and crew would encounter some adverse weather in their training exercises, but said the training had to be scheduled well in advance for logistical reasons and specific wind and waves conditions would not be sought out. The advisory council noted in a white paper accompanying the resolution that Crowley has completed exercises in waves up to 15 feet with 35-knot winds. The Alaska Department of Environmental Conservation and the U.S. Coast Guard allow loaded tankers to operate in conditions up to 45-knot winds and 15-foot seas, according to the council, citing the tanker operational and escort response plans submitted to the agencies. DEC Central Region Manager Geoff Merrell wrote in a Dec. 12 letter to the Prince WIlliam Sound Response Planning Group that the new tugs will be expected to stop and control a fully laden 193,000-ton deadweight tanker in nine-foot seas and 40-knot winds, based on performance criteria in the existing operating plans, or closure conditions at Cape Hinchinbrook. Merrell wrote that the department acknowledges tankers are rarely loaded that full, however. “The department also understands that the scheduling of demonstration exercises combining both a fully laden tanker and inclement weather conditions may prove impossible during the transition timeline,” he wrote further. “The department remains open to the discussion of alternative demonstrations, surrogate ships or other options, but, ultimately, will require the satisfactory demonstration of system performance before a fully laden 193,000 (deadweight tons) tanker will be allowed to depart the Valdez marine terminal and transit Prince William Sound.” The advisory council also contends it has evidence indicating the buoy used by the National Weather Service to measure Gale Warnings, which equate to closure conditions, is somewhat protected from what can be worse wind and wave conditions at the adjacent Hinchinbrook Entrance at the same time. Elwood Brehmer can be reached at [email protected]

Producers celebrate Slope as House takes up another tax hike

Alaska leaders of the largest oil producers in the state are pointing to the recently-reversed production decline curve as proof the state’s oil tax system is working, but House Majority leaders contend Senate Republicans have forced them to again propose an oil tax increase to ease the state’s projected $2.7 billion budget deficit. BP Alaska President Janet Weiss, speaking at the Alaska Support Industry Alliance’s Meet Alaska Conference Jan. 19 in Anchorage, highlighted the fact that oil production at Prudhoe Bay has ostensibly been flat for three years despite the field’s age and low oil prices since then. “It was an amazing year to see no decline. In 2015, production was 281,700 barrels per day, in 2016 it was 280,700 barrels per day and déjà vu, 2017 it was 280,040, and in my book that’s no decline in a 40-year field that was supposed to have a life of only 30,” said Weiss, who had her head shaved the next day after losing a bet on the Prudhoe production output for 2017. Two days later, Weiss mailed her long black locks to Pantene, which has a program that makes wigs for cancer patients. At the operational level, she said the company improved the field’s plant reliability and did more than 500 non-rig well work jobs along with adding another previously drilled 100 wells to the active Prudhoe count. “It was like 100 wells coming online, so it’s the focus on the basics that enable extraordinary performance,” Weiss said. ConocoPhillips Alaska President Joe Marushack highlighted in a separate talk that several large and numerous smaller prospects and oil projects in development on the Slope could add more than 400,000 barrels per day of production at their peak over the next six years. Those projects include ConocoPhillips’ two Greater Mooses Tooth developments, at up to 30,000 barrels per day each; its Willow prospect with an estimated production capability of up to 100,000 barrels per day; Armstrong Energy’s Nanushuk project — to be taken over by Australian-based Oil Search in June — at 120,000 barrels; and Hilcorp’s offshore Liberty development at roughly 70,000 barrels per day of peak production. “We’ve got a lot of promise. We’ve got a lot of really good things (going),” Marushack said. He added that ConocoPhillips is working to add to that promise by drilling five exploration and appraisal wells this winter, its largest exploration program on the North Slope since 2002. It’s also the largest exploration program for ConocoPhillips this year across all the basins it operates, according to Marushack. “All eyes are on Alaska,” he said. Additionally, the company is preparing to shoot a seismic program across the roughly 250 square miles of state acreage south of the Alpine field along the east edge of the National Petroleum Reserve-Alaska that the company acquired last year. Weiss also noted that the coastal plain of the Arctic National Wildlife Refuge, just opened to industry by Congress and the Trump administration, is a greenfield area that could hold enormous potential and lead to longer term prospects. The U.S. Geological Survey estimates the coastal plain could hold upwards of 7 billion barrels of recoverable oil. She said BP would evaluate ANWR in light of the company’s global portfolio. The prospectivity is on top of two years of increased North Slope oil production already, with a third expected for the current state fiscal year 2018 that ends June 30. Production bottomed out in state fiscal year 2015 at 501,500 barrels per day but rebounded with two years of growth to 526,700 barrels per day in 2017. The Department of Natural Resources expects production to hit 533,000 barrels per day this year, according to the state Revenue Sources Book published this past December. Both Weiss and Marushack said keeping the existing but oft-debated state oil severance tax in place is critical to continuing growth on the Slope and seeing the prospects to production. Large producing companies on the Slope, such as BP and ConocoPhillips, were not eligible for the refundable exploration and development tax credit program that the Legislature ended last year, so they were not impacted by that change. The tax, passed by the state in 2013, was the primary driver behind the current production increases, Weiss said, reiterating a point hammered home by industry and most Republican lawmakers in the state. “We might be enjoying prices today that are over $70 per barrel but when you look at the fundamental — at BP anyway — we still think lower for even longer and staying competitive is very important,” she said. “It’s the lowest cost basins that will get produced,” Weiss continued. “Not all the barrels in Alaska are going to be produced if we don’t make them competitive.” Marushack said he is often competing within ConocoPhillips for investment dollars for Alaska projects, particularly against Lower 48 shale prospects, while his colleagues don’t continually have to worry about tax changes skewing project economics like he does. “We have to have stable, competitive fiscal policies,” Marushack said. House takes up tax hike Meanwhile, in Juneau, the House Resources Committee took up House Bill 288 for the first time Jan. 22. HB 228, introduced by Resources Committee co-chair Rep. Geran Tarr, D-Anchorage, would raise the minimum gross production tax on North Slope oil from 4 percent to 7 percent as a means of raising between about $220 million to $250 million of additional state revenue per year. Tarr said that while the broader criticism of the Legislature consistently changing oil tax policy is generally fair, she is proposing the oil tax change primarily because Senate Republicans have stonewalled attempts by Gov. Bill Walker and the Democrat-led House Majority coalition to pass an income or payroll tax that would diversify the state’s revenue streams and play a role in dissolving the multibillion-dollar budget deficits. Instead, the Republican-dominated Senate Majority has insisted on maximizing a draw from the Permanent Fund Earnings Reserve and relying on future budget cuts and increasing oil prices and production to balance the budget over several years. However, the prospect of achieving the further cuts of $400 million to $500 million — roughly 10 percent of the current Unrestricted General Fund budget — necessary to meet the Senate’s plan is unclear at best. Deeper cuts to education, community assistance and social programs proposed over the past few years have been withdrawn after being met with stiff resistance and public backlash. Tarr said House leaders feel “a little backed into a corner” in fighting for their constituents who do not want the reduced Permanent Fund dividends that come with utilizing the Earnings Reserve for government to be the only way out of the budget problems. She noted she represents the poorest part of Anchorage and her constituents often rely on the PFD to pay for essential items. “I could see some members of the industry thinking now’s the time to diversify and find some other sources (of revenue) so the finger’s not always pointed in their direction,” Tarr commented while outlining the bill. She stressed that it does not change the underlying production tax structure, but it would shift the oil price-sensitive “crossover point” where the tax switches from a gross to a profit-based tax to a higher price band. At its core, Alaska’s oil tax is a 35 percent net profits tax. On top of that is a sliding scale per-barrel credit that is $8 at prices less than $80 per barrel and fades out at prices greater than $150 per barrel. By applying the per-barrel credit, companies can achieve a lower tax rate at lower, less profitable prices. The last primary layer is the gross minimum tax, also known as the tax floor. It is applied at lower prices — the crossover is usually between $60 and $70 per barrel, according to the Revenue Department — when the amount 4 percent gross value calculation exceeds the amount of the profits tax calculation. For example, at $60 per barrel, the profits tax, with the per-barrel credit and deductible expenses applied, becomes a negative value. The 4 percent gross tax at $60 — minus oil transport costs that are never taxed — is approximately $2 per barrel and thus the oil is taxed on its gross value at that price. Anchorage Republican Rep. Chris Birch said the tax debate often omits discussion about the royalty revenue of 12.5 percent to 16.6 percent that the state receives on each barrel produced and he can’t see how increasing taxes will spur production and by extension more royalty revenue. “I’m almost struck by the old adage of ‘the beatings will continue until morale improves,’” Birch quipped. Tarr said she shares his concerns about keeping production up but characterized the proposal as being part of the state’s larger “math problem” when it comes to balancing the budget. She also contended the 7 percent gross tax would be among the lowest in the country for states with a gross severance tax on oil. The Resources Committee is expected to hear testimony from industry and Revenue Department officials starting Jan. 26. Elwood Brehmer can be reached at [email protected]

ConocoPhillips to drill Putu with unprecedented mitigation steps

ConocoPhillips is finally ready to drill into a small and long-sought piece of the North Slope, but only after agreeing to employ mitigation measures largely thought to be unprecedented, particularly for a single well. The Putu 2 exploration well is scheduled to be spudded in early February and finished in late April with completion of a well sidetrack, according to ConocoPhillips spokeswoman Amy Burnett. The cause for the unique drilling mitigation practices — from an electrified drill rig to multiple air quality monitoring sites and light suppression efforts — flows from the drill site’s proximity to the Native village of Nuiqsut. About three miles east-northeast from Nuiqsut, the Putu 2 drill site is in the direction of the prevailing winter winds that cross the tundra plains to the village. That caught the attention of many in Nuiqsut, according to Kuukpik Corp. CEO Lanston Chinn, who said the residents became concerned about, among other things, exhaust drifting into the community from a diesel drill rig that would be running continuously for more than two months. Kuukpik is the Native village corporation for Nuiqsut and holds title to about 147,000 acres on the Slope. It jointly holds surface rights along with the state to the Putu acreage, which the Department of Natural Resources awarded to ConocoPhillips in November 2016. The company has also taken on the role of being a public voice for the community of about 400 residents that it answers to. ConocoPhillips first planned to drill the Putu well a year ago. That exploration plan was a driving force behind DNR Commissioner Andy Mack overturning his predecessor’s decision and transferring all 9,100 acres in and around Nuiqsut, and once part of the now defunct Tofkat Unit, from the small independent Brooks Range Petroleum Corp. to ConocoPhillips. It is now part of the large Colville River Unit, commonly referred to as Alpine, from which ConocoPhillips produces about 65,000 barrels of oil per day. While a small area in North Slope terms, its proximity to a large, established oil field and the Nanushuk prospect that could hold more than 2 billion barrels of recoverable oil, according to its owner Armstrong Energy, make it a potentially rich piece of property. ConocoPhillips held the acreage in the early 2000s but had to give it back to the state after failing to meet drilling requirements. Brooks Range also held the leases for years but was unable to secure an access agreement with Kuukpik, according to documents previously submitted to the state. ConocoPhillips Alaska President Joe Marushack said Jan. 19 at the Alaska Support Industry Alliance’s Meet Alaska Conference that even before drilling a well the company believes the Putu prospect could produce 20,000 barrels per day. It’s worth noting that as a publicly traded oil company, ConocoPhillips is in the business of making conservative public statements. When the company informed DNR last winter that it had decided to defer its 2016-17 Putu plan because of the villagers’ concerns, Mack, charged with assuring the state’s resources are developed as timely as possible, threatened to revoke the acreage. An agreement was eventually reached last August after a lengthy back-and-forth of formal correspondence to let ConocoPhillips keep the acreage if it drilled a well into the hot Nanushuk geologic formation by May 2018. The deal included a $7 million payment to the state in-lieu of the bids DNR estimated it would get if the area was put up for bid in a lease sale. While ConocoPhillips has long held a surface access agreement with Kuukpik Corp., according to the producer, it still needed to allay the worries of the locals downwind that they would not be ignored. They weren’t. For starters, the Putu 2 drill site is about a half-mile farther from Nuiqsut than the location chosen to drill last winter. The drill rig — Kuukpik 5, another part of the producer-Native corporation agreement — will be electrified and powered by six, 975-horsepower Tier 4 diesel generators located about a mile north of the drill site. Kuukpik Corp. has five subsidiary companies mostly focused on oilfield service support in the drilling, ice road, camp and catering, engineering and environmental monitoring specialties. Chinn said Kuukpik’s companies and Nuiqsut residents will do much of the work associated with drilling the well. According to Burnett, about 85 people will be on site at peak activity. A 13.8 kilovolt power cable encapsulated in ice 25 inches thick will connect the generators to the drill location, according to ConocoPhillips’ Putu 2 mitigation plan submitted to DNR. The Tier 4 generators are top-of-the-line in terms of limiting emissions, according to Cummins Power Generation, which claims to be the first generator manufacturer to receive the Environmental Protection Agency’s most stringent applicable certification. The exhaust scrubbers installed on the generators make them as much as 90 percent cleaner than the traditional drill rigs by capturing much of the sulfur and other particulate matter found in diesel exhaust before it is emitted, according to Chinn. “There will be zero emissions from the drill rig and zero emissions from the camp,” he emphasized. Further, three air monitoring stations will be set up for the project; two near the northeast edge of the village and one at the Putu 2 site. If particulate levels exceed EPA standards the whole operation will go into “warm shutdown,” Chinn said, and the generators and other engines will be run just enough to keep equipment and facilities from freezing. Noise monitoring equipment will also be installed at one of the air quality stations at the edge of the village and ConocoPhillips will limit vehicle idling at the site to cut down on noise pollution. A snow berm — if there is enough snow — will be built on the village side of the pad as a final noise-dampening measure, according to the mitigation plan. Water quality tests will also be done at the nearby lake that is Nuiqsut’s water source once it melts to assure none of the limited particulate matter emitted from the exhaust has settled and found its way into the lake, Chinn added. “Everything is monitored all along the path,” he said. “I think singularly it’s the most any oil company I know of here in Alaska has ever agreed to do.” If gas flaring is required to test the well, the flare will be enclosed and pointed away from the village, Chinn said. When drilling is complete, the well will be plugged and abandoned but the well will be caped and buried eight feet below the tundra, a full five feet beyond state requirements. Finally, ConocoPhillips plans to directional drill into the reservoir if it decides to develop the area, according to Burnett, meaning a permanent gravel well pad would be substantially farther from the village than the ice exploration pad. “Essentially, we got to the point where — it was kind of interesting — we kind of ran out of things to even ask them for,” Chinn said. “This is about everything you can possibly, conceivably think of to reduce (impacts). It’s not just reduction of impacts, it’s reduction of unnecessary impacts and we got to the point where the reduction of unnecessary impacts was just gone.” He said he believes the Putu 2 mitigation measures set a standard for exploratory drilling, if not Slope-wide, at least on Kuukpik land near Nuiqsut. “At this point I think it sets a good tone for the future relationship with industry too, because once it gets done, whether they want to admit it or not, it does set a precedent about how you go about doing things,” Chinn said. “We just demonstrated that you can and that under the right set of circumstances — they drug their feet initially because they’re not used to doing this. “But we said the environment is important; subsistence is important; the people are important; and therefore we have to address it accordingly. And I said if you’re not willing to address those major elements then we don’t need to be doing this. It’s important that the fundamental priorities that exist are treated that way.” He acknowledged that project economics would likely play a role in future mitigation discussions Kuukpik is involved in but the Putu well is close enough to Nuiqsut that economic considerations had to take a backseat in this instance. When asked if ConocoPhillips agreed that the Putu 2 well sets a precedent for future Slope exploration, Burnett wrote in an email that the well is much closer to a community than any other project on the Slope and the company is doing what it can to be a good neighbor. “We are committed to collaborating with the Nuiqsut community to address their concerns on having an exploration well drilled close to their village,” she wrote. “We want the community to be comfortable with the drilling program. With that in mind, we have developed a robust mitigation plan to address concerns related to the drilling program.” She said the company could not share the cost of the mitigation measures or the overall Putu 2 effort. Chinn said Kuukpik — deep in the oil business — is not trying to play both sides of the game, but rather is trying to represent the interests of its shareholders who live amongst the North Slope development. The company has objected to other projects as originally planned by ConocoPhillips and currently opposes the Nanushuk project in permitting north of the village because, he said, it’s pad and road designs do not adequately consider caribou migration routes and fill unnecessary amounts of wetlands. “Here, where subsistence is such a big issue; it’s a really big deal, you have to accommodate everything: where people fish in a stream or river or so forth, where people hunt caribou. This is what people live on, ok. Alaska is very unique in that way,” Chinn stressed. He added that fish — mostly from the Colville River that braids through much of the oil development north of Nuiqsut — account for up to 30 percent of a Nuiqsut resident’s diet. “I’m not a flaming environmentalist, but I do care about the environment. I do care about the subsistence. I do care about the people that are involved in this and what kind of legacy does this leave for them.” Elwood Brehmer can be reached at [email protected]

King Cove road deal checks another item on Alaska to-do list

Alaska’s congressional delegation celebrated another victory enabled by the Trump administration Jan. 22 when the Republicans revealed the details of a land swap allowing construction of a road out of the remote village of King Cove near the tip of the Alaska Peninsula. The land exchange between the Interior Department and King Cove Corp., the area Native village corporation, will provide a 12-mile right-of-way through a portion of the Izembek National Wildlife Refuge. The delegation, Gov. Bill Walker and King Cove residents say the road would provide an essential link for emergency services when bad weather prevents flights out of King Cove or boat travel across Cold Bay. With a paved runway longer than 10,000 feet, Cold Bay’s airport has one of the longest civilian runways in the state and is the area’s main link to Anchorage 600 miles away. The old military post was built during World War II. King Cove’s airport has a 3,500-foot gravel runway for the community with roughly 950 year-round residents. Over the years 18 people have died in plane crashes or waiting to get medevac service out of King Cove, according to the Interior Department. However, no one has died trying to leave since 1994. The U.S. Coast Guard has frequently served as a medevac service out of King Cove in bad weather — at more than $210,000 per trip when a helicopter is deployed from Kodiak, according to Sen. Lisa Murkowski’s office. Interior Secretary Ryan Zinke said the equal-value land exchange fulfills two of the primary duties of the federal government: keeping Americans safe and respecting treaty agreements with Native people. “Previous administrations prioritized birds over human lives, and that’s just wrong,” Zinke said in a statement. “The people of King Cove have been stewarding the land and wildlife for thousands of years and I am confident that working together we will be able to continue responsible stewardship while also saving precious lives.” Walker called the agreement “a paradigm shift” in a statement from his office, contending the feds had been irresponsible “by placing a higher value on appeasing people who will never get within a thousand miles of King Cove, over the health and safety of those who actually live there.” In late 2013, then-Interior Secretary Sally Jewell rejected land swap deal passed by Congress in 2009 after a U.S. Fish and Wildlife Service environmental review determined the road would irreparably damage critical waterfowl habitat in the 315,000-acre Izembek Refuge. That swap would have traded 206 acres of Izembek land and 1,600 federal acres outside the refuge for about 56,000 acres of state and King Cove Corp. land. The new eight-page agreement calls for an equal-value land swap between King Cove Corp. and Interior. Further work must be done to identify exactly what lands will be exchanged, but neither side is to give up more than 500 acres, according to the deal. Rep. Don Young called assertions by environmental groups and the others, including some Republicans, that the road would unacceptably damage the habitat of the unique waterfowl populations that use the refuge “pure poppycock or goose you-know-what,” in a delegation press call Monday with Alaska reporters. He added that he thought the Native corporation conceded too much in the previous proposal. In summer, the refuge is home to 98 percent of the world’s population of Pacific black brant, a goose that breeds there, according to the Interior Department, as well as other sensitive wildlife and waterfowl. Walker also thanked the Legislature for approving $7.5 million in last year’s capital budget to jump-start construction of the road if it were ever approved, despite the state’s ongoing budget problems. Last summer the state Department of Transportation assisted in survey work to help establish the specific road route. DOT has estimated construction to cost $30 million and the state is expected to largely fund the work. It is expected to take about a year and start in two or three years after design and other pre-construction work is completed. In February 2017 the Alaska Legislature unanimously approved a resolution in support of a land transfer for building the single-lane gravel road between King Cove and Cold Bay. Murkowski said she called Trump to thank him for his administration’s work, but was unsure if she’d get through. The president took her call informing him of the deal and spent roughly five minutes talking about King Cove. “There’s not too many 950 population communities that are off the road system that the president has taken an interest in and he was quite pleased to learn that an agreement had been inked today,” Murkowski said. Sen. Dan Sullivan said the delegation made Zinke “an honorary Alaskan today” after the agreement was signed. He also noted that President Donald Trump took a personal interest in the issue after a briefing on their priorities from the senators shortly after he took office and would periodically ask them about the status of the road. “This is an Alaska issue in many, many ways,” Murkowski added. “This is more than just a 10-mile, one-lane, gravel, non-commercial use road. This is about how we provide a level of fairness and equity to those who are seeking a simple resolution to a way that they can gain safety at times when the elements do not allow for folks to travel safely by air or by boat.” Leaders of the Alaska office of the Audubon Society said in a formal response that it’s hard to overstate the importance of the Izembek Refuge to migrating waterfowl and transferring public land to private hands epitomizes the Trump administration’s damaging resource management policies. “The Izembek NWR is not your typical piece of Alaska. At times it supports the majority of the world’s populations of Emperor geese, Pacific black brant and the federally listed population of Steller’s eiders,” Audubon Alaska Executive Director Nils Warnock said. “There’s a reason the Interior Department decided against authorizing this road back in 2013. Izembek is too critical to wildlife to risk by having a road blasted through it.” Audubon Alaska also alleged an “underlying commercial motivation” for the project in its statement. And while the delegation has long stressed the road would be limited to emergency-use only, the land exchange signed Monday states the road will be used “primarily” for health and safety purposes “and generally for noncommercial purposes. The commercial transport of fish and seafood products, except by an individual or a small business, on any portion of the road shall be prohibited.” Opponents have consistently argued building a road through wilderness-designated land would set a bad precedent nationwide. Additionally, Peter Pan Seafoods, which has a processing plant in King Cove, could end up using the road to further its business interests — an egregious reason to develop the area, they contend. Murkowski said Peter Pan would be prohibited from the road but the deal does not restrict resident travel, which would be unreasonable. “It’s recognized that if you’re a local fisherman and you’ve got some fish in the back of your truck we’re not going to prohibit you from accessing the road,” she described. The Interior Department cites Section 1302 of the 1980 Alaska National Interest Lands Conservation Act for its authority to make the deal, but opposition groups are expected to challenge that authority in court. Murkowski said she always prefers to take action via legislation — which would all but nullify avenues to sue — but going about the land swap administratively is a much quicker route. “We want the Outside groups to refrain from litigating this. We are in the right legally,” Sullivan added. The House passed a bill authorizing a land swap for the road in July, but it has not passed the Senate. Elwood Brehmer can be reached at [email protected]

Missile defense gets major boost from latest bill

While the Republican tax overhaul was dominating year-end headlines, a major piece of bipartisan legislation became law that also has significant implications for Alaska. The 2018 National Defense Authorization Act, signed by President Donald Trump in mid-December, allocates $699 billion to Defense agencies in the coming year. Broad support of the annual Defense funding bill is nothing new, but wrapped in this NDAA is nearly every provision of Sen. Dan Sullivan’s Advancing America’s Missile Defense Act. The missile defense provisions in the NDAA will not only improve national security, but should be a boon to Alaska contractors as well, Sullivan said in a late December interview with the Journal. That’s because the NDAA calls for 20 new intercontinental ballistic missile, or ICBM, interceptors at Fort Greely near Delta Junction. Another eight “spare” interceptors, set aside for testing the ground-based interceptor system, will also be deployed, according to Sullivan’s office. His original bill called for installing 14 interceptors and 14 test missiles. The latest round of interceptors is in addition to 14 the Pentagon decided to add in 2013 to the original 26 at Fort Greely. The last of those 14 were installed last November. The interceptors are the country’s primary defense against ICBM threats from North Korea and Iran. Another of Sullivan’s provisions in the NDAA directs studies to identify a Midwest or East Coast missile defense site and evaluate the necessity of up to 104 ground-based interceptors at installations across the country. Overall, the nearly $700 billion in the NDAA is $26.2 billion more than the administration’s request and includes $12.3 billion for the Missile Defense Agency, which is also $4.4 billion above what President Trump asked for and the largest Missile Defense appropriation ever. Sullivan said it reflects the bipartisan support to restore Defense funding after it declined from 2010-2016 because of budget sequestration — a bipartisan mistake, he added. The $200 million needed to construct a new missile field at Fort Greely that was authorized in the NDAA was also one of the only additions to the otherwise status quo continuing budget resolution Congress passed Dec. 22, Sullivan noted. The short-term government funding bill expires Jan. 19. The NDAA also includes another $168.9 million for construction projects at Eielson Air Force Base in 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. Some of that money from prior appropriations is already flowing to Alaska. “In the three years I’ve been on the Armed Services Committee we’ve had over $1 billion of authorized military construction in Alaska — a billion,” Sullivan said. “That’s really good for the national security of the country but those are really, really good jobs for Alaskans.” He added that leaders of the U.S. Army Corps of Engineers have assured him much of the work at the Alaska military installations will go to Alaska contractors. “I also think it’s good for taxpayer spending to make sure this money goes to Alaskan contractors, unions, companies, because they know how to do it better than a contract team from Georgia; they know how to work in 40 below,” Sullivan said further. 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. Clear is a radar base near Nenana along the Parks Highway. The money there is going towards installing a new power plant and missile detection radar system. Clear Air Force Station is on the electrical grid; however, the upgraded power plant is a backup facility that will be protected against electromagnetic pulse weapons that could be used to render electrical systems useless, according to former MDA Director Vice Admiral James Syring. The Long Range Discrimination Radar being installed at Clear —expected to be done in the early 2020s — could be part of an integrated, space-based ICBM detection system, which Sullivan likes to refer to as an “unblinking eye,” he said. Another of his missile defense amendments to the NDAA mandates creation of a plan to develop and deploy such a missile detection system. The military construction boom around Fairbanks comes just a few years after the Air Force was considering moving the F-16 Aggressor squadron from Eielson to Joint Base Elmendorf-Richardson in Anchorage. City leaders in Fairbanks said the move would’ve crippled the community’s economy and ostensibly made Eielson obsolete without officially closing the base. The Air Force dropped the plan to move the F-16s off Eielson in late 2013. More recently, the Alaska congressional delegation and Anchorage leaders pushed back against an Army proposal to cut the 4th Infantry, 25th Brigade, also known as the 4-25, from Fort Richardson in Anchorage. Citing the state’s strategic Arctic location, emerging threats in the Pacific theater and the 4-25 status as the only Airborne Brigade in the region, the delegation convinced the Army to delay any force reduction in Alaska. The turnabout in the Pentagon’s plans for Alaska has made Alaska the “cornerstone of missile defense, the hub of combat power for the Asia-Pacific and the Arctic,” Sullivan described. With the F-22s stationed at JBER, the state will soon be in the unique position of having more than 100 modern fighters once the F-35s land at Eielson. “No place in the world has 100 combat-coded fifth-generation fighters — those are F-22s or F-35s,” Sullivan said. Elwood Brehmer can be reached at [email protected]

Politicians, stakeholders want conditions for Juneau utility sale

Alaskans with addresses from North Pole to Washington, D.C., are objecting to the proposed sale of the Juneau electric utility by its current Washington state-based owners to a large Ontario utility. The cause for the North American geography mini-lesson is what will happen if the Regulatory Commission of Alaska approves the sale including the 78-megawatt Snettisham hydroelectric facility that provides up to 75 percent of Juneau’s base load power supply. In July, Toronto-based Hydro One Ltd. and Spokane, Wash.-based Avista Corp. announced that Hydro One would buy Avista for $5.3 billion in cash to form one of the largest utilities in North America with a combined asset value estimated at more than $25 billion. Avista bought Alaska Energy and Resources Co., the parent to Juneau’s electric utility Alaska Electric Light and Power, in a deal that closed in 2014 for $170 million. Prior to being under Avista, a Juneau family held majority ownership of AEL&P. The Juneau utility operates and maintains the Snettisham facilities located about 30 miles southeast of Juneau, but the hydro project was built by the U.S. Army Corps of Engineers in the 1960s and subsequently expanded multiple times. Snettisham was sold to the state-owned Alaska Industrial Development and Export Authority in 1998 as part of a broader federal move to divest from local utilities nationwide. The state investment bank financed the purchase with $100 million in revenue bonds, which will be paid off in 2034, according to AIDEA. The sticking point in the sale is what happens when those bonds are paid off and AIDEA owns the hydro facilities and the associated 44-mile transmission line free-and-clear. At that point, the owners of AEL&P have the option of purchasing the energy-producing infrastructure for $1, a condition of the 1998 purchase by AIDEA, according to a letter from Rep. Don Young to the RCA. Young’s Dec. 4 letter to the commission — submitted during the public comment period on the proposed Avista to Hydro One sale of AEL&P — urges the RCA to condition the sale to require the Snettisham facilities remain in state or local ownership. “The Snettisham assets were transferred to the State of Alaska at below construction and replacement value to help insure low electric utility rates in Juneau. I can (assure) you that it was never Congress’ intent that this asset be transferred for the potential profiteering by Canadian government interests,” Young wrote. “At this point, a foreign government entity could ‘hijack’ this public asset initially built to produce low-cost power and pledge, monetize or refinance this asset cashing in the equity at the U.S. taxpayer and Alaskan ratepayer expense without recourse,” he continued. “A Hydro One sale, without divesture of this asset option, could pre-empt Juneau from reaping the benefits of Congress’ intended purpose.” Young concluded by clarifying he does not object to the sale other than to ensure Snettisham remains in public ownership. Hydro One, Canada’s largest electric transmission and distribution utility according to its website, was formed by the Ontario Legislature in 1906. It became a publicly traded company on the Toronto Stock Exchange in late 2015 as the provincial government began divesting the utility. The government of Ontario currently owns 47.4 percent of Hydro One shares, according to the international investment research firm Morningstar Inc. Alaska Independent Power Producers Association Director and Juneau-area resident Duff Mitchell said in an interview that Snettisham power currently costs a little more than 5 cents per kilowatt-hour and once the bonds are paid off that rate could drop to less than 1 cent per kilowatt-hour. If Hydro One is allowed to own Snettisham it could refinance the project, monetize its equity or use it as collateral for other projects and potentially impact future rates in Juneau, Mitchell stressed. He said the $1 purchase option also applies to Avista, but wasn’t generally known when its purchase of AEL&P was pending in late 2013-14. “It’s a very simple fix; it doesn’t hurt Hydro One. Juneau will get its rates reduced and it keeps a foreign government entity from playing games with the asset,” Mitchell said. Alaska state Rep. Tammie Wilson, R-North Pole, reiterated Young’s sentiments in comments to the RCA, contending that, “If Hydro One is successful in obtaining RCA approval with the Snettisham asset rights, this would set a bad precedent that Alaska is for sale and that it is open season to plunder our state. This is a bad message.” Additionally, Alaska Chamber CEO Curtis Thayer, former legislators Cathy Munoz and Lesil McGuire and numerous Juneau residents joined in support of conditioning the sale of AEL&P. Hydro One and Avista wrote in a joint response to the public comments Dec. 11 that they agree with Young that Snettisham “should be preserved for the benefit of Alaskan utility rate payers so that it can continue to provide low cost power for Juneau” and should remain in local ownership. They argue, however, that the concerns are already addressed and conditioning the sale is unnecessary. Utility operations will stay the same when the deal closes, according to the companies. “As it does today, AEL&P will continue to manage the utility and will continue to have certain rights and obligations relating to Snettisham,” they wrote. “Avista has not inserted itself into AEL&P management and neither will Hydro One, because the structure of the merger leaves in place local control.” Former AEL&P director Neil MacKinnon wrote to the RCA that he supports the sale as-is because, among other things, it makes no difference who owns the hydro facilities given the power can only go to the Juneau area and the commission has to approve any rate changes. The expertise a large owner company provides the small utility is extremely valuable as well, according to MacKinnon. (This story has been amended to correctly note that former Alaska Electric Light and Power director Neil MacKinnon supports the Avista-Hydro One transaction without stipulations. The original version of the story incorrectly stated MacKinnon requested the RCA condition the sale.) The RCA rejected the utility companies’ first sale application in Nov. 8 on procedural grounds. They reapplied Nov. 21 and the commission has until May 20 to issue its decision. Wilson, who has championed open access for small, often renewable power producers to utility-owned transmission lines in the Legislature, also urged the RCA stipulate Hydro One provide open access to the Snettisham transmission line that runs from the generation facilities to Juneau. “The RCA, by conditioning Hydro One, can send a public interest message to the utility industry that if multi-state or multi-national corporations want to take over Alaskan utilities and do business in Alaska that they will have to treat Alaskan energy developers with the same nondiscriminatory transmission interconnection rights and privileges that they are required to provide energy developers in other jurisdictions,” Wilson wrote. The Federal Energy Regulatory Commission requires Lower 48 electric transmission owners to provide all power producers equal access to transmission infrastructure. Current Alaska laws and regulations do not, according to Mitchell, which has been a growing source of contention between renewable power startups in the state and the utilities that own or manage large segments of Alaska’s transmission lines. Hydro One sells power to Lower 48 utilities and as a result operates under FERC regulations in many instances despite being a Canadian company. Hydro One spokeswoman Tiziana Baccega Rosa wrote in an emailed response to questions that the benefits of the Snettisham facility will remain in Alaska and that AEL&P is already subject to the RCA’s open-access requirements and will continue to comply with them. However, Wilson and McGuire, of Anchorage who retired from the state Senate in 2016, further noted that Juneau Hydropower Inc. has been trying to gain access to the Snettisham line from AEL&P for several years without success. Juneau Hydropower, also led by Alaska Independent Power Producers Association head Mitchell, has regulatory approval to construct the Sweetheart Lake hydro project south of Juneau but needs to secure transmission capacity before it can start construction. The 20-megawatt hydro project would supply power to the Kensington gold mine north of Juneau, which currently runs on diesel-fired generation. Kensington’s owner company Coeur Mining also urged the RCA to condition the Hydro One sale on an access agreement with Juneau Hydropower, which has been trying to get such an agreement since 2012, according to the filings. The Sweetheart Lake condition was a request of AIPPA as well. Mitchell acknowledged that his company would stand to benefit from such terms, but said the stance is in line with what the association has sought for years in other similar instances across the state. “I believe our state is the breadbasket of renewable energy and we have manmade problems keeping those developments from happening. It’s not a question of financing; it’s not a question of natural, God-given resources. It’s a question of legislative and regulatory problems,” Mitchell said. “I have always been — Juneau Hydropower and AIPPA has always been — consistently for open access and non-discriminaatory access to transmission lines in Alaska.” He also noted that Sweetheart Lake, by getting Kensington off diesel, would cut Juneau-area greenhouse gas emissions by about 8 percent. “I’m doing what America is supposed to do,” Mitchell emphasized. “If you can offer a better product — this transmission issue does affect Juneau Hydropower but it also affects every independent power producer in Alaska.” Elwood Brehmer can be reached at [email protected]

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