Elwood Brehmer

Permanent Fund trustees seek inflation-proofing bill

The folks in charge of Alaska’s largest asset made few, but significant, requests of the Legislature at their meeting Sept. 28. The Alaska Permanent Fund Corp. Board of Trustees unanimously passed a resolution directing corporation executives to pursue legislation to strengthen inflation-proofing mechanisms for the corpus of the $61 billion Permanent Fund, and passed motions requesting an exemption from state procurement codes and to add up to 10 new employees to its Juneau headquarters. CEO Angela Rodell said during the meeting that inflation-proofing the roughly $40 billion corpus of the Fund — the portion made up of resource royalty and inflation-proofing payments — is the only way to truly ensure growth in the Fund. The Fund holds another nearly $8 billion in unrealized gains from investments, according to its August balance sheet. The trustees also passed a more specific motion asking that inflation proofing be accounted for as part of the Fund’s annual statutory net income calculation. Doing so would prioritize the inflation-proofing payment to be made before tallying the Fund’s gains or losses in a year. Natural Resources Commissioner Andy Mack, taking part in his first meeting as a trustee, said there are other ways to address inflation proofing beyond making it a part of the income calculation, but added he feels “strongly it should be accounted for in the legislative process.” Mack, a former director at the Alaska private equity fund Pt Capital, was just appointed to the APFC board by Gov. Bill Walker Sept. 27 to replace retired Revenue Commissioner Randy Hoffbeck. Similarly, new Revenue Commissioner Sheldon Fisher said he totally supports strengthening inflation-proofing provisions but he’s not sure if the way proposed in the motion is the best way to do it. He noted the passive inflation-proofing provision in Senate Bill 26, Walker’s bill to establish an annual percent of market value, or POMV, draw from the Fund to pay dividends and support government services. Historically, the Legislature has made the inflation-proofing payments to the corpus of the Fund on an as-needed basis. Inflation payments are transferred from Earnings Reserve Account to the corpus that is off limits to spending by the Legislature. The Earnings Reserve, which holds the Fund’s investment gains and is the only portion of the Permanent Fund that is available for appropriation by the Legislature, currently has more than $13 billion. However, the last two fiscal years the Legislature has broken from tradition and chosen not to inflation-proof the corpus of the Fund while the expectation of employing a POMV draw on the Earnings Reserve has grown. SB 26, passed by both the House and Senate last session but needing reconciliation of details in a conference committee before heading to the governor’s desk, calls for any cash in excess of four times the annual POMV draw amount left in the Earnings Reserve after the draw to be automatically transferred to the corpus as an inflation-proofing payment. With the total POMV draw expected to start at roughly $2.5 billion, the Earnings Reserve as it stands now is almost large enough to trigger those payments. Rodell said in an August interview with the Journal that the precedent set by the Legislature the last two years is worrisome. It has been helpful that inflation rates have been very low of late; two years ago the payment would’ve been just $47 million, she said. But it jumped to more than $500 million last year and is up to $693 million for the current fiscal year, according to APFC calculations. The corporation typically seeks support from the governor first when proposing legislative changes, but APFC leaders can go to individual legislators to find a bill sponsor if need be. Walker’s spokesman Jonathon Taylor said it is too early to speculate on what legislation the governor will support for the upcoming regular session in January. Walker’s former DNR Commissioner Marty Rutherford, who he appointed to the board after she resigned in July 2016, said inflation proofing should be dealt with irrespective of the pending POMV legislation, which is largely expected to be fully passed next year. “I feel very uncomfortable with not pushing the Legislature to deal with inflation proofing because it is in fact a future generations’ protection,” Rutherford said, echoing Rodell’s sentiment. Other requests Getting an exemption from state procurement codes for investment management-related contracts would allow the corporation to more efficiently contract with outside investment managers and consultants on often time-sensitive investments involving proprietary information, according to Fund leaders. The exemption would also require legislative action. In an interesting move, the trustees also approved two proposed fiscal year 2019 budget amounts for the APFC, a $174.2 million “status quo” budget, which would be up from a $151 million budget for the current fiscal year. The second budget — including 10 new positions — would actually be $5 million less than the status quo at $169.2 million. The APFC budget is funded out of the Earnings Reserve. Operations Director Laura Achee said the 10 new jobs, if approved by the Legislature and Walker, would add to the corporation’s internal investment programs and reduce the need for expensive outside managers, thus reducing the overall budget. The budget proposal with the 10 new personnel has $136 million for outside investment manager fees; the status quo budget has a $145 million line item for those costs. The corporation in charge of $61 billion currently has 42 employees. “The Fund has grown $9 billion in the last 15 months and growth in the size of the Fund also triggers growth in the request that we need to have the tools that we need to have in order to be able to manage the Fund in the way that the people of the state of Alaska expect,” Achee said. The new positions would include four investment officers, three finance positions, two IT staff and one office administrator, she said. Additional IT support is needed as the Fund is invested more and more in global markets, which requires tech help be available 24/7 for traveling investment officers, Achee explained. She also said the industry standard for middle and back office support staffing has grown to about 2.5 support personnel for each investment position and the corporation doesn’t come close to that now. “For every front office (investment) position we have 0.8 middle or back office staff, so we’re very much understaffed in that area, in that scenario, where we need to catch up if we’re going to continue to support the work that our front office is doing,” Achee said. Elwood Brehmer can be reached at [email protected]

First look at Nanushuk released

The details of how Armstrong Energy plans to develop its billion-plus-barrel North Slope Nanushuk oil prospect are now public after the U.S. Army Corps of Engineers released the draft environmental impact statement for the project. Tucked between ConocoPhillips’ large Alpine and Kuparuk River fields, the Nanushuk project in the Pikka Unit is expected to produce upwards of 120,000 barrels per day of conventional light oil at its peak rate. An exploratory well and sidetrack Armstrong drilled last winter about 20 miles south of the project area indicated the reservoir could hold more than 2 billion barrels of oil, company CEO Bill Armstrong said in a prior interview with the Journal. At this point, though, the Nanushuk project is based on 1.2 billion barrels of proven recoverable reserves. It is named after the Nanushuk geologic formation that is Armstrong’s primary target. Armstrong Energy operates the Pikka Unit for its partners Spanish major Repsol and Denver-based independent GMT Exploration Co. Armstrong increased its stake in the project to become majority owner and took over as operator of the project from Repsol in late 2015. Long an overlooked North Slope play, 3D underground seismic mapping technology has helped geologists locate subtle but large oil-bearing traps in the Nanushuk formation in recent years. Armstrong has emphasized his belief that more Nanushuk oil reservoirs can be found in other areas of the Slope and this past January ConocoPhillips announced its Willow discovery, a 300 million-barrel recoverable Nanushuk find west of the Alpine field in the National Petroleum Reserve-Alaska. For its project, Armstrong Energy is proposing three gravel drill sites just south and east of the Colville River delta to hold a total of 146 production and injection wells. A central processing facility to improve the oil to sales quality would also be located on the northernmost drill site pad. According to the draft EIS, nearby oil processing facilities at Kuparuk and Alpine do not have the capacity to handle the 120,000 barrels per day of peak production from the Nanushuk project. The Bureau of Ocean Energy Management also recently released a draft EIS for Hilcorp Energy’s proposed Liberty project, which would produce about 60,000 barrels of oil per day from a manmade island in shallow federal waters just offshore from Prudhoe Bay. Initial production from Nanushuk is targeted for sometime in 2021; however that would overlap with the tail end of what is expected to be a four- to five-year construction period. A final EIS is expected next year, according to the Corps. The workforce on the project is expected to start at just 20 to 50 construction-related workers during the first year of development and peak at about 1,450 construction and drilling personnel by year four. A drilling workforce of about 450 people is expected to remain on the project for up to 15 years after construction, in addition to about 200 permanent operations personnel needed for the length of the expected 30-year production life of the project. Drill Site 3, on the southwest edge of the project area, would be the closest infrastructure to the Village of Nuiqsut, which sits about 6.5 miles to the southwest and across the Colville River from the proposed development. In total, Armstrong’s plan would require 331 acres of new gravel pads, 26 miles of new gravel roads and use an estimated 2.74 million cubic yards of gravel fill from nearby mines. It would impact an estimated 330 acres of wetlands. Three alternative project options developed by the Corps of Engineers would make modest reductions to the cumulative gravel footprint down to 301 acres and 21 miles of road. A southern access plan would utilize a road built by the state-owned Alaska Industrial Development and Export Authority and Anchorage-based Brooks Range Petroleum for the small Mustang oil project that Brooks Range is advancing adjacent to the Nanushuk project. But that would move the processing facility and operations camp closer to Nuiqsut on new gravel pads about 10 miles from the village. A northern access option would utilize a road expected to be built for Caelus Energy’s delayed Nuna development to the northeast of Nanushuk. It would also require additional pads for the processing facility and operations camp but would move them farther from Nuiqsut. The third alternative would re-route as much of the road and pipeline infrastructure out of the Colville River’s 50-year floodplain as possible. It would also try to alleviate concerns of area residents and regulators about potential impacts to migrating caribou by routing the roads to be less parallel to the general south-to-north Colville River. Segments of north-south roads and pipelines could act as impediments to caribou traveling along the coast, particularly during the summer when the animals move closer to the Beaufort Sea coast for relief from insects, according to the draft EIS. The Army Corps of Engineers is accepting public comments on the draft Nanushuk plan through Nov. 14 on the project’s website, www.nanushukeis.com. Elwood Brehmer can be reached at [email protected]

Habitat initiative proponents argue appeal in Superior Court

Is there discretion in the term “significant adverse effects?” That is the question at the center of the court debate over a ballot initiative aimed at reforming Alaska’s permitting laws to better protect salmon habitat from large development projects. The Department of Law doesn’t think so, and Assistant Attorney General Elizabeth Bakalar stressed as much during about 90 minutes of oral arguments Oct. 3 in Anchorage for Stand for Salmon’s appeal of Lt. Gov. Byron Mallott’s rejection of the initiative, which was based on a Department of Law recommendation. Superior Court Judge Mark Rindner heard the appeal. Valerie Brown, legal director for the nonprofit environmental advocacy law firm Trustees for Alaska, argued on behalf of fellow nonprofit Stand for Salmon that the initiative entitled, “An Act providing for protection of wild salmon and fish and wildlife habitat,” indeed affords the Department of Fish and Game adequate discretion to determine what constitutes significant adverse effects on salmon habitat. Mallott rejected the citizens’ ballot initiative Sept. 12 after receiving a legal opinion from Bakalar, who wrote that the proposed law change would blatantly limit the Legislature’s ability to allocate state assets; in this case anadromous fish habitat. In June, Bakalar wrote a letter to initiative sponsors Mike Wood, a commercial fisherman, Bristol Bay lodge owner Brian Kraft and Gayla Hoseth of Dillingham, informing them that a prior version of the initiative would likely be denied because it was deemed to appropriate state resources. The Alaska Constitution reserves the power of resource appropriation for the Legislature and thus prohibits ballot measures from doing so. Brown repeatedly stressed that the initiative’s key language mirrors a 2008 initiative that was rejected by voters after making it to the ballot after being upheld by the Alaska Supreme Court. In that case, the initiative, aimed at restricting discharges from the proposed Pebble mine, would have prohibited large mining operations from releasing or storing pollutants that “could adversely affect water that is used by humans or salmon.” The state’s current salmon habitat law, Title 16, directs the Fish and Game commissioner to issue a development permit as long as a project provides “proper protection of fish and game.” The petitioners contend that is far too vague and an update is needed to just define what “proper protection” means. Opponents in the mining, oil and gas, and construction industries argue the initiative would ostensibly prohibit projects of any meaningful size, including many pipeline and road construction efforts, among others. Bakalar reiterated that argument as proof that the initiative would appropriate waters for fish habitat. However, she said, “This is not a policy debate. It’s a question of Article XI, Section 7 (of the Alaska Constitution.)” Bakalar added that the initiative’s language might indeed be good policy, but that is up to the Legislature to decide. To that end, House Bill 199 sponsored by Rep. Louise Stutes, R-Kodiak, which mirrors the language in the voter proposal, is up for consideration by the Legislature come the regular legislative session in January. According to Bakalar, even if the initiative is not a strict appropriation, Judge Rindner must rule on how voters would interpret the proposed changes in the voting booth. She said it “defies plain English” to read the language of the proposal as anything but putting water for salmon habitat above all other uses. Brown said the current initiative in question would add scrutiny to the permitting process for large development projects but would still allow them to go forward if Fish and Game determined they would not have those “significant adverse effects” on salmon-bearing waters. Additionally, the department would have the discretion to permit large projects even if they impacted salmon waters as long as mitigation and restoration measures helped the waters recover to be viable fish habitat in a “reasonable period,” as the initiative states. “The definition of substantial damage includes the discretion of Fish and Game to determine how much harm is substantial damage so that makes it very similar to the Pebble case where the commissioner can allow some kinds of harm,” Brown argued. “He can’t allow harm that is so significant that it rises to substantial damage and that’s exactly the kind of regulation that’s allowed to prohibit harm to a state asset.” The first iteration of the initiative also required restoration to support historic levels of water flow and fish populations, Brown noted, but that requirement was pulled from the version now in court. “It would have to say no disturbance of fish habitat is permitted” to be an appropriation of assets, she added. Brown said that the now-abandoned Chuitna coal mine, which Stand for Salmon fought to prevent, would have been allowed under the initiative if the habitat restoration methods proposed could be proven effective. Bakalar noted that the initiative generally requires water restoration to account for the life cycle of salmon; meaning restoration could have to happen in such a short time frame to make it unfeasible. “There’s simply no way to build some of these projects without dewatering habitat,” Bakalar said. James Leik, arguing on behalf of the Council of Alaska Producers, a mining industry group, said the initiative is much broader than the 2008 Pebble case emphasized by Brown. “Very fundamentally the initiative changes the priority for the use of these assets. That in itself restricts the Legislature’s ability to allocate those assets,” Leik said. The petitioners simply “scattered the words ‘adverse effect’ into several of the provisions” of the revised initiative to make the claim it aligns with the Pebble case, he contended. Brown rebutted that Rindner shouldn’t speculate on how Fish and Game would implement the provisions, but that he must only determine whether or not there is discretion in the language. “The initiative doesn’t establish a preferred use as anadromous fish habitat. Anadromous fish habitat is the asset that’s being regulated and the question is: Is the initiative a permissible regulation of harm to that asset?” Brown said. “It’s clearly not a priority of use initiative; it is about protecting a specific asset, anadromous fish habitat, from harm.” Rindner said he would rule on the appeal as expeditiously as possible, acknowledging trial court judges such as himself are often seen as “speed bumps” on the way to the Supreme Court, a nod to the almost certain appeal that will follow his ruling, whichever side it favors. Elwood Brehmer can be reached at [email protected]

Walker talks special session in Anchorage

Gov. Bill Walker is making one last push for his plan to end the state’s ongoing multibillion-dollar budget deficits. On Sept. 20 Walker released a proposal for what members of his administration describe as a capped 1.5 percent payroll tax; others have called it a modified head tax. On Sept. 22 he formalized the prospect of a special legislative session to address the state’s finances starting Oct. 23 that he previously told legislators to expect when he signed a proclamation making it official. Walker made his pitch Sept. 29 for the special session to a breakfast gathering of the policy forum Commonwealth North in Anchorage with his new Revenue Commissioner Sheldon Fisher and Chief of Staff Scott Kendall in tow. Correcting the state’s ever-worsening financial situation has dominated the governor’s agenda nearly since the day he took office in December 2014. It was during the last months of that year’s general election campaign that oil prices began to take the dive they have yet to substantially recover from. The results of nearly three years of tussling with legislators over how to best close the budget cap — projected at about $2.6 billion for the current fiscal year but down from close to $4 billion in fiscal year 2016 — were apparent in Walker’s comments Sept 29. The Republican-turned-independent has consistently drawn sharp criticism from his formerly party comrades for saying Alaska needs to reinstitute a broad-based personal tax. While overall state spending has been cut more than 40 percent during Walker’s tenure, most Republican legislators have been adamant that cuts need to continue before residents are taxed. The budget passed in June was smaller but did not have the major spending reductions of recent years. Part of that was the Democrat-led House majority, which took control after pulling together a coalition that included three Republicans following the 2016 election, pushing against deeper cuts. Part of it was leaders of the Republican-dominated Senate not being able to drum up enough support for some reductions. “A lot of work has been done. The Legislature has made a lot of tough votes and I appreciate that very much and we have made some very tough — it’s not fun to roll out stuff involving the word — I don’t know how many ways you can disguise the word tax but we just say it the way it is; it’s a tax. We’re at a point where we can no longer afford to be the only state in the nation that doesn’t have a broad-based tax,” Walker said. Of his tax proposal, he continued: “It’s not one of those feel good levers but you know what? It doesn’t feel good to not do something and to sit back and continue to draw down on savings after having gone through $14 billion in savings. At some point you have to say enough is enough. We need to bring this to a close.” The current fiscal year budget was paid for primarily with state savings. The state’s last savings account, the Constitutional Budget Reserve, will have about $2 billion left in it at the end of the fiscal year next June 30, according to Fisher. The general consensus is that the state needs to have about that much left in savings to cover the costs of a potential natural disaster or a mechanical one, such as a lengthy shutdown of the Trans-Alaska Pipeline System, or both. During the 2016 legislative session Walker introduced a state income tax that would’ve been 6 percent of an individual’s federal liability, which was part of a suite of nine industry and personal tax increases he proposed to minimize the impact on any single sector of the economy. He quipped Sept. 29 that “no one was jumping over tall buildings to vote for any of those.” Early this year Walker supported the House majority’s income tax plan that was summarily shot down in the Senate. With that as background, some form of personal tax was expected on the call for what has been dubbed the “revenue special session.” What is accompanying the tax bill on the call, Senate Bill 54, was not. SB 54 amends some of the provisions in Senate Bill 91, the criminal justice reform package that passed the Legislature in 2016, by giving judges and prosecutors more discretion in how low-level crimes are punished. The reform efforts in SB 91 focused on treatment and rehabilitation of shoplifters, burglars and others convicted of misdemeanor crimes as a way to prevent what were seen by some as unnecessary incarcerations, which are also very costly to the state. SB 91 has subsequently been criticized amid a spike in all categories of crime statewide despite the fact that it has been law for little more than a year. SB 54 passed the Senate last April and will be taken up by House committees during the special session. “I don’t like living in an Alaska where Alaskans are afraid and that’s where we are right now in many regards,” Walker said. He added that he expects the House to pass it fairly quickly given that public safety is a priority for all in office. “I don’t say it’s a panacea that all of a sudden crime is going to come to a screeching halt as a result of (SB) 54 but it’s a tool and we need to put some tools back in the toolbox for our prosecutors and judges — for those that are out there — our police officers,” he continued. The Senate bill that was expected on the call but left off is SB 26, the plan to enact a percent of market value, or POMV, draw from the earnings reserve of the Permanent Fund to support government services and pay future dividends. Both the House and Senate passed similar versions of the bill last spring but the contingencies that each attached to the legislation have prevented the versions from being reconciled and sent to the governor’s desk. With the potential to spin off roughly $2 billion for state government while paying Permanent Fund dividends in the $1,000 to $1,200 range, SB 26 or something like it, is the only means available to drastically reduce the deficit without extreme additional budget cuts that most in the Legislature agree aren’t feasible. Walker said the House leadership’s insistence on a progressive broad-based tax to offset likely smaller future dividends that are characterized as a “regressive tax” by Democrats, pushed him to keep SB 26 off the special session call, for now, despite his two-year push to pass such a bill. “(SB) 26 can be added in short order. I can’t remove something from the call but I can certainly amend it and add it. So if House and Senate leadership came to me and said, ‘Governor, please add this to the call’ — or there’s a process they can (add it) — we would certainly do that,” Walker said. “It’s really the structural issue that needs to get resolved on the broad-based (tax) and then there’s no reason that the POMV couldn’t dovetail right behind that.” The Senate has insisted on a spending cap to accompany a Permanent Fund bill, which Walker again said he is amenable to as well. He said he is open to most ideas that would resolve the deficit and restore financial confidence in the state. “On the fiscal situation there’s little I would oppose as far as bringing through concepts that finish it out. We don’t say what we propose is absolutely perfect; I guarantee you it’s not perfect but it’s something on the table to have that discussion,” Walker said. Walker’s Chief of Staff Kendall said the 1.5 percent payroll tax, which would be capped at either a $2,200 payment or twice the previous year’s dividend, is critical because it would once again link government to economic growth even if the roughly $300 million it’s projected to generate would barely cover 10 percent of the deficit. The tax would also apply to nonresidents working in the state. “We’ve got the Alaska disconnect.” Kendall said. “What it means is economic growth punishes state government. So if Amazon decided 50,000 employees, we’re moving them to Anchorage and that’s our new headquarters, the state would lose tens of millions of dollars. There is no connection between economic activity and state revenue except for the oil industry. Everything’s balanced on the back of one industry.” He described further that economic growth meaning more jobs and more people in the state naturally leads to more need for government services and infrastructure and without a tax to link the two government has no way to pay for the increased demands place on it. “It’s a modest structure but it’s a structure that says when the economy grows, when there are more jobs, the state revenue can take care of those people,” Kendall said further. He also noted that Alaskans would remain the lowest-taxed people in the country “by orders of multiples” even with the governor’s payroll proposal. “So to the folks who say, ‘That’s it. I give up on Alaska; I’m leaving’ — where are you going to go?” Kendall commented. On the flipside, for those who want to retain the current PFD formula that would’ve paid out checks in excess of $2,000 per person this year and suggest closing the gap with taxes and spending cuts, Kendall said the state’s small population won’t let the numbers work. “Even if we put New York state’s entire suite of taxes in place — income taxes and everything else — we would still be running something like a $1 billion deficit,” he said. “We just don’t have enough people. It just doesn’t work, so it’s a little of this and a little of that.” To those skeptical about the ability to pass a new tax or overhaul how the Permanent Fund is used as election talk for 2018 is already ramping up, the governor was blunt. “It’s time to do the people’s business and not worry about our own political futures,” he said. “I’m all in on getting this done. Alaska deserves an answer this year and that’s what we’re going to do.” Elwood Brehmer can be reached at [email protected]

State loses another court fight over Roadless Rule

The courts have not been kind to the State of Alaska when it comes to the Roadless Rule. Federal District Court Judge for the District of Columbia Richard Leon threw out the state’s lawsuit against the U.S. Department of Agriculture Sept. 20, ruling the conservation regulation enacted more than 15 years ago was properly promulgated. Multiple state administrations and Alaska’s congressional delegation have fought against implementation of the Roadless Rule in Alaska, contending the Clinton-era regulation has severely damaged Southeast Alaska’s once robust timber industry. However, in July 2015 the 9th Circuit Court of Appeals overturned an exemption to the rule for the Tongass National Forest instituted by the USDA under President George W. Bush. The U.S. Supreme Court declined to hear the state’s subsequent appeal in that case. Simply, the Roadless Rule prohibits new road construction in most areas of national forests. And in the most recent ruling, Leon dismissed the state’s case with prejudice, meaning he ruled on the merits of the arguments in the suit and not on procedural grounds. In its lawsuit filed in June 2011, the State of Alaska argued the USDA ignored the economic impacts the Roadless Rule would have on the state when it was approved in 2001. The Alaska Forest Association, the Southeast Conference, the Juneau Chamber of Commerce and the City of Ketchikan, among other development groups, joined the state as plaintiffs in the suit. The Southeast Alaska Conservation Council, the Alaska Center for the Environment and several national conservation groups also joined the suit in defense of the rule. Southeast Alaska Conservation Council Executive Director Meredith Trainor wrote in a Sept. 22 post on the group’s website that the decision is a “resounding win for the Tongass and national forests throughout the United States.” “This decision provides a critical affirmation of the importance of the Roadless Rule in protecting our nation’s and the state of Alaska’s most essential intact habitat and forested lands,” Trainor wrote. “The precedent-setting decision should remind all Americans of the importance of protecting our public lands from attacks by industry groups seeking to undermine our most fundamental and cherished environmental protections.” Sen. Lisa Murkowski, who chairs the Senate Energy and Natural Resources Committee, said in a statement from her office that she is frustrated with Leon’s ruling. “A judge can dismiss a case, but Alaskans cannot dismiss the negative impacts the Roadless Rule is having on our communities. The rule has decimated our timber industry and serves mainly to prevent the access needed to construct everything from roads and power lines to energy and mining projects,” Murkowski said. “I recognize the damage this rule is causing, particularly in Southeast, and will pursue every possible legislative and administrative option to exempt us from it.” Alaska U.S. Rep. Don Young said the fight against the Roadless Rule will continue. “When the court fails Alaska, I believe it is Congress’ responsibility to act,” he said. Forest Service officials have said Southeast’s timber industry has declined primarily due to economics: the high cost of harvesting timber from the Tongass and its remote location make it hard for Alaska mills to compete with Lower 48 timber. State industry leaders contend a lack of access to timber due to the Roadless Rule has caused the downfall. While the Roadless Rule also applies to the Chugach National Forest in Southcentral, relatively little logging activity has occurred there. State Department of Law spokeswoman Cori Mills said Gov. Bill Walker’s administration is reviewing its appeal options but no decision has been made on how it will proceed at this point. Leon noted in his 45-page memorandum that documents posted in the Federal Register at the time the Roadless Rule was being considered projected Alaska could lose nearly 900 jobs and more than $38 million in personal income as a result of its implementation. Yet, he concluded that the USDA followed the National Environmental Policy Act because it obtained all the relevant information about the rule’s potential economic impacts, even if it did not make its decision solely based on them. “Put simply, NEPA ensures ‘a fully informed and well-considered decision, not necessarily the best decision,’” Leon wrote. He also called the fact that the USDA issued a rule that impacts 2 percent of all land in the country in less than 15 months “alarming,” but found the agency followed NEPA in its decision-making process. The state also asserted the rule violated the Alaska National Interest Lands Conservation Act, which prevents agencies from withdrawing more than 5,000 acres of lands in the state from potential use without congressional approval. Leon determined that while the rule ostensibly prohibits development in roadless areas, it does not technically. “Critically, the Roadless Rule does not exempt (inventoried roadless areas) from the operation of the mineral leasing laws. Instead, the rule restricts the terms of surface occupancy of the land, which is within the USDA’s authority under the mineral leasing laws,” he wrote. “Indeed, the rule explicitly allows for new mineral leases in the (inventoried roadless areas), provided that there are no new roads constructed in conjunction with those new leases.” Joint timber sale A day after Leon’s ruling, the state Department of Natural Resources announced a joint young-growth timber sale on state and federal lands near Edna Bay on Kosciusko Island just off of Prince of Wales Island in Southeast. DNR Commissioner Andy Mack said the $2.6 million sale to Alcan Timber Inc. of Ketchikan is the largest sale in Southeast this year. The state-federal sale was put together under the Good Neighbor Authority agreement the state Division of Forestry and the Forest Service signed last November to allow for such a sale. “We are excited that this new partnership with the Forest Service is providing more wood to Alaska’s forest products industry while maintaining a healthy forest. We will continue to press for more timber to be made from Alaska’s forests,” Mack said. The sale is for about 1,500 acres of young-growth timber totaling 29 million board feet, according to a DNR release. ^ Elwood Brehmer can be reached at [email protected]

Progress for Interior gas project with supply contract

Interior Energy Project leaders can finally see the light from a small, blue flame at the end of the tunnel. Gene Therriault, the former Fairbanks-area state senator who of late has led the project to expand natural gas availability in his hometown, outlined the terms of the key natural gas supply contract Pentex Alaska Natural Gas Co. recently secured with Hilcorp Alaska to underpin the whole operation during the Sept. 21 Alaska Industrial Development and Export Authority board meeting. Pentex is the parent company to Fairbanks Natural Gas; both are currently owned by AIDEA. For starters, Therriault said the contract with Hilcorp, which takes effect April 1, 2018, eliminates a 4 percent increase to the current price of gas that was set for Jan. 1 in the utility’s existing deal with Hilcorp. The new deal, with a three-year term, also provides “a great deal of volume flexibility,” he said — a particularly important factor considering the IEP is still mostly theoretical at this point. “We do anticipate of course the signing of new customers but we didn’t want the project to have a whole lot of take-or-pay risk and so the contract offers a lot of flexibility to grow that (gas) volume without actually having to sign up for take-or-pay risk ahead of the customers actually signing up,” Therriault told the board. AIDEA officials have been trying to reach a gas supply deal with Cook Inlet producers since early 2016 but the fact that the ultimate demand for gas is still unknown hampered progress. What is known is that at least initially that demand will be small, another challenge. The contract is for a flat price of $7.72 per thousand cubic feet, or mcf, of natural gas for its duration. That is also the highest price Hilcorp is allowed to sell gas for this year under the five-year Consent Decree agreement the company signed with the state when it purchased Inlet assets from major producers in 2012 and immediately became the dominant gas supplier in Southcentral Alaska. The Consent Decree expires Dec. 31. A prior Interior region gas demand forecast study commissioned by AIDEA projected gas use would increase about 50 percent per year once additional supply was available. Based on that assumption, AIDEA believes demand will grow to 3.25 billion cubic feet, or bcf, of gas by 2023 and reach nearly 5 bcf by 2027. That volume growth should drive prices down from the roughly $20 per mcf current Fairbanks Natural Gas customers are paying to $17.30 per mcf in 2020 when the new supply should come online and hit the target $15 per mcf range by 2022. A work in progress since its inception in 2013, the underlying goal of the Interior Energy Project has been to compete with the price of fuel oil on an energy-equivalent basis since oil prices fell sharply in late 2014. Natural gas at $17.30 per mcf is equal to fuel oil priced at $2.39 per gallon, according to AIDEA. Therriault acknowledged the promising numbers are all based on projections that could still change significantly and that the project’s price goals simply aren’t feasible on day one. “It really does highlight that this is a volume enterprise and whatever we can do in conjunction with the local communities to help customers use this new cleaner fuel — it helps the economics tremendously,” he said. While it appeared it would be relatively easy to convince residents to convert from fuel oil furnaces to natural gas appliances at the outset of the IEP when fuel oil was near $4 per gallon in Fairbanks, it is now much less clear how many households will commit to spending upward of $10,000 in some cases to overhaul their home heating systems with fuel oil closer to $2 per gallon. As a result, AIDEA and the region’s local governments have looked for ways residents could lower conversion costs or use various mechanisms to finance them, such as adding conversion costs to property tax or natural gas utility bills. To that end, Therriault said getting businesses to buy quantities of gas potentially equaling dozens of homes is imperative to the project’s success. “We certainly want to get residential customers, but we just want volume and if it’s a business customer that’s good,” he said further. “It’s all about units of gas primarily.” LNG plant, storage Getting a gas deal done allows AIDEA and Fairbanks Natural Gas to move ahead with the other primary components of the IEP: expanding gas processing and LNG storage capacities. Therriault said full-fledged engineering and design work will begin soon on the long-anticipated $46 million expansion of the Titan LNG plant on Point MacKenzie that supplies FNG. The expansion will add about 3 bcf per year of gas processing capacity to the existing roughly 1 bcf per year plant. Coinciding with that, FNG is currently taking proposals to build a 5.25 million-gallon LNG storage tank in South Fairbanks to match the future LNG production growth. The utility hopes to break frozen ground on the $42 million LNG storage project in February or March of next year and have it done in late 2019, according to Therriault. If all goes as planned, the larger Titan plant will be ready to ramp up production very shortly after the LNG storage facility is complete and the whole system should start bringing more natural gas to the Interior in 2020. Finally, having the gas supply deal in hand also gives AIDEA and the Fairbanks North Star Borough-owned Interior Gas Utility what they need to fold Pentex and Fairbanks Natural Gas into the IGU. It has been presumed since AIDEA bought Pentex in 2015 that the two Fairbanks-area gas utilities would be integrated to maximize operational efficiencies across what is a relatively small service area. Late last December, AIDEA agreed in principal to sell Pentex to IGU for $58.2 million. A memorandum of understanding between the local startup utility and the state-owned authority outlining that deal also included preliminary terms for AIDEA to fund up to $333.6 million of natural gas infrastructure throughout the utility’s supply chain — from expanding the Titan LNG plant to constructing LNG storage facility to continuing build-out of the gas distribution network to homes and businesses in Fairbanks and North Pole. Most of the $333.6 million will come from the $332.5 million financing package of loans, bonds and grant money approved by the Legislature in 2013 for the Interior Energy Project. Therriault said in an interview that the sides have continued to work under the terms of the MOU — which originally had a closing date of March 31 — to finalize the finer points of the financing and sale package. The hope now is to have the whole thing wrapped up by the end of the year, he said. AIDEA board member and Fairbanks resident Gary Wilken thanked state legislators, AIDEA staff and local government leaders in Fairbanks and North Pole for their continued support and patience toward the multiple iterations of the Interior Energy Project before voting to approve a project plan that again was contingent on the gas contract. Wilken also said the conversation among Interior residents about getting natural gas has slowly changed in recent years from disbelief to hope. “Today it’s not a question of if; it’s a question of when,” he said. IGU General Manager Jomo Stewart also thanked AIDEA officials for their work on the project in comments to the board. “With the passage of this resolution we now have a project,” AIDEA board chair Dana Pruhs concluded. Elwood Brehmer can be reached at [email protected]

Valdez tug transition on track, Alyeska official says

WHITTIER — The major move to a new oil tanker escort firm in Valdez is going well according to Alyeska Pipeline Service Co. managers. “All the vessels, based on schedule analysis and the visits we make to the shipyards, are on schedule,” said Mike Day, the manager of Alyeska Ship Escort/Response Vessel Systems, or SERVS. Day reported to the Prince William Sound Regional Citizens’ Advisory Council board of directors at its Sept. 14 meeting in Whittier on the progress of the SERVS operator transition from Crowley Maritime to Edison Chouest Offshore. Edison Chouest announced in June 2016 that it had secured a 10-year contract from Alyeska to conduct SERVS operations out of the Valdez oil terminal starting in summer 2018. Crowley tugboats have assisted oil tankers docking in Valdez since the 1977 startup of the Trans-Alaska Pipeline System, which terminates there. The company added the Prince William Sound tanker escort and oil spill response duties to its work in 1990, a year after the Exxon Valdez oil spill. Edison Chouest is building 14 new vessels and spill response barges to fulfill its duties under the SERVS contract. The new SERVS fleet will include five large tanker escort tugs and four smaller support tugs, which are under construction at Edison Chouest’s various Louisiana shipyards. The first two tugs and a spill response barge are scheduled to arrive in Valdez in February. Shortly thereafter, the new tug captains and crews will begin five months of live training exercises — some with tankers in tow — before officially taking over for Crowley next July, according to Day. But formal crew training will begin before the tugs arrive. Day said each of the roughly 160 people Edison Chouest plans to commit to the SERVS contract will first go through 68 hours of classroom training starting in October on how to operate spill response equipment. Those folks will then get another 12 hours of hands-on equipment training “before they ever step foot on a vessel,” he said. In July, Edison Chouest shipped spill response equipment to Louisiana for two weeks of initial training. A ship bridge simulator Edison Chouest built in Louisiana will also be moved to Valdez once the company is done with it down south. Vessel operators are expected to put in 36 hours of simulator time and Day said Alaska Tanker Co. officials have expressed interest in participating in simulator training. Alaska Tanker Co. operates four 1.3 million-barrel capacity tankers for BP. Also starting in October, each SERVS tug captain will travel to Valdez and get on a working Crowley tug for at least a week. That observational training, which will run through March, was originally planned for last winter but was rescheduled for logistics issues, according to Day. “We’re hopeful they might find a big wave or two, or some wind, snow — find out what it’s like to operate a vessel in winter in Prince William Sound,” Day said. Sea trials on the first tugs are set for November. This past January, longtime Canadian naval architect Robert Allan made a presentation to the council board in which he was highly critical of the tug designs selected by Edison Chouest. Allan outlined a long list of perceived design flaws that could hamper the ability of the tugs to operate safely and successfully in the harsh winter conditions of Prince William Sound. However, he also acknowledged that he did not have access to the full, detailed tug design documents. At the time, Edison Chouest Alaska leaders could not be reached for comment but an Alyeska spokeswoman said the terminal operator has confidence in Edison Chouest and also noted that Allan only reviewed high-level information. In a separate presentation during the September meeting, Nathaniel Leonard, president of Maine-based Little River Marine Consultants, said Edison Chouest is using different design and construction methods than many in the industry are accustomed to. “Edison Chouest is a top-notch company and they’re building top-notch boats,” Leonard said to the council board. Day also reiterated Alyeska’s confidence in the full-service maritime company in comments to the board. When the tugs get to Alaska they will be thoroughly tested to assure they meet performance requirements, such as the ability to stop a loaded tanker moving at 6 nautical miles per hour with wind at its stern, Day said. He noted specific weather conditions will not be sought out for the performance tests; it will be up to the tug and tanker captains to decide when weather and sea conditions permit the exercises. Also, the Alaska Department of Environmental Conservation wants Alaska Tanker Co.’s largest tanker available for the tug tests, according to Day. The tests done with loaded tankers will at least first be done in the deep and open central area of the sound and not in Valdez Narrows to minimize the risk of an incident during training, he said. “I don’t anticipate any single test that’s pass or fail but a stepped approach to the force we put on a ship,” Day added. Such tests, in which the tugs are tethered to the tankers, only take about 10 minutes each, so several can be done in a day, he said. Additionally, Edison Chouest tugs will follow Crowley tugs on tanker escorts until they have passed all tether and towing exercises, Day said, which could continue through 2018 after the official July transition. Elwood Brehmer can be reached at [email protected]

State works to formalize method for assessing oil and gas properties

Some of the affected parties are raising concerns as state tax assessors are finalizing a methodology for valuing oil and gas properties other than the Trans-Alaska Pipeline System for the first time. Alaska Petroleum Property Assessor Jim Greeley said in an interview that the way the state currently assess values for oil and gas properties isn’t new; it’s been phased in over the last five years. However, the means for assessing the industry’s often complex and extremely expensive infrastructure has never been spelled out in state regulations, according to Greeley. “The regulation provides only high-level, broad guidance that basically says for production properties you have to use replacement cost (valuation),” he said. “Then for pipelines it says you can use sales, income or replacement cost and it stops there so there’s no specifics of methodology in currently. That’s what we’re trying to fix.” The vagueness of the regulations opens the door to subjectivity by the state and local governments or the property owners, creating a situation that’s “ripe for appeal,” Greeley added. That’s exactly why local governments and the producers fought over the value of TAPS for so many years, he said; there were no ground rules defining how it would be valued. The Tax Division hopes codifying a specific methodology in regulation will add transparency to the assessing process and clarity to the results so everything is understood by all the involved parties, he continued. The challenge in valuing oil and gas properties in the state — just another in the list of issues unique to Alaska — is that they don’t fit the mold of traditional business and residential properties, or even that of similar industry infrastructure elsewhere. The property tax assessments most folks are familiar with are market-based but that doesn’t work for Slope oil pipelines or process facilities. “When you have 50,000 homes in Anchorage you’ve got all sorts of comparables and you actually have an active market of buying and selling to conduct those assessments under that (market value) standard. We don’t have an active (oil and gas property) market where we have similarly situation properties to compare to. There’s only one Alpine; there’s only one Prudhoe Bay,” Greeley said. “Conversely, not only is there only one of them, they’re not being actively bought and sold so we don’t have that marketplace.” In most Lower 48 oil and gas basins, pipelines, reservoirs and their associated facilities change hands frequently enough to apply the well-understood market value principles, he noted. Father time has also complicated how the replacement cost of a property is calculated. When the laws outlining oil and gas property taxes were written roughly 40 years ago, replacement cost was pretty much what the facilities had just been built for. As things have aged and technology has changed, determining what it would cost to replace a facility has become largely theoretical, Greeley said. To combat those problems, the Tax Division has gone to the “use-value” standard first employed by the Alaska Superior Court and eventually the Supreme Court in litigation over TAPS. Greeley emphasized the regulations the division is considering are not for TAPS, which has a long history of value disputes. ‘Use-value’ standard In February 2014, the Alaska Supreme Court upheld a 2011 Superior Court ruling that concluded the value of TAPS is primarily based on the proven reserves that will eventually flow through it. At the time, the Supreme Court set the taxable value of the iconic pipeline at $9.9 billion; the owner companies had sought an $800 million value. In March 2016, the TAPS owners, who are the three major North Slope producers, the North Slope Borough, the City of Valdez, and the state settled on an $8 billion value through 2020 to at least temporarily stop the nearly endless litigation over the issue. While not for TAPS, the valuation methodology the state uses does follow the principles laid out by the Alaska courts. At its base, the use-value standard the state now employs on all unrefined oil and gas properties uses proven reserves — arrived at via production data — to determine the value of the facilities dedicated to exploiting those reserves. Refineries are assessed at the municipal level. “The reason we look at production is production is highly correlated to be the best measurement of what the proven reserves are,” Greeley said. “In other words, when Prudhoe Bay had 10 billion barrels of proven reserves it was producing at its plateau rate, 1.6 million barrels (per day); and when Prudhoe Bay had 2.5 billion barrels of reserves in 2009 it was producing 300,000 barrels per day.” He continued to explain that production data from the prior year is entered into a regression formula and looking back one can see that a field’s reserves and production correlate nearly perfectly over time. Reserves available to feed oil and gas facilities are a good measurement for valuing the facilities on a replacement cost basis because the infrastructure is almost always built to exploit a single reserve. As the available oil and gas depletes and production declines, the size and capacity of the facilities needed to serve a given reservoir also declines — and so does the minimum cost to replace it with a facility capable of handling a smaller oil and gas pool. Therefore the facility’s value depreciates. Greeley also said actual proven reserves data is very hard to get; companies generally keep detailed figures close to the vest and if it can be obtained it is confidential taxpayer information. Thus, using it would be contrary to a primary tenant of property taxes: that the method to calculate them is transparent and taxable values can be compared against each other. Production data is readily available to anyone on multiple state agency websites. “When the field has produced all of its proven reserves and you look back at how we depreciated it you’ll have no possible other outcome other than to have perfectly depreciated it over the life of that field and that’s because we’re letting the reservoir tell us what depreciation should be over the life of that field,” Greeley said. Oil price and other factors are accounted for through production, he added; if the economics of a field worsen the economically recoverable reserves will decline and that will ultimately show up in production figures. Prior to phasing in this methodology several years ago, state oil and gas property assessors conducted deterministic production forecasts, which Greeley described as “radically error prone” because they had to predict what a reservoir would produce. “When you look back at our depreciation applications it’s just the opposite. You have no other choice than to always be wrong. You need to be able to predict oil price; you need to be able to predict development; you need to be able to predict reservoir performance; you need to be able to predict all these things and then you have to come up with this deterministic estimate,” he said. “The probability of being perfectly correct is almost nil. By telling the reservoir what it’s going to do you’re just injecting a higher error rate into the assessment.” Overall tax revenue has not changed significantly since the new use-value approach has been applied, but most importantly it has not led to a single taxpayer appeal, according to Greeley. In 2016, the state collected $111.7 million in oil and gas property taxes, but much more went to municipalities, namely the North Slope and Kenai Peninsula boroughs. While the state conducts oil and gas property tax assessments, local governments are able to apply their mill rates on the state’s assessments to collect their portion of oil and gas property taxes. Companies then use the local tax payments as credits against the state’s 20-mill oil and gas property tax rate. In July, the Revenue Department held a workshop to explain the use-value approach and obtain feedback from taxpayers before formally proposing the regulatory changes. Whether or not the department will ultimately move to add methodology to state regulations hasn’t been decided, Greeley said, but the process to do so will likely be started sometime yet this year if the Revenue Department moves in that direction. That process also includes further opportunities for stakeholder input. The workshop elicited letters from the City of Valdez and three companies: BP, ConocoPhillips and small independent producer Caelus Energy. Greeley characterized the comments from BP and ConocoPhillips as primarily clarification questions, saying conversations with officials from both companies about the methodology have been favorable. He again noted the approach has not led to any appeals since it has been put into practice. Among other things, BP asked several questions regarding how equipment aging on the harsh North Slope is factored into the use-value approach and whether or not equipment that has been fully depreciated under the methodology still has an economic value even if it is idle and probably wont be used again. ConocoPhillips Alaska officials stated that the definition for replacement cost — while seemingly straightforward in that it is the estimate to construct a new property to meet current needs — could lead to differing interpretations and “provides plenty of opportunity for dispute.” They further noted that how the method is applied to facilities fed by multiple reservoirs was not addressed during the workshop and recommended the department share its plans on how potential issues arising from that will be resolved. Caelus Energy Vice President Marc Byerly had more direct criticism for Revenue officials. He wrote that the methodology is “inconsistent with both the current tax law and current tax regulation.” He contended that reproduction cost is being used instead of replacement cost, and that depreciation is not based on the economic life of proven reserves because reserves are not estimated in the calculation. Further, he stated that the methodology does not account for physical deterioration of assets and “ignores” external obsolescence, or depreciation based on factors outside the property. “We look forward to working with Caelus to deal with issues they’ve brought up and we hope the (proposed regulation) process will forward that opportunity,” Greeley said. To Valdez, he said the comments from city’s attorneys were mostly concerns based on where they’ve been with TAPS. The Tax Division believes TAPS’ value and the corresponding taxes will continue to be arrived at via settlement, according to Greeley. Local help Separate from the methodology regulations, the Tax Division is looking for help conducting oil and gas property assessments from the local governments that are home to Alaska’s oil and gas industry. It’s yet another consequence of the state’s continuing multibillion-dollar budget deficits. “Everything’s cut; we’re resource constrained so the state is looking at the provisions in (law) which allow for municipalities to assist in the assessments under MOU (memorandums of understanding),” Greeley said. “We’re looking to see if there’s any interest from municipalities to participate with the state and assist under those existing statutory provisions.” He said it’s something Tax Division and Revenue officials have been discussing with local leaders for a couple years. Personnel has been cut from the overall Tax Division, but Greeley said he still has his tax technician and staff appraiser. Where he felt the hit was in his contract budget. “I get real busy during the assessment season and historically we would spend significant amounts of money to bring in temporary assistance to get through the assessments in terms of contract staff and that has been completely wiped out. So, in other words when we need it most that assistance is no longer there,” he said. He specified the cost to usually be a couple hundred thousand dollars, noting it varied year-to-year. Valdez Mayor Ruth Knight signed an MOU, with the Revenue Department in late March to take on oil and gas property audit responsibilities inside the city under the department’s direction. That includes hiring contractors at the city’s expense, according to the MOU. The North Slope Borough agreed to help the state through MOU in 2015 and while that agreement is not active, Greeley said it remains in place so the state and borough can collaborate when need be. The MOU notes the state retains sole authority to determine taxable property values. Outgoing Kenai Peninsula Borough Mayor Mike Navarre, who has reached his term limit, decided against helping the state with assessments after conversations this summer because he couldn’t ask the Assembly for $25,000 the borough would get a tangible return on, according to Navarre’s Chief of Staff Larry Persily. Persily said the mayor is certainly aware of the department’s budget situation and sympathizes with Revenue officials over it but he couldn’t see how the local government would get its money back. He also said the $25,000 figure was one floated by the department leaders in the summer meetings as the amount they hoped the borough would kick in to the state’s effort. Persily did note, though, that the new borough mayor after the Oct. 3 election might be more amicable to the idea. New Revenue Commissioner Sheldon Fisher, who took over for Randy Hoffbeck after he retired from the position in August, might also have different ideas about how the borough could help, he added. Elwood Brehmer can be reached at [email protected]

Report recommends improvements for ferry system

Insulating the state ferry system from annual political battles is one of the biggest things lawmakers can do to improve its operating efficiencies, according to a draft report released Sept. 13. The Alaska Marine Highway System Reform Initiative draft report highlights the potential benefits the system could obtain from being converted into a public corporation as well as being forward funded by the state Legislature. In May 2016, Gov. Bill Walker signed a memorandum of understanding with the Southeast Conference to have the Southeast Alaska nonprofit economic development group lead an examination of what reforms the state can take to improve the system’s operations over the long-term. In recent years, as the State of Alaska has tried to reconcile annual and ongoing multibillion-dollar budget deficits, the AMHS has been caught in the middle of tense political battles. Conservative legislators from Anchorage, Fairbanks and the Matanuska-Susitna region have often criticized the ferry system, which operates at a significant annual loss, as a bloated government agency that needs to be scaled back greatly. Coastal legislators contend robust ferry service is vital for their communities and is often the only feasible way for residents in small communities to travel and ship vehicles, boats and all sorts of other goods. The draft report compiled by the Alaska research firm McDowell Group in concert with marine engineering consultant Elliott Bay Design Group of Seattle acknowledges the AMHS will never be a money-making operation. “Given the small markets served, long distances between ports, and often extreme weather operating environment, AMHS will always be dependent on public support to provide safe and reliable transportation,” the report concludes. McDowell and Elliott Bay studied other ferry systems worldwide for their report. The national firm KPFF Consulting Engineers was also contracted to draft a strategic business plan for the AMHS as part of the larger reform effort. During the 2016 state fiscal year, the ferry system collected $47.2 million in operating revenues on $145.2 million in operating expenses. The revenue gap is filled mostly with state general funds. Currently, the AMHS fleet consists of 11 ferries. State Transportation Department officials have been trying to sell the M/V Taku, one of the oldest mainliner ferries, and other vessels have been laid up due to budget cuts. After the state dropped the minimum bid several times, a group of Portland investors secured the purchase at a sale price of $300,000 to turn the Taku into a floating hotel and restaurant on the Willamette River. Bids were unveiled Sept. 15, and the state Transportation Department announced Sept. 19 that it was accepting the bid. Jonathan Cohen of Portland, Ore.,was the high bidder when the Alaska Department of Transportation opened three bidding envelopes for the 352-foot Taku. Cohen, who represents a group of Portland investors, bid $300,000 — almost six times the amount of the No. 2 bid — and said by phone on Sept. 18 that he intends to transform the Taku into a waterfront hotel and restaurant that will occasionally sail into the Columbia and Willamette rivers. “Our hope is to bring it to Portland, Oregon, where we’re based and to use it as a way to give this very historic vessel a second life,” he said. At the same time, two new smaller “day boat” ferries destined for service on the popular Lynn Canal routes out of Juneau are under construction in Ketchikan. Construction of those vessels, built with about $110 million of state money, was approved shortly before the state’s budget fell apart when oil prices collapsed in late 2014. The Department of Transportation is also working to replace the M/V Tustumena, which serves Homer, Kodiak and the Aleutian communities, but that replacement vessel will be paid for primarily with federal dollars. While the AMHS will probably never be self-sufficient, the aforementioned recommendations could help it maximize its strengths, according to the report. As it stands, the AMHS is a state agency managed as a public transportation service. Shifting it to a public corporation similar to the Alaska Railroad Corp. with its own board of directors would better allow for long-term operational and financial strategies to be implemented without the fear of them being changed or scrapped by political forces, according to the report. A public state corporation would also still be able to receive federal highway funds, which the system relies on heavily for vessel maintenance and replacement. As a public corporation the AMHS would be best suited to optimize operations if it were able to draw on the state AMHS Fund comprised of the revenue the system generates without approval from the Legislature, the report states. Allowing system leaders to manage the fund would provide a predictable revenue base. Funding the system’s remaining needs ahead of the next year would also allow it to maximize efficiencies and “is essential for the system to take full advantage of its revenue opportunities.” “Forward funding, which allows developing operating schedules up to 18 to 24 months in advance, would enhance revenue generation, especially in the nonresident tourism market where there is significant potential for growth,” the study authors wrote. “This growth would bring economic benefits to the many Alaskan communities that depend on the visitor industry.” Roughly 40 percent of ferry riders are non-resident, according to the AMHS. The system is often marketed as an alternative to traditional cruise ships, particularly in Southeast Alaska. However, seasonal ferry schedules are finalized just a few months prior to implementation because the system budget is not known each year until the overall state budget is approved. Cruise operators, on the other hand, set sailing schedules several years in advance to allow prospective customers ample time to plan vacations. The report contends that increasing passenger fares significantly would impact ridership to a point that it would negate the sought revenue benefits. Conversely, lowering fares would not attract enough new riders to offset the lost per-passenger revenue. It does suggest the AMHS employ demand management strategies as a way to grow freight revenue, which is currently about $2 million per year. “AMHS should look for opportunities to partner with private freight carriers to maximize revenue and community service,” the report states. Standardization of the ferry fleet to the extent possible and replacing the most expensive to operate ferries will in the long run significantly save money, according to the report; and utilizing modern automated ferries could reduce on-vessel labor by up to 10 percent. The McDowell-Elliott Bay team also determined that continuing the system’s service to Bellingham, Wash., is critical because it accounts for 44 percent of total operating revenues. The long-haul service through the Inside Passage is a popular way for people moving to and from Alaska, and to travel. Taku sale In July, Cohen outlined a plan to put a floating hotel at a pier in northwest Portland. According to the application, and as first reported by the Oregonian, the pier would be converted “into a terminal for river-related activities: floating hotel, watersports, seaplane terminal, spa, park, farmers’ market, and/or other amenities beneficial to adjacent condos and apartment buildings.” Cohen said by phone that the result would be similar to the Queen Mary, an ocean liner converted into a hotel and destination in Long Beach, Calif. “We’re not strangers to new and challenging projects. This is a different type of project, and it will come with its own challenges,” he said. Cohen said the Taku wouldn’t be a high-end hotel; it’d be similar to the Society Hotel, which offers hostel-style accommodations as well as individual rooms. “We’re not looking to offer high-end hotel rooms. We’re actually looking to make these the least-expensive hotel rooms in town,” he said. The Taku’s open car deck might be converted into a space for a farmers’ market or small businesses, he said. The lounges could become spaces for “digital nomads” who need working room. “Everyone has just been so positive about this boat, and I think it just has such a wonderful energy about it, and we want to keep that going,” he said. Refitting the Taku is likely to be an expensive proposition, something that deterred other bidders. The state extended the bidding deadline four times, and that came after two other offerings received no takers. According to information provided to bidders, the Taku needs several Coast Guard certifications and some significant maintenance work. Built in 1963, it is showing its age, and the cost of repairs was one of the reasons the ship was taken out of service in 2015. All three bids for the Taku were below the state’s reserve price of $350,000. Elwood Brehmer can be reached at [email protected] James Brooks of the Juneau Empire contributed to this report.

DNR starts work on North Slope road network

The Department of Natural Resources is trying to take advantage of what it sees as a convergence of fortuitous events to build a network of roads across the western Arctic. The Arctic Strategic Transportation and Resources, or ASTAR, project hatched out of a series of conversations Gov. Bill Walker had with North Slope Borough Mayor Harry Brower Jr. late last year about ways the state could support North Slope villages, DNR Commissioner Andy Mack said in a Sept. 12 interview. Mack noted that the talks between Walker and Brower were similar to those Alaska governors have had for decades with local leaders about the need for basic infrastructure in rural parts of the state. “In rural Alaska these infrastructure pieces sometimes take on a life of their own and can really improve the quality of life,” he said. However, it wasn’t until a remarkable victory last November — not the Chicago Cubs — that the administration really saw a chance to make a move. “Then the election happened last fall and President Trump was elected and very quickly we realized some of the things we’d been talking about — a lot had changed in the policy arena and there were some new opportunities to take the North Slope Borough up on what we’d been talking about and that was really to focus on community needs and whittling down the cost of living in those communities,” Mack continued. As a result, DNR began to put together the concept of a network of basic gravel roads to connect communities across the North Slope, primarily in the federal National Petroleum Reserve-Alaska. A map on the department’s ASTAR page shows potential road corridors connecting Anaktuvuk Pass and Umiat to the south to Point Hope, Point Lay and Wainwright to the west and Nuiqsut and Point Thomson to the east, among others. The administration then made a late addition to its capital budget request and in May, Mack and Brower sent letters to the House Finance Committee requesting funding to start planning for and prioritizing which parts of the large concept could move forward. The Legislature ultimately approved $7.3 million for ASTAR; money reappropriated from the Department of Transportation, DNR and leftover funds from the Alaska Railroad’s Tanana River bridge project southeast of Fairbanks. Mack said now is the time to investigate ASTAR despite the state’s serious budget problems because the Department of the Interior is reassessing its view of oil and gas potential in the NPR-A. Recent Nanushuk formation oil discoveries inside the reserve and on state lands near it by ConocoPhillips and Armstrong Energy and strong interest in NPR-A leases in the fall 2016 federal oil and gas lease sale give every indication the assessment will show increased oil potential and industry wants more access into the area. There has also been a push from resource development proponents in the state to reopen the NPR-A management plan and the Trump administration has hinted that it is interested in opening more areas in the 23 million-acre reserve. Mack acknowledged $7.3 million doesn’t build much on the Slope and said that money will be used to plan projects and hopefully devise a payment structure for what might actually be built, which he also said almost certainly won’t come close to the entire network. “We know we’re getting into some major (National Environmental Policy Act) planning. We think there ought to be good results for the communities on rights of ways so that we have clear plans for community development and if there’s a secondary benefit for industry, we’re happy, we’re extremely happy,” Mack said. Most of that planning will be done over the next year to 18 months, he added. DNR is currently advertising a long-term but temporary position to travel to the Slope communities, gather input and manage those planning efforts. Those secondary benefits for industry — accessing otherwise isolated prospects — could help pay for ASTAR infrastructure through fees or simply expedited projects leading to more state taxes and royalties, according to Mack. “Even if there is a minor uptick in production in one unit or field or it comes online a little sooner because a company might be able to pay tolls to get to that prospect it possibly has the ability to pay for itself,” he said. “Part of the project is to understand and examine the financial opportunities and one of the opportunities may be a tolling structure and how that might work.” He said further that companies have noticed the ice road season being consistently squeezed on both ends. Leaders of the small independent producer Caelus Energy have consistently noted that a road to their 6 billion-barrel Smith Bay oil prospect about 125 miles northwest of existing Slope infrastructure would bring down development costs immensely and likely get the project into production quicker. While the state is moving quickly on ASTAR, Mack emphasized, “We’re not backing away from our commitment to protect the area and the subsistence culture but we certainly see new information that should be considered.” He also said the roads could be used as utility corridors to bring lower cost energy and broadband to the region, but all that is a long ways off. “We don’t have any particular project in mind and it will probably start out with an effort to identify what one or two roads in the NPR-A looks like, maybe a marine facility or two and what they would look like,” Mack said. “We’ll kind of chew it bite sizes.” ^ Elwood Brehmer can be reached at [email protected]

Slope producers doing more with less

Alaska’s oil workforce has been hit hard by low prices, yet the companies in the state have managed to buck a longstanding trend and increase production for the last two years. So what gives? For state Labor Department Economist Neal Fried, the curiosity in the numbers goes back further than when oil prices started tumbling from the $100-plus per barrel plateau in August 2014. “The whole trend in oil production and employment has been very interesting just because in 2015 we reached a record number of employees in oil and gas in the state’s history, which is pretty amazing given the fact that we were producing significantly less than our peak in 1988 or for many years before that,” Fried noted. He said that the decade-long run-up in oil and gas sector jobs exceeded the generally accepted notion that oil fields — the three primary North Slope fields are 17 to 40 years old — require more investment as they age. In 2006, Alaska had an average of 9,600 oil industry workers, according to the state Labor Department. That year Trans-Alaska Pipeline System throughput averaged just more than 759,000 barrels per day. By the peak of industry employment in 2015, just before price-induced layoffs started taking their toll, oil accounted for about 14,200 jobs while TAPS carried just 508,000 barrels per day, the lowest annual production level in the history of the North Slope. Fried attributes the employment boom to the peak oil price years of 2011 to 2014. “Without that magical price I don’t expect that it would’ve ever happened but it still was surprising,” he said of the workforce expansion. “It kind of humbled anyone that makes any kind of long-term forecast on any industry.” However, the script has flipped in less than two years. So far this year Alaska has averaged 10,600 oil industry jobs, the fewest since 2006, while TAPS throughput is at nearly 523,000 barrels per day, according to the pipeline owner Alyeska Pipeline Service Co. The last month Alaska North Slope crude averaged more than $60 per barrel was June 2015. North Slope oil production has generally declined at about 5 percent per year with few exceptions since peaking in 1988 at just more than 2 million barrels per day. With the regular North Slope winter production ramp-up still on the horizon for the end of the year, 2017 is already on pace to surpass the 517,000 barrels per day of 2016. If that holds true, it would mark the first two consecutive calendar years and only the third year overall of year-over-year increased North Slope production since 1988. The only other year prior to 2016 to see a production increase on the Slope was 2002 when the Alpine field came online. New technologies could be starting to displace some traditional manpower, Fried surmised, but quantifying that for Alaska in the complex and extremely proprietary oil and gas industry is very difficult. “You just have all this other noise going on,” he said. On a high level, the federal Bureau of Labor Statistics estimates productivity in the oil and gas sector increased 5.4 percent nationwide in 2016 on a production per hours worked basis. The industry saw production output decrease over the year, but less than hours worked did, as oil prices down to less than $30 per barrel to start 2016 discouraged investment. Just because there are fewer people doesn’t mean there is less quality work going on, Alaska Division of Oil and Gas Deputy Director Jim Beckham said. He described it as producers “refining their techniques and their abilities to make efficiencies all the time.” “They will pick and choose, high-grade, so to speak, the work that they’re going to do targeting the projects that they’ll get the most benefit from,” Beckham said. He surmised a significant number of the jobs lost in the recent downturn could’ve come from Anchorage offices, allowing the Slope workers to continue the actual work of extracting oil. The oil and gas sector in the city is down about 700 jobs from mid-2016 to now, according to the Anchorage Economic Development Corp. Beckham said the production increase has been driven primarily by more oil from the Prudhoe Bay and Alpine fields. BP, which operates Prudhoe, outpaced its own estimates for oil and natural gas liquids production from the Prudhoe Bay field in 2016, with production averaging 197,900 barrels per day for the year. The company had expected reduced drilling activity brought on by low oil prices would result in average daily production to be flat or down as much as 40,000 barrels from 2015, when 196,400 barrels per day were pumped from Prudhoe. “In the Prudhoe Bay Unit they’re still reaping some of the benefits of their drilling and workover program that they had over the last couple of years,” Beckham said. BP is only down about 50 jobs since 2015, with 1,700 Alaska employees, according to spokeswoman Dawn Patience. The company has two drilling rigs working at Prudhoe this year. “We are pursuing well work which can be done less costly and more efficiently by non-rig equipment such as coil tubing,” Patience wrote in an email. “In today’s low oil price environment, Prudhoe Bay’s working interest owners must look closely at every investment decision.” Beckham added that BP has achieved “remarkable results for a field that’s that age and size” with its well workover and maintenance programs over the past couple years. At Alpine, in the Colville River Unit, ConocoPhillips started up its CD-5 oil project in October 2015. The company approved adding 18 new wells to CD-5 in April 2016 — bringing the total to 33 — and since then production from the Colville River satellite has approached 20,000 barrels per day, or about 25 percent above the company’s stated goal of 16,000 barrels daily. At the same time, ConocoPhillips Alaska is down about 240 positions since January 2015, spokeswoman Natalie Lowman said, adding a majority of the employees affected by layoffs worked in Anchorage. Overall, ConocoPhillips has managed to reduce its operating cost by about 20 percent since 2014, Lowman noted. “We have found ways to streamline processes both in the office and on the Slope,” she said. “We are a stronger, leaner company than before the oil price crash.” Beckham also noted ExxonMobil brought the Point Thomson natural gas field, which pumps liquid gas condensates into TAPS, online in April 2016. While technical problems have hampered Exxon’s ability to average its 10,000 barrels per day target, the field has pumped about 3,000 barrels per day into the pipeline. “You start to add those up and you get an 11,000-12,000 barrels per day increase,” Beckham said. It should be noted the new production must offset continuing decline in other fields before contributing to increased production Slope-wide. If the majority of job losses have not come from the largest companies operating on the Slope, there is only one other place to turn: their contractors. Alaska Support Industry Alliance General Manager Rebecca Logan said the issue of job losses amongst Slope contractors is a touchy subject, but acknowledged a majority of the positions cut from Slope oil work came from contractor companies. Best known simply as the Alliance, Logan’s trade association represents more than 500 companies with upwards of 50,000 employees working in the state’s oil and gas and mining sectors. Contractors are often the first place the operators turn for cost savings in the form of less expensive work, she said. “People are doing more with less and the less means fewer people,” Logan said. She added that when oil prices were at $100 per barrel, the operating companies were likely not looking as hard for efficiencies in day-to-day work. Additionally, Logan said the transition from the majors with large capital budgets dominating the Slope to smaller companies operating more fields likely means leaner contracts for her members. “I think that our contractors have known, especially the ones that have been around for a long time — who built the pipeline and have been here through all the ups and downs — to be working for companies like a Hilcorp, which comes in and does things differently than a global company like a BP, right?” she said. Hilcorp purchased operating interests in several of BP’s producing Slope fields and prospects in 2014 for $1.25 billion. Houston-based independent Hilcorp Energy is known for reviving aging oil and gas fields that larger companies no longer deem worthy of investment. Logan said she hopes the continued low prices and state policy decisions don’t deter future investment in Slope fields that could lead to a sharp decline in production in the coming years. Beckham said the state is very excited about a few massive Slope oil discoveries that have been announced but are yet to be developed that could add several hundred thousand barrels per day of new oil into TAPS. However, even the most advanced of those prospects, Armstrong Energy’s estimated 120,000 barrels per day Nanushuk project, is several years off. Elwood Brehmer can be reached at [email protected]

Hilcorp advances plan for cross-Inlet oil pipeline

Hilcorp Energy is moving ahead with its $75 million plan to ship oil across Cook Inlet. Harvest Alaska, Hilcorp’s pipeline subsidiary, filed applications with the Regulatory Commission of Alaska Sept. 8 requesting approval to expand the Inlet’s pipeline network and ultimately pipe oil from west Inlet facilities to the Andeavor refinery in Nikiski. The project includes constructing new subsea and onshore pipelines as well as repurposing a cross-Inlet gas pipeline into an oil line to feed the refinery at Nikiski. “The Cross-Inlet Expansion Project will bring a higher level of safety and reliability for shipping oil across Cook Inlet. We think it’s the right thing to do,” Harvest President Sean Kolassa said in a company release. Repurposing the existing cross-Inlet gasline will mean installing a new gasline from the Tyonek platform to tie into the large Beluga gas transmission line on the west side of the Inlet. Also, oil flow that now goes from Granite Point south to the Trading Bay processing facility and on to the Drift River storage and tanker loading terminal will be reversed. The Drift River tank farm, with capacity in excess of 1 million barrels of oil, feeds the offshore Christy Lee tanker loading platform via pipeline. Its location in the shadows of Mt. Redoubt, an active volcano, has long made it an environmental concern. The Drift River facility was partially flooded by a snowmelt-ash sludge in April 2009 after Redoubt erupted. Then operated by Chevron, the tank farm was shut down as a precautionary measure. Hilcorp restarted the then-40-year-old terminal in late 2012. Hilcorp has been investigating the prospect of a subsea oil transmission line — a lower spill risk option than tanker traffic — for some time, Hilcorp Senior Vice President Dave Wilkins said in a prior interview with the Journal. Its purchase of the Tyonek platform and associated pipelines last year from ConocoPhillips gave the company what it needed to make the project economic, according to Wilkins. The company has already ordered U.S. steel in preparation for next year’s construction season and hopes to have the project complete by the end of 2018, according to the release. Hilcorp took significant heat starting in February when a natural gas leak was discovered in one of its subsea Inlet pipelines and the company was unable to fix it for roughly two months as heavy ice flows made it unsafe for dive crews to reach the pipeline. Executive Director of the Cook Inlet Regional Citizens Advisory Council Mike Munger said in the Hilcorp release that the nonprofit tasked with oversight of Inlet oil and gas operations is pleased that the company is progressing an oil pipeline as a safer alternative to tanker shipments. “The council has advocated for a crude oil subsea pipeline since the reopening of the terminal after the 2009 Mt. Redoubt eruption,” Munger said. “We support Hilcorp’s project and we look forward to working closely with them through this process to ensure it’s done responsibly.” Elwood Brehmer can be reached at [email protected]

Ahtna apologizes to state regulators after $380K fine

Ahtna Inc. leaders admitted the Native corporation’s drilling subsidiary repeatedly failed to comply with state regulators’ demands over several months, but at the same time asked the Alaska Oil and Gas Conservation Commission to lessen the resulting $380,000 in fines that the corporate officials feel are excessive. Ahtna CEO Tom Maloney said during a Sept. 12 AOGCC appeal hearing that the company has the “deepest sorrow” for the internal communications failures that led the commission to levy the fines. He stressed the communications problems were fixed as soon as possible after he was notified. “We are committed that it will never happen again,” Maloney said. The commission issued the fines to Tolsona Oil and Gas Exploration LLC, a wholly-owned Ahtna subsidiary of which Maloney is also CEO, because the company, among other things, time and again did not provide data on the natural gas exploration well it drilled last fall and was not responsive to efforts by commission officials to contact the company, according to a May 24 AOGCC order. The Alaska Oil and Gas Conservation Commission is a technical state regulatory body responsible for oversight of subsurface oil and gas activity. The fine order in May followed an April 11 Notice of Proposed Enforcement Action that claimed Tolsona failed to hold up its end of a deal after the commission granted the company’s request to suspend the well it had challenges drilling. Maloney and Ahtna attorneys did not dispute the general conclusion that the company dropped the ball by having poor internal communications policies. He said he was made aware of the order on May 25 by an individual in the oil and gas industry but outside the Ahtna family of companies. “I was shocked and dismayed when I read the order,” Maloney testified to the commission. “We’re deeply sorry that this has occurred. It’s been a black eye for all of us in the corporation.” Late last September, the wholly owned Ahtna Inc. subsidiary spudded the Tolsona-1 gas exploration well on state land about 11 miles west of Glennallen. An Ahtna press release announcing the start of the drilling work said the well’s target depth was about 4,000 feet. The company statement also noted previous exploration wells in the region — Ahtna was a partner on one — hit high pressure water zones that hampered drilling. According to the AOGCC, the Tolsona-1 well reached its total depth on Nov. 22, after 54 days of drilling. Ahtna originally expected the drilling to take 26 days. A Jan. 6 Ahtna release stated the well was ultimately drilled to 5,500 feet on Dec. 5 to overcome challenges from unexpected complexities in the area’s geology. At that time Ahtna was preparing for detailed analysis of the well data, the company said. According to the commission, the well was evaluated until Dec. 14, when the company applied to the commission to suspend the well. That application was approved the same day. A day later, the company reported that pressure was building in the well casing annulus — the area between the inner tubing and outer casing — to nearly 900 pounds per square inch. The pressure again built back to approximately 1,110 pounds per square inch after Tolsona bled it to zero, according to AOGCC documents. As a result, the commission approved continued suspension of well operations and the installment of a second mechanical tubing plug. The commission additionally wanted Tolsona to monitor the well pressure and provide weekly reports until Jan. 20. On Jan. 12, the commission approved Tolsona’s request to further install a back pressure valve in the well tubing at the end of the pressure reporting period. As a stipulation of installing the back pressure valve, Tolsona was required to provide monthly pressure reports to the AOGCC and give commission inspectors three days notice so they could witness the pressure readings. Shortly thereafter the problems began. A March 6 AOGCC Notice of Violation issued to Tolsona Oil and Gas stated the company failed to report the well pressure on Jan. 20, but after a Jan. 23 follow-up by the commission, “Tolsona provided the data the same day with ‘apologies, we will not be late again.’” However, according to the March 6 notice, after not receiving the Feb. 20 pressure report, the commission did not hear back from Tolsona via email after Feb. 28 and March 2 phone calls were not returned. The commission subsequently sent an inspector to the drill pad March 3. The notice states that once on site, the inspector discovered that the well pressures had not been recorded over the past month; a Tolsona representative that met with the inspector did not know if the back pressure valve had been installed; and the Tolsona employee had not been trained to properly record the wellhead pressures. The April 11 AOGCC enforcement notice states that “Tolsona remains non-responsive and has failed to provide the required monthly well pressures for March 2017. Further, it alleges the company violated state regulations by not installing another pressure gauge on an outer well casing. Ahtna attorney Nicholas Ostrovsky said during the hearing that his subsequent review of company communications found a “choke point” in communications within Tolsona without redundancy measures to assure management was made aware of issues such as the AOGCC’s demands. That choke point came down to the company’s operations and development manager, according to the Ahtna officials. The commission’s directives simply did not make it to Maloney or any other senior leaders, they said, despite the fact that everyone involved works in the same office complex. Maloney said he talked with the individual responsible almost daily but the situation was never brought up. A clearly perturbed Commissioner Cathy Foerster asked a series of technical questions the Ahtna officials were unable to answer; the attorneys and Maloney said they understood the hearing was to focus on the timeline of events and not issues with the well. As a result, the commission gave the company 30 days to respond to the questions. Ahtna counsel Brewster Jamieson said the company sympathizes with what the commission initially thought was the case, that Tolsona was “simply blowing the commission off,” but said that was absolutely not the case because management did know what was going on. Therefore, he said the company believes the fines for not following the commission’s orders are excessive and not in line with similar previous cases. Foerster also asked why it should matter to the commission whether or not management was notified. “The AOGCC did everything in its power to get a hold of us and we simply failed to respond,” Ostrovsky said. The April 11 notice details the $380,000 proposed fine as $10,000 for failing to install the pressure gauge and another $10,000 for failing to submit the March 20 well pressure report. On top of that, the commission levied another $5,000 per day for each of the 50 days the gauge was not installed, from Feb. 20 to April 11, and $5,000 per day for each day the March 20 pressure report was past due. Jamieson contended the commission issued the $260,000 in fines for not installing the pressure gauge based on inapplicable regulations. He said the commission referenced production well regulations in issuing the fines, but the exploration well has never reached production so it couldn’t violate those regulations. The regulation application issues were not discussed further. AOGCC Chair Hollis French said the commission noted Ahtna’s contrition on the matter and left the hearing record open until Oct. 26 to allow for the company to respond to Foerster’s technical questions. No ruling was made on the fines as a result. ^ Elwood Brehmer can be reached at [email protected]

Mallott rejects salmon habitat ballot initiative

Lt. Gov. Byron Mallott denied an application on Sept. 12 to put a voter initiative on the 2018 statewide ballot that would have tightened the state’s permitting requirements for development projects with the potential to impact salmon streams. Assistant Attorney General Elizabeth Bakalar wrote a Sept. 6 letter to Mallott recommending he not certify the initiative because it would strip the Legislature of its power to allocate resources — in this case salmon habitat — and thus violate the Alaska Constitution. The lieutenant governor’s primary responsibility in Alaska is to manage state elections. The “salmon habitat initiative” pushed by the nonprofit Stand for Salmon, which is chaired by Cook Inlet commercial fisherman Mike Wood, met all but one of the four criteria the Department of Law uses to evaluate ballot initiatives, according to Bakalar. She noted that the Alaska Supreme Court has generally ruled broadly to allow citizen initiatives unless there is no debate the proposal in question is unconstitutional. “An initiative us unobjectionable as long as it grants the Legislature sufficient discretion in executing the initiative’s purpose. But an initiative that controls the use of public assets such that it essentially usurps the Legislature’s resource allocation role runs afoul of Article XI, Section 7 (of the Alaska Constitution),” Bakalar wrote. “17FSH2 (its technical title) clearly limits the Legislature’s ability to decide how to allocate anadromous streams among competing uses. The initiative contains restrictions and directives that would require the commissioner to reject permits for resource development or public projects in favor of fish habitat.” Specifically, it would have overhauled Title 16, the state’s permitting law for salmon streams, by establishing two tiers of development permits that could be issued by the Department of Fish and Game commissioner. “Minor” habitat permits could be issued quickly and generally for projects deemed to have an insignificant impact on salmon waters. “Major” permits for larger projects such as mines, dams and anything determined to potentially have a significant impact on salmon-bearing waters would require the project sponsor to prove the project would not damage salmon habitat. Additionally, the project sponsor would have to prove that impacted waters are not salmon habitat during any stage of the fish life cycle if the waters are connected to proven salmon habitat in any way but not yet listed in the state’s Anadromous Waters Catalog. Currently, Title 16 directs the Fish and Game commissioner to issue a development permit as long as a project provides “proper protection of fish and game.” The initiative sponsors contend that is far too vague and an update is needed to just define what “proper protection” means. The Department of Law deemed an earlier iteration of the initiative as a means to allocate resources and prohibit projects such as the Pebble and Chuitna mines and Susitna-Watana dam, which the initiative sponsors have opposed. Stand for Salmon wrote in a formal statement that Gov. Bill Walker’s administration has chosen to “play politics” and defer to the short-term gains of Outside mining companies instead of supporting the fish Alaskans depend on. “The decision to deny us our constitutional right as Alaskans to gather signatures and put this issue before voters is stunning, particularly from a governor who once promised to support fish first policies,” the group wrote. “Instead, Governor Walker and Lt. Governor Mallott have done next to nothing to uphold their promises to Alaskans who depend on salmon for jobs, culture, recreation and way of life. “The merits of our application should have been based purely on the law. Yet, the relentless lobbying and pressuring from corporate representatives and lawyers seemed to carry more weight than the integrity of the public process.” Opponents to the initiative have said Title 16 is working as it is and the proof is that Alaska has not had an environmental disaster related to projects under the law’s jurisdiction. Wood, one of the sponsors, said in a previous interview with the Journal that the state has simply been “lucky” that it has avoided such a disaster, noting most of the large mines and other projects in Alaska are well away from salmon rivers. Bakalar wrote in a June 30 letter to the sponsors that a previous version of the initiative would have also allocated resources without the Legislature’s consent. The initiative was then reworded in an attempt pass legal muster, but the revisions apparently didn’t go far enough. “Despite the altered language, we remain concerned that 17FSH2 would, theoretically and/or in practice, categorically prohibit certain mines, dams, roadways, gaslines, and/or pipelines,” Bakalar wrote Sept. 6. “In doing so, the measure would effectively set state waters aside for the specific purpose of protecting anadromous fish and wildlife habitat ‘in such a manner that is executable, mandatory, and reasonably definite with no further legislative action,’ while leaving insufficient discretion to the Legislature or its delegated executives to use that resource in another way.” She also noted the letter should not be viewed as an opinion to whether the initiative is good public policy or not, but is simply a legal opinion on its constitutionality. To that end, the public policy could still be changed via House Bill 199, sponsored by Rep. Louise Stutes, R-Kodiak. The bill largely mirrors the language of the initiative and if passed, would be the Legislature deciding to allocate and prioritize water resources for salmon. Board of Fisheries Chair John Jensen also wrote in a Jan. 19 letter to House and Senate leaders that there is nothing in current state laws or regulations defining what is a proper protection. The Kenai Peninsula Borough Assembly also unanimously passed a resolution about a year ago supporting an update to Title 16 to further protect fish habitat. Wood said HB 199 would be the ideal vehicle for changing Title 16, as it could be amended to include input from development proponents and thus be more agreeable to more Alaskans, but added that the initiative was the group’s way of showing how serious it is about getting the law changed. The sponsors have 30 days to appeal Mallott’s ruling and Stand for Salmon said it is currently evaluating its next move. Elwood Brehmer can be reached at [email protected]

Ballot measure would give greater say to ADFG

Alaska fishing groups concerned about the impacts that large-scale development projects could have on salmon habitat are pushing to reform the state’s permitting requirements through a voter initiative on the 2018 ballot. The initiative would primarily establish a two-tiered permitting structure for projects with the potential to impact salmon-bearing waters. It would give the Department of Fish and Game commissioner the authority to issue broad approval for projects deemed “minor,” but also require proponents of larger projects to prove they would not have a significant adverse impact on salmon habitat. Additionally, it would require project advocates to prove to Fish and Game that the area of the water body the development could damage is not used by salmon sometime in their life cycle if the water is connected to one known to have salmon. The initiative was sponsored by Cook Inlet commercial fisherman Mike Wood, Bristol Bay lodge owner Brian Kraft and Gayla Hoseth of Bristol Bay Native Association. Lt. Gov. Byron Mallott will decide whether to certify the initiative by Sept. 12. In an interview, Wood said it is not intended to stop development projects, but rather to simply update the state’s protections for salmon as the Board of Fisheries requested. Current law directs the Fish and Game commissioner to approve fish habitat permits if a project is deemed to provide “the proper protection for fish and game.” Board of Fisheries Chair John Jensen wrote in a Jan. 19 letter to House and Senate leaders that there is nothing in current state laws or regulations defining what is a proper protection. “Additional guidance is warranted for the protection of fish, to set clear expectations for permit applicants and to reduce uncertainty in predevelopment planning costs,” Jensen wrote. “To strengthen ADF&G’s implementation enforcement of the permitting program, the Legislature may want to consider creating enforceable standards in statute to protect fish habitat, and to guide and create a more certain permitting system.” The Board of Fisheries letter was spurred by public pressure to amend Title 16, the state’s general laws relating to Fish and Game, according to Jensen. To that end, the initiative, which would rewrite state law, is mirrored after House Bill 199 sponsored by Rep. Louise Stutes, R-Kodiak. “We don’t want to stop (development); we want to make sure that the permitting process is rigorous so that we don’t destroy the fish habitat that we need to get the returns that are so important to the Alaska economy,” Wood said. The Alaska Constitution was written with a huge amount of thought toward salmon resources and the effort is to get back to that mindset in the state, he added. “It’s gotten a little blown out of proportion because this won’t stop things; it’s just trying to elevate the level of accountability back to where we believe it began at statehood. Over the years the regulations have been whittled away from administration to administration,” Wood said. Initiative opponents have cited federal laws, such as the Clean Water Act and National Environmental Policy Act that guides the environmental impact statement process as additional adequate salmon habitat protections; meaning an update to Title 16 is unnecessary. “I think there was a time when we thought we could have faith in the feds, the EPA, to have those standards and I think now we’re seeing that we can’t and it’s just part of the state having a greater say in its own outcome to have those high (permitting) standards,” Wood said. Wood characterized Alaska as simply “lucky” it hasn’t seen a large-scale manmade disaster of late similar to the 2014 Mount Polley mine tailings dam failure in British Columbia. He noted many of the state’s largest mines and other developments are in the Interior region or otherwise away from major salmon-bearing watersheds. The Department of Law deemed an earlier iteration of the initiative as a means to allocate resources and prohibit projects such as the Pebble and Chuitna mines and Susitna-Watana dam, which the initiative sponsors have opposed. A June 30 Department of Law letter to the sponsors outlined the provisions in the first draft of the initiative that would not pass legal muster. Assistant Attorney General Elizabeth Bakalar emphasized in an interview that the letter was in large part a response to industry concerns about the initiative that the department heard and is the same type of opinion state attorneys issue on any ballot measure — just earlier. She commented that the department isn’t likely to issue “courtesy” opinions in the future because this one has been incorrectly perceived as the state helping the petitioners. However, it could just as easily be seen as a way to calm development industry concerns by clarifying ahead of time that the initiative would not be ratified. “It’s just a heads up; do with it what you will,” Bakalar said. Wood said small changes were made to the latest version to hopefully meet the Department of Law standards. He acknowledged that the preferable vehicle to address salmon habitat protections would be through HB 199, which could be amended to include input from development proponents, but characterized the ballot proposal as a “belt and suspenders” approach to the issue. The Resource Development Council and other pro-development groups stressed in testimony on HB 199 that reforming the state’s habitat permit requirements is a solution searching for a problem. “The intent to safeguard Alaska’s salmon fisheries is an objective we share and it is why we support Alaska’s existing rigorous and science-based regulatory system,” wrote a coalition including the Alaska Chamber, Southeast Conference and the Anchorage and Fairbanks economic development corporations in an April letter to legislators. “As a coalition that includes urban and rural Alaskans and businesses and associations representing tens of thousands of jobs for our state’s citizens, we cannot overstate how important it is to have consistent regulator and permitting processes.” They continued to contend that HB 199 or the initiative would likely cause delays to smaller community projects like wastewater facility upgrades or airport expansions while worsening the state’s fiscal crisis by slowing or stopping economic development without any true benefits to fish habitat. Alaska Native corporations such as Cook Inlet Region Inc., Calista Corp. and Doyon Ltd. have opposed the measures, while Native tribal organizations such as the Tanana Chiefs Conference and the Native Village of Eklutna support it. The Kenai Peninsula Borough Assembly unanimously approved a resolution in September 2016 supporting an update to Title 16 to further protect fish habitat. A 2014 state ballot measure requiring legislative approval for a large mine in Bristol Bay — which Pebble argues is a blatant violation of the Alaska Constitution — was billed as a way to protect the region’s salmon and passed with 66 percent support among Alaska voters. It was supported by 72 percent of voters in Bristol Bay and greater southwest Alaska, according to Division of Election results. Elwood Brehmer can be reached at [email protected]

Railbelt utilities make progress to pool resources

Leaders of Alaska’s largest electric utilities hope to have a green light from state regulators to form new infrastructure management companies in a little more than a year. A collection of officials from the six Railbelt region utilities told the Regulatory Commission of Alaska at a late August meeting that they are collectively working toward internally approving the joint formation of a transmission company, or transco, by the end of the year. That would allow the utilities to submit the plan to the RCA early in 2018 and possibly have it approved by the end of next year. Proponents of the new jointly owned company believe pooling transmission lines and the resources is the best way to spread the costs of large infrastructure projects and assure the benefits from them reach as many of the region’s residents as possible. The RCA strongly ordered the utilities to investigate forming a transco in 2015, stating the cooperatives had not collaborated enough to maximize efficiencies and economies of scale in delivering power to their ratepayers. Covering an area from Fairbanks to Homer — home to about 80 percent of Alaskans — managers at some of the utilities had previously been hesitant about forming a transco, as it means giving up control of the utility-owned transmission lines that can provide revenue from wheeling tariffs. They generally acknowledge a transco would be of at least some benefit, but also emphasize their cooperatives’ bylaws require them to do what’s best for their ratepayers and investing in a transco could mean spending on projects that provide the greatest aid to others. The transco would be a partnership between the utilities and Wisconsin-based American Transmission Co., a transco formed after its state’s Legislature passed a law mandating Wisconsin utilities to do so. American Transmission Co. has pitched its experience in operating a transco to the Alaska utilities and the positives of forming one in Alaska, where long lengths of expensive transmission lines are needed to serve relatively small populations. The Alaska Energy Authority just finalized a study that says more than $880 million of substations, new lines, and other improvements are needed to optimize Railbelt electric generation and distribution. The utilities have consistently downplayed the need for such large-scale spending, contending a less expensive, more targeted investments would give the greatest benefits for money spent. ATC Business Development Manager Eric Myers told the RCA that his company knows it must earn a right to participate in the Alaska transco. “(In Wisconsin) every company was doing what was best within his or her jurisdiction to meet its customers’ needs. But the interconnections were a little weak, and economics and reliability suffered as a result.” Myers said. Fairbanks-area Golden Valley Electric Association CEO Cory Borgeson and Matanuska Electric Association General Manager Tony Izzo both said the utilities need to form an independent system operator, or ISO, as well to similarly manage power transactions between utilities down to a minute-by-minute basis. MEA, Anchorage Municipal Light and Power and Chugach Electric Association entered into their own ISO-like power pooling agreement in January. They estimate pooling their generation resources to maximize efficiencies could save their ratepayers between $12 million and $16 million per year. Much of the savings comes in the form of less fuel, which in Southcentral Alaska means less burning of natural gas. Chris Rose the executive director of the Anchorage nonprofit Renewable Energy Alaska Project, also testified to the RCA that an ISO is as much of a necessity as a transco is. “We do not want to find ourselves in a situation where a transco is formed, the parties declare victory, and the momentum to do anything further dies out. New transmission assets may increase the ability of the Railbelt to economically dispatch electrons and add more nonfuel renewable energy to the grid,” Rose said. The utilities’ leaders said a governance model assuring maximum local control of the transco is a priority and remains something the utilities must finish. They also have to finalize the operating agreements and methods for allocating transmission costs before taking the plans to their boards for approval. The RCA has scheduled a meeting Sep. 27 for further updates on the progress of the utilities’ work. Elwood Brehmer can be reached at [email protected]

State rejects Point Thomson expansion plan

The Alaska Division of Oil and Gas has denied ExxonMobil’s plan to expand the Point Thomson North Slope gas project because it doesn’t live up to a prior settlement between the state and the company, according to Director Chantal Walsh. In a detailed six-page letter dated Aug. 29, Walsh wrote to ExxonMobil Alaska Vice President Cory Quarles that the Point Thomson Expansion Project Planning Plan of Development, or POD, is far too vague and offers no commitment that the company will live up to the 2012 Point Thomson Settlement Agreement. Separate from but related to the Expansion Project POD, the division parsed out and approved the Initial Production System POD despite the company not meeting production expectations of natural gas condensates at Point Thomson because of technical challenges. ExxonMobil submitted a single Point Thomson POD to the state on June 30, but division officials determined it contained two PODs because the 2012 settlement does not spell out what the company must do with its current infrastructure at the large eastern Slope gas field after this year. The settlement does, however, direct the company to start expanding production at Point Thomson by 2019 under one of several scenarios. PODs are submitted annually by the unit operator company for every oil and gas unit in the state. They detail the company’s work plan for the coming year. The plans are generally adhered to but not strictly enforced by the state if unforeseen factors, such as changes to a project’s economics from external market forces or technical challenges, arise, Walsh noted. But in the unique case of Point Thomson, development is prescribed by the settlement, which the Division of Oil and Gas considers to be a contract with the state, meaning its terms must be upheld regardless of extenuating circumstances, according to Walsh. The Point Thomson Settlement, reached under former Gov. Sean Parnell, ended years of litigation between the state and the company in which the state argued ExxonMobil had not fulfilled its responsibility to develop the leases it held for many years. It also set a course for ExxonMobil to develop Point Thomson and start production by May 2016. The field was discovered in 1977. ExxonMobil, which operates Point Thomson, and BP, its primary working interest owner partner, spent roughly $4 billion developing the gas field since 2012. Production started in late April 2016. Gov. Bill Walker, who’d lost to Parnell in the Republican primary in the 2010 governor’s race, promptly sued the state over the settlement in 2012 on the grounds that the settlement over state assets was reached in private negotiations and was not in the best interest of Alaska residents. He withdrew his appeal to the Alaska Supreme Court in February 2015 shortly after taking office. Last year Walker’s administration deemed the Prudhoe Bay Unit POD incomplete until BP, as unit operator, and the state reached an agreement that the company would provide more information on its efforts to further the Alaska LNG Project in future PODs. ExxonMobil outlined its plans to move gas from Point Thomson and inject it into the Prudhoe Bay oil and gas pool as a way to further enhance oil recovery from the large oil field. The reinjection of gas produced during oil production efforts at Prudhoe has been a primary driver behind BP’s ability to extract more than 30 percent more oil — currently about 12.5 billion barrels in total — from the massive field than was expected when it came into production 40 years ago. Production facilities at Point Thomson would first be expanded to handle production of more than 50,000 barrels per day of the diesel-like condensates and 920 million cubic feet per day of gas. The current Point Thomson facilities have a production capacity of about 10,000 barrels of condensates and 200 million cubic feet of gas per day. Moving gas to Prudhoe is one of the options for expanding Point Thomson under the settlement in the event major gas sales — the Alaska LNG Project — was not sanctioned by mid-2016. While the Alaska Gasline Development Corp. continues to advance the gasline project, it is still uncertain if it will be built. With an estimated 8 trillion cubic feet of natural gas, Point Thomson holds about a quarter of the gas needed to feed a large gasline; the rest is in the Prudhoe Bay pool. Point Thomson is one of the highest pressure producing gas fields on Earth, at about 10,000 pounds per square-inch. A positive of the reservoir pressure is that it makes separating the condensates, or natural gas liquids, from the gas much easier. According to ExxonMobil officials, the liquids essentially “fall out” of the gas once the pressure is relieved. Those liquids are then fed into the Trans-Alaska Pipeline System. The natural gas has so far been reinjected into the Point Thomson reservoir. Getting the gas from Point Thomson to Prudhoe would require construction of a 62.5-mile, 32-inch diameter gas pipeline between the fields and production would be ramped up with the drilling of three new wells, according to the plan of development. The two wells now used for gas injection would also be converted to production. Specifically, Walsh points to the wording the company used in its Expansion POD to justify her ruling. The POD states that before expansion planning can proceed, the working interest owner companies at Point Thomson and Prudhoe must sign a commercial agreement and fund the work, and according to Walsh, ExxonMobil confirmed that in a technical meeting with division officials. Company representatives said further that it had “not even approached the Prudhoe working interest owners to begin these discussion, but surmised that the Prudhoe working interest owners were aware of the need for an agreement,” Walsh recalled in her letter. She noted that BP, ExxonMobil and ConocoPhillips collectively own 99 percent of both fields — Chevron holds 1.6 percent of Prudhoe — and therefore Exxon was, in part, waiting to negotiate with itself. ExxonMobil corporate spokesman Aaron Stryk wrote in an email that, “We have been, and continue to be, in full compliance with the Point Thomson Settlement Agreement. We are aware of the letter from the Department of Natural Resources, but have not yet reviewed the letter, so we are unable to comment.” Walsh further emphasized that the need for a commercial agreement is not part of the settlement and the lack of one should not prevent Exxon from continuing expansion planning. “The POD conditions all FEED (front-end engineering and design) work — the work that the Settlement Agreement requires the Point Thomson Unit WIOs to conduct during this POD period — on whether the WIOs decide to fund the work. Exxon prefaces its discussion of FEED by stating, ‘if funded FEED would progress…’ and then proceeds to refer to activities it ‘would’ do, rather than activities it will do,” Walsh wrote. “The division questioned Exxon about this language to determine if it was intentional or merely inartful wording. Exxon confirmed at the technical meeting that the WIOs did not intend to proceed with any Expansion Project Planning work unless they both decide to fund the work and enter a commercial agreement for Prudhoe Bay Unit injection. Again, the division understands the importance of the commercial agreement, but it is not an impediment to complying with the Settlement Agreement.” She continued: “This proposed POD would allow the WIOs to decide that they would rather not pay for planning, and then Exxon would perform no work. This proposed POD would also allow the WIOs to not enter an agreement with themselves for Prudhoe Bay Unit injection, and then Exxon would perform no work.” Walsh additionally contended that the plan does not comply with the settlement because it is far too vague to be an adequate POD. The Settlement Agreement requires the plan to include the number of wells, their locations and other plans for completion of expansion, while Exxon simply stated it would drill three new wells on the Central Point Thomson pad, without identifying the wells’ targets or completion plans, she wrote. Similarly, it states Exxon expects to file for permits to do the work with little more detail. “Scheduling time to apply for permits is not a plan for acquiring them,” Walsh wrote. She summarized her displeasure with the company by writing that the “POD fails to paint even the most impressionistic picture of what Exxon will do over the next year and a half to engineer and permit an expansion project.” “The proposed Expansion Project Planning POD fails to provide for Exxon to fulfill this contractual obligation. The proposed POD includes conditions that would give the Point Thomson Unit WIOs control to avoid doing any planning work, effectively nullifying this portion of the Settlement Agreement,” Walsh concluded. Appeals to Oil and Gas POD rulings usually go to the Department of Natural Resources Commissioner; however, the Settlement Agreement nullifies the administrative appeal and sends Point Thomson disputes directly to the Alaska Superior Court, according to Walsh. ExxonMobil has until Oct. 13 to submit a revised Point Thomson Expansion POD. Production challenges ExxonMobil met its first big deadline at Point Thomson by starting condensate production and natural gas cycling in April 2016. Since then, however, the company has had difficulty meeting the 10,000 barrels per day of condensates production threshold called for in the 2012 Settlement Agreement with the state. ExxonMobil noted in its proposed Point Thomson POD that production exceeded 10,000 barrels of condensate and 200 million cubic feet of natural gas on Dec. 20, 2016. Yet, Walsh wrote the company has not met its obligation because production levels have fluctuated wildly in the year-plus since the project came online. According to Alaska Oil and Gas Conservation Commission data, Point Thomson produced 47,972 barrels of natural gas condensates in April 2016, but that fell to just 7,903 barrels for the entire month of May. Production was then ramped back up to hit 213,845 barrels in December, to average about 7,000 barrels per day for the month. Production then peaked in January with a daily average of 7,634 barrels, but fell again in June to a total of 8,400 barrels for the month, or just 280 barrels per day. In July, Point Thomson produced an average of 1,738 barrels per day of natural gas condensates. The production fluctuations stem from problems ExxonMobil has had with the gas compressor it uses to reinject the natural gas back into the reservoir, according to Walsh’s letter. “During the technical meeting, Exxon provided additional detail about the compressor and its design flaws and difficulties in relation to this reservoir. By Exxon’s account, it was conducting maintenance or repairs on the compressor during periods when production ceased or decreased,” she wrote. The company also acknowledged a requirement to pursue, but has not identified work, to “debottleneck” the Initial Production System, as it is directed to in the Settlement Agreement, Walsh noted. Finally, ExxonMobil has not advanced permitting for an East Pad and associated wells at Point Thomson — another requirement of the deal — beyond what it had done at the time the settlement was reached, she continued. Walsh wrote that the Oil and Gas Division is “hopeful” the company can resolve the technical issues with the IPS and sustain production at 10,000 barrels per day and the division appreciates its consideration of debottlenecking work. “While the division remains concerned about the future of the IPS, the proposed POD does generally provide for continued production, which is a benefit to the state. Unitized production like this generally conserves resources, minimizes environmental impacts, and prevents waste,” Walsh summarized. “The proposed POD does not create additional impacts to the land. Thus, despite the division’s continued concerns, the division hereby approves the IPS POD for the period Sept. 30, 2017, through December 31, 2019.” Elwood Brehmer can be reached at [email protected]

Coast Guard commandant keeps up push for icebreakers

U.S. Coast Guard Commandant Adm. Paul Zukunft has one very clear message: the country needs more icebreakers. Zukunft reiterated that point time and again during an Aug. 24 speech to members of the Alaska policy nonprofit Commonwealth North in Anchorage. He recalled a conversation he had with then-National Security Advisor Susan Rice when Rice asked him what President Barack Obama should highlight shortly before the president’s extended trip to Alaska in late August 2015. “I said (to Rice) we are an Arctic nation. We have not made the right investments and we do not have the strategic assets to be an Arctic nation and that translates to icebreakers and that’s almost exactly what President Obama said when he came up here,” Zukunft said. “Fast forward — it’s Jan. 20, 2017, and I’m sitting next to President Trump and as they’re parading by he says, ‘So, you got everything you need?’ I said, ‘I don’t. The last administration, they made a statement but they didn’t show me the money. I need icebreakers.’ (Trump said) ‘How many?’ ‘Six.’ ‘You got it.’ “You never miss an opportunity,” Zukunft quipped. It’s well documented in Alaska that the U.S. has “one-and-a-half” operable icebreakers. That is, the heavy icebreaker Polar Star and the medium icebreaker Healy, which are in the Coast Guard’s fleet. A sister ship to the Polar Star, the Polar Sea remains inactive after an engine failure in 2010. Zukunft noted Russia’s current fleet of 41 icebreakers to emphasize how far behind he feels the U.S. is in preparing for increased military and commercial activity in the Arctic as sea ice continues to retreat — a message Alaska’s congressional delegation stresses as well. “We are the only military service that’s truly focused on what’s happening in the Arctic and what happens in the Arctic does not happen in isolation,” Zukunft said. He added that Russia is on track to deliver two more cruise missile-equipped icebreakers in 2020. “I’m not real comfortable with them right on our back step coming through the Bering Strait and operating in this domain when we have nothing to counter it with,” he said. The Coast Guard’s 2017 budget included a $150 million request to fund a new medium icebreaker, which Zukunft characterized as a “down payment” on the vessel expected to cost about $780 million, according to an Aug. 15 Congressional Research Service report on the progress of adding to the country’s icebreaking fleet. For years it was estimated that new heavy icebreakers would cost in the neighborhood of $1 billion each, but those estimates have been revised down as the benefits of lessons learned through construction of the initial vessel and ordering multiple icebreakers from the same shipyard are further examined. The CRS report now estimates the first heavy icebreaker will cost about $980 million to build, but by the fourth that price tag would go down to about $690 million for an average per-vessel cost of about $790 million. That is on par with the cost for a single new medium icebreaker. Zukunft said the Coast Guard is working with five shipyards on an accelerated timeline to get the first icebreaker by 2023, but how it will be fully funded is still unclear. “We have great bipartisan support but who is going to write the check?” he said, adding that aside from Russia and China, the United States’ economy is larger than that of the other 18 nations with icebreakers combined. The Obama administration first proposed a high-level funding plan for new icebreakers in 2013 that has not been advanced outside of small appropriations. “Our GDP (gross domestic product) is at least five times that of Russia and we’re telling ourselves we can’t afford it,” Zukunft continued. “Now this is just an issue of political will and not having the strategic forbearance to say this is an investment that we must have.” He also advocated for the U.S. finally signing onto the United Nations Law of the Sea treaty, which lays out the broad ground rules for what nations control off their coasts and how they interact in international waters. Not signing onto the Law of the Sea, which was opened in 1982, leaves the U.S. little say as other nations further study and potentially exploit the Arctic waters that are opening, he said. “We are in the same club as Yemen; we are in the Star Wars bar of misfits of countries that have not ratified the Law of the Sea convention,” Zukunft said. ^ Elwood Brehmer can be reached at [email protected]

Court rules on PFD veto lawsuit

JUNEAU — The Alaska Supreme Court ruled that Gov. Bill Walker acted within his authority in reducing the amount set aside for checks to state residents from Alaska’s oil-wealth fund last year. The decision, released Aug. 25, affirms a lower court decision that sided with the state in the dispute over Alaska Permanent Fund dividends. The high court decided that the legislature’s use of fund income is subject to normal appropriation and veto processes. It says Walker validly exercised his veto authority when reducing the amount available for dividends last year. The case was brought by Democratic state Sen. Bill Wielechowski and two former legislators. Wielechowski said he is “bitterly disappointed” by the court’s ruling. Walker called it “by far” the most difficult decision he’s made as governor. They had argued that the Alaska Permanent Fund Corp. was required by law to make available nearly $1.4 billion from the fund’s earnings reserve for dividends, despite Walker’s veto. The case was heard before the Supreme Court on June 20. The court determined the “narrow question” it had to answer was whether the constitutional amendment that created the Fund and dedicated 25 percent of all state resource royalties to feed it also exempted the use of the Fund’s income from the anti-dedication clause, according to the ruling. “The answer cannot be found by weighing the merits of the dividend program or by examining the statutory dividend formula,” the justices wrote. Wielechowski’s group argued in part that Walker overstepped his authority by crossing out the reference to the dividend formula statute in the budget in addition to replacing the original estimated $1.36 billion collective dividend payment with $695 million. The Alaska governor has the authority to veto appropriations, but not existing laws. In its discussion of the ruling, the court noted it ruled in a 1982 case that the anti-dedication clause of the Alaska Constitution “prohibits the dedication of any source of revenue” without a constitutional exception. The crafters of the state Constitution believed dedicated funds to be a “fiscal evil,” according to the ruling, because they took control necessary to manage state finances away from the governor and Legislature. “No party suggests that Permanent Fund income (distributed for dividends) is not state revenue,” the ruling states. “Our starting point must therefore be that the anti-dedication clause prohibits the dedication of Permanent Fund income unless the 1976 constitutional amendment exempted not only the dedication of enumerated revenues into the Permanent fund but also — as Wielechowski argues — the Legislature’s potential future, unspecified dedication of revenues out of the Permanent Fund.” Attorney General Jahna Lindemuth thanked the state’s attorneys that argued the case in a Friday Department of Law release. “I know this was not a decision Gov. Walker took lightly, but I’m glad we have more clarity around the use of Permanent Fund earnings as we continue to try and resolve the state’s fiscal crisis,” she said. Walker announced that he roughly halved the dividend appropriation among other vetoes in June 2016 on what he called “a day of reckoning” to drive home his message to legislators and the public that drastic changes to state finances need to be made to resolve Alaska’s ongoing multibillion-dollar budget deficits. This year, the Legislature itself ignored the statutory dividend formula and set an arbitrary dividend appropriation to pay dividends of $1,100 per Alaskan, a compromise amount based on what dividends would be under the differing versions of Walker’s Permanent Fund restructure bill passed by the House and Senate. To Wielechowski’s arguments, the court concluded that a plain reading of the Permanent Fund amendment, which states that income from the fund will go to the General Fund, “unless otherwise provided by law,” does not amount to a dedication. The Fund clause in the Constitution directs the Fund’s income to be deposited for appropriation, but it does not give the Legislature the authority to dedicate that income, according to the court. “Interpreting the 1976 constitutional amendment to allow dedications of Permanent Fund income would create an anti-dedication clause exception that would swallow the rule,” the justices concluded.

Rodell reflects on Fund at $60B milestone

The Permanent Fund is many things to many Alaskans. It’s the State of Alaska’s way of transforming finite resources into potentially perpetual wealth. It’s the source of undoubtedly one of the most popular government programs ever envisioned, the Permanent Fund Dividend. It’s always a reliable topic for lively debate. At more than $60 billion, it’s currently worth about $83,000 per Alaskan. To Alaska Permanent Fund Corp. CEO Angela Rodell, it’s also beautiful. “When you think about the forward thinking and political will it took to set this up, it’s stunning. All too often I hear about the things that we’re not proud of in Alaska,” Rodell said during an hour-long interview with the Journal on Aug. 23. “Yet this one we got really right. This is something I think we should all be tremendously proud of and understand.” The understanding part is key, according to Rodell, particularly as the Legislature and Gov. Bill Walker debate whether the Fund should also be a funder of government. She said Alaskans, even some legislators, regularly refer to her organization as the “Permanent Dividend Division” or the “Permanent Dividend Fund,” referencing the corporation’s longtime sole purpose as far as much of the public is concerned: to produce the annual dividend checks distributed by the Revenue Department each October. On one level, the misconceptions about the Fund are understandable. Since 1976, when voters passed a constitutional amendment establishing the Permanent Fund, it has been cared for in relative anonymity. In 1980, the Legislature directed the corporation to start spinning off dividends based on the length of each Alaskan’s residency. The U.S. Supreme Court promptly nixed the idea of rewarding Alaskans based on their time served and in 1982 the Legislature approved the Permanent Fund Dividend formula that stands today. The PFD is half of the average annual net income generated by the Fund over the five most recent state fiscal years divided amongst all eligible residents. To date, the Fund supported more than 18.4 million dividend checks totaling about $21.1 billion. It was started with an initial deposit of $734,000 in oil royalties on Feb. 28, 1977. Continuous mineral royalty deposits and prudent management have grown the fund to $60.9 billion today. During the 2017 fiscal year that ended June 30, the Fund grew by more than $7 billion thanks to corporate managers achieving a 12.6 percent return on its investments. Rodell described the strong returns as a “nice recovery” after turbulence in financial markets through much of 2016 limited the Fund to about 1 percent growth. The 12.6 percent return was led by a roughly 20 percent return on the $26.1 billion of the Fund invested in public equities, or stocks. Rodell acknowledged that a market correction is all but assured given U.S. public markets continue to set records almost daily. “We know because history tells us there will be a correction. When and where — how much — is anyone’s guess. We don’t have any more insight into that than anyone else,” she said, noting that is why the Fund has an ever-more diversified portfolio. Rodell said the staff regularly run scenarios of various possible market downturns to evaluate how they could impact the Fund. Time of transition Rodell took the helm at the APFC in October 2015 just a couple months before Walker took a big political leap and proposed employing the Fund’s earning power to help alleviate what was then a roughly $4 billion budget deficit. Walker’s original bill would have drastically re-plumbed state finances to funnel most revenue through the Permanent Fund to fully harness that earning power and spin off about $3.2 billion to pay for government services. The governor has since endorsed a simpler percent of market value, or POMV, draw from the Fund’s Earnings Reserve Account each year, a plan his administration devised alongside Senate Republicans early in 2016. While the Democrat-led House and Republican-dominated Senate both passed similar version of Walker’s POMV bill earlier this year, the politically disparate leadership in the bodies have yet to compromise on the contingencies each has placed on doing something that was unheard of just a couple years ago, as Rodell and others have noted. Both House and Senate POMV plans would result in a smaller dividend check from the current statutory formula. Neither Walker nor former Gov. Sean Parnell ever mentioned turning to the Fund’s earnings to fix the deficit in the 2014 gubernatorial race, with Walker explicitly rejecting the idea of touching the PFD. However, less than three years later, it feels inevitable. Rodell was Revenue commissioner and a Permanent Fund trustee in Parnell’s administration. And though the Legislature is on the precipice of tapping the Fund for government — something it has resisted for 40 years — Rodell said it is being done properly, even if the politics is messy. “I think having a structural plan in place that is either POMV or a capped dollar amount draw really sort of helps everybody plan for some sort of distribution of the Earnings Reserve Account to the extent that (legislators) decide that’s the direction they want to go,” she said. Like the General Fund, the Earnings Reserve has always been accessible by majority votes in the House and Senate along with the governor’s approval. Additionally, the Alaska Supreme Court ruled Aug. 25 that the dividend is just another state appropriation that the governor has veto power over despite the best efforts of Sen. Bill Wielechowski and former state Sens. Clem Tillion and Rick Halford, who served in the Legislature when the dividend program was established. The bipartisan trio and some others in the Legislature have also supported the idea of enshrining the current dividend formula in the state Constitution to protect it from actions like Walker’s veto to halve the PFD appropriation in 2016 and the Legislature’s move this year to arbitrarily set dividends at $1,100 per Alaskan. Both moves resulted in PFD payments that were about half of what they would have been under the statutory formula. The $1,100 amount was a compromise between the dividends the House and Senate’s Permanent Fund POMV bills would provide for; the Senate’s was set at $1,000 with a 5.25 percent draw and the House’s at $1,200 with a 4.75 percent draw. Those bills would generate about $2.5 billion for government and dividends combined. Three times between 2000 and 2004, the Permanent Fund Corp. Board of Trustees passed resolutions in support of a POMV draw from the Fund of up to 5 percent after inflation; that was the last time lawmakers mulled employing the Fund to reduce deficits. Soaring oil prices and tax revenue soon pushed deficit worries aside. With all that as background, Rodell again stressed the importance of broadening knowledge about the Fund and its namesake corporation among both lawmakers and the general public. “For a long time nobody paid any attention because our purpose was to pay an amount over to (Revenue) to pay dividends, so you didn’t have a constituency that really cared,” she said. “Everybody cares about their dividend; they don’t really care how you get to the dividend or what it takes to generate that dividend. “I think in order for people to understand exactly what they’re being asked to make decisions about, whether it’s voters deciding the dividend or whatever it is, they need to understand what the Permanent Fund and the corporation is.” Fund 101 If the Fund is going to be expected to support part of the state’s budget each year, the first shift has to be mentally separating the Earnings Reserve that holds the Fund’s net income from its principal, according to Rodell. Together, the accounts make up what has always been known as the entirety of the Fund. Rodell admitted she often slips up, referring to the Fund as “$60 billion” to the Journal, instead of parsing out the $47 billion principal, or corpus, and the nearly $13 billion Earnings Reserve. The accounts are usually rhetorically lumped together in part because they are invested together. Stocks, for example, are purchased by the corporation with a pro-rated amount of the corpus and the Earnings Reserve. However, 100 percent of the income earned off that stock when it is sold is deposited into the Earnings Reserve, which is why inflation-proofing the corpus of the Fund is critical, Rodell said. The Legislature has not transferred money from the Earnings Reserve to the corpus for inflation proofing in the last two state budgets in an effort to build up the Earnings Reserve before starting to draw on it. It’s a decision Rodell appreciates, but it doesn’t make fighting the value degradation of the Fund any less important. In fiscal year 2016, it would’ve only taken about $47 million to counteract inflation — about 0.12 percent of the corpus value. But in 2017, that jumped to more than $500 million, according to Rodell. “If we’re not putting anything back into the corpus we still have that same $39 billion we had in the nominal value of the royalties contributed over the years; that’s all we have to invest,” she said. Rodell objects to the premise that the ongoing mineral royalty payments offset inflation. First, with current lower oil prices and much less production than the state has seen historically, last year’s royalty injection into the Fund of about $225 million isn’t even half of what was needed to offset inflation. Additionally, using royalties in-lieu of inflation proofing transfers does a disservice to young Alaskans, Rodell contended. “I would argue the royalty payment is the nonrenewable resource turning into a renewable resource. It shouldn’t even be considered a hedge against inflation by any stretch,” she said. “We’re still harvesting that nonrenewable resource and future generations should get the benefit of what we’re harvesting today and that’s the royalty payment.” Along with deferring inflation proofing, legislators also disregarded laws directing up to 50 percent of royalty revenue from some state leases to be deposited into the Fund. The Constitution requires a minimum of 25 percent of all resource royalties be used to grow the Permanent Fund and the Legislature has funneled the other 75 percent of royalty revenue into the General Fund of late in an effort to shrink the deficit. “There are a number of statutes that have been ignored without a plan being put in place. That concerns me,” Rodell said. Gov. Walker’s Permanent Fund restructure bills also reverted to the 25 percent royalty minimum and the POMV bills would only start to inflation-proof the Fund once the value of the Earnings Reserve is greater than four times the previous year’s draw. Any excess cash beyond the four-fold threshold would automatically be injected into the corpus. Budget battles While the realities of the state’s fiscal situation are putting pressures on the Fund, the Legislature’s ever-increasing inability to timely pass a budget is starting to weigh on the Alaska Permanent Fund Corp., as it is an arm of the state Revenue Department. Rodell recalled that the budget fight in 2015 drew into May, but the Legislature passed a receipts budget allowing self-sustaining state operations to stay open in the event of a government shutdown. The corporation’s budget comes out of the Earnings Reserve. By 2016, a budget deal was reached just days before the dreaded “pink slips” had to go out to state workers on June 1, but there was no receipt authority granted prior. In 2017, the budget battle lasted until a week before a government shutdown. At one point during the month, the Senate had passed a bill to use about $2 billion in Fund earnings while the House passed a budget to spend $5 billion. The eventual compromise ended up filling the deficit from the Constitutional Budget Reserve and dividends were funded as usual from the Earnings Reserve. “This year, they’re fine with sending out pink slips, but we’re not actually going to shut down state government. What do you think happens next year? I don’t care that it’s an election year,” she commented, adding that people in the Lower 48 are taking notice. “I’ve got headhunters watching this and calling my staff, calling me, saying, ‘Hey Angela, do you really want to keep working for the State of Alaska? I’ve got a great job in the Lower 48 for you.’ My (chief investment officer) got calls; we all got calls,” Rodell said. “Now the good news is we’re also residents of Alaska; we love Alaska, but how many more times are we going to do this?” “I don’t think there’s a single legislator out there that has any interest in seeing us shut off the lights and close our doors, not one, but we’re part of the bigger budget battles that happen.” To that, Rodell said the corporation Board of Trustees will likely decide at its late September meeting in Juneau whether or not the corporation will seek a change to state law to forward fund the corporation or otherwise remove it from the annual budget debates. She also characterized trying to adequately compensate the world-class finance professionals managing investments on the scale of the Permanent Fund requires as “a real challenge,” noting the Revenue commissioner faces the same obstacles with Treasury Division officials. Keeping up with compensation Because the APFC is technically an arm of the state, its salaries are viewed through the lens of what’s fair compensation for state government workers, Rodell said. “We got caught this year again in a debate of ‘no one’s getting merit increases.’ They cut $169,000 from our budget request I had built in for merit increases but we made $7 billion,” she commented, emphasizing that she does not advocate for Wall Street-like compensation at the APFC. Thankfully, the opportunity to work on the Permanent Fund — the United States’ premier sovereign wealth fund — in a place like Juneau usually sells itself, according to Rodell. She said investment types from worldwide hubs such as Singapore and London apply to move to Juneau to be a part of Alaska’s Fund. She described it as a “really crazy unique experience,” noting that the U.S. Treasury looks to the APFC to be its “eyes, ears, voice in the international camp. We participate in the International Forum of Sovereign Wealth Funds that was created by the World Bank and the IMF (in 2009); we are a leader in that organization.” Former CEO Mike Burns helped craft the Santiago Principles of transparency and good governance for sovereign wealth funds after the 2008-09 financial crisis, Rodell pointed out. “We have trillion-dollar funds — the staff come to Juneau and learn how we do things because they like the results that they see; they appreciate the transparency we create,” she said. “We bring a bit of a ‘halo effect’ we call it, to certain investments when we participate and I was not aware of that international reputation until I got into this job and started going outside.” She continued, “Knowing that we are voice in the international finance community — I think people would be really stunned by that. Now, whether or not people think that’s a role for us to play or not I don’t care. The fact is we can’t get away from it. “We have access to some of the most amazing, brightest thought leaders around the world and that’s a function of our size. It’s why I could recruit a chief investment officer the caliber of Russell Read.” Read joined the APFC in May 2016. He has also served as CIO for CalPERS, the $330 billion California state pension fund, among other positions, and holds master’s degrees from the University of Chicago and Stanford University as well as a Ph.D. in political economy from Stanford. Being able to participate on the global scale from a small town like Juneau offers other benefits, such as a work-life balance that is lost in the mega cities, Rodell added. “We save 170 hours in commuting time alone that you get back from New York if you come to Juneau. There’s no commuting time in Juneau,” she said with a laugh. The four-hour time difference between New York and Juneau can be a challenge but is not always a deterrent, according to Rodell. Investing internationally requires odd hours and one knows that going in. “If you’re a fixed income trader and you’re sitting at your desk when the markets open at 5:30 in the morning; you’re done by 1 o’clock in the afternoon,” she noted. “You know what that means in the summer in Alaska?” It’s changing times for nearly everyone in Alaska and Rodell said she doesn’t want to see the state’s biggest asset fall by the wayside or be pulled apart by competing pressures. She summed her thoughts up by reciting a question posed at a recent conference she attended. “Fifty years from now, what do you think your grandchildren will wish you had invested in today?” Rodell recalled. “My answer was the Permanent Fund because I worry that we’re not thinking about the Fund itself anymore; that we’re taking the Fund for granted in some ways and that it will be this perpetual ongoing resource.” ^ Elwood Brehmer can be reached at [email protected]

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