Elwood Brehmer

ConocoPhillips is continuing its series of active North Slope work seasons with seven more exploration wells in the National Petroleum Reserve-Alaska this coming winter. While the drilling will slightly delay one of its prized projects, the Houston-based major is also jumpstarting a recently acquired stalled Slope development. ConocoPhillips Alaska Vice President Scott Jepsen said to during a Sept. 12 presentation to the Alaska Support Industry Alliance trade group that the wells will be focused on the prospective Harpoon area southwest of its existing NPR-A projects and better delineating the large Willow prospect. “We want to get more confidence around the geology and reservoir characteristics of the field, so that’s one of the reasons we pushed back our startup date to around 2025-2026 now for the Willow development,” Jepsen said. The draft environmental impact statement for the project released Aug. 23 cites a late 2024 expected startup. ConocoPhillips announced the Willow discovery in early 2017 and has steadily advanced it since. The company estimates it could produce 130,000 barrels per day at its peak. It will additionally be shooting 3-D seismic data south of Oil Search’s Pikka Unit around the Putu prospect near the village of Nuiqsut. The work will require roughly 165 miles of ice roads, according to Jepsen. “Hopefully the weather will cooperate and we’ll be able to accomplish all this,” he said. ConocoPhillips also announced in June it had purchased the Nuna project from Dallas-based independent Caelus Energy. Caelus held the estimated $1.5 billion oil prospect for years but did not develop it beyond a gravel pad in part because of lower-than-expected tax credit refunds from the state. When Caelus sanctioned Nuna in March 2105 the company indicated in a letter to Department of Natural Resources officials that it had authorized $480 million of expenditures on the project to that point. ConocoPhillips North America and Europe President Michael Hatfield during a July 30 conference call the referred to Nuna as “$100 million for 100 million barrels.” “It’s something we’re very pleased about,” Hatfield said. According to Jepsen, Nuna has been made part of the Kuparuk River Unit and its oil — Caelus estimated up to 20,000 barrels per day — will be processed through Kuparuk facilities, significantly lowering development cost. Drilling will be done from the Nuna pad and a Kuparuk pad to minimize new infrastructure costs, Jepsen said. The company expects 400 laborers over one winter construction season will be able to prep the project for first production, with is expected in 2022. ConocoPhillips is also building the eight-mile gravel road between its completed Greater Mooses Tooth-1 and in-progress Greater Mooses Tooth-2 projects in the NPR-A, Jepsen said. First oil is expected from GMT-2 in late 2021 at a projected peak production of up to 40,000 barrels per day. Finally, the largest mobile drilling rig in North America, which ConocoPhillips contracted with Doyon Drilling for in 2016, the Doyon 26, is on its way through Canada to the North Slope, Jepsen said. “We call it the beast and it’s going to be a beast,” Jepsen said. The extended reach drilling rig will enable the company to develop the Fiord West pool from an Alpine drill site, which could generate up to 20,000 barrels per day, he added. It’s scheduled to start drilling next spring. Elwood Brehmer can be reached at [email protected]

Alaskans, it’s time to dust off your economics textbooks and dig the calculators out of the back of your junk drawers because the arcane issue of oil taxes is again about to be a hotly contested topic going into the 2020 elections. The sponsors of the Fair Share Act all but assured oil taxes will be a central debate point over the coming year when they filed an initiative petition Aug. 19 with the state Division of Elections to put a major production tax change the ballot next year. The aim of the Fair Share Act is to raise the production tax rate on the three largest and generally most profitable North Slope oil fields of Prudhoe Bay, Kuparuk River and Alpine. Initiative sponsor and longtime Alaska oil and gas attorney Robin Brena, who chairs Vote Yes for Alaska’s Fair Share, said during a Sept. 9 press conference to officially kick off the campaign that under the current oil tax system Alaska is “giving away $1.5 (billion) to $2 billion in tax breaks and getting nothing in return.” That system, best known by its legislative title Senate Bill 21, would return Alaska to being a competitive oil region and spur additional investment and eventually reverse the long trend of declining North Slope oil production industry advocates said at the time. However, a host of lawmakers and interested citizens — including many who were not fans of the former oil tax system called ACES — saw SB 21 as swinging the tax pendulum too far towards industry’s side and launched a referendum to repeal it. The referendum made it to the 2014 primary election ballot but ultimately failed by more than 10,000 votes, or a margin of 52.7 percent to 47.3 percent. That loss hasn’t stopped the debate over the system, though. Brena was blunt in his assessment of the way the state calculates its oil production tax. “Senate Bill 21 is an abject failure for Alaska. It’s giving away massive tax breaks for no particular reason,” Brena said Sept. 9. “As an overall matter there’s no better deal for the oil industry than Alaska. They make more money in Alaska than they do anywhere else in the world that matters with significant oil production.” Alaska Oil and Gas Association CEO Kara Moriarty said total oil revenue still accounted for roughly $2.6 billion in fiscal 2019, which ended June 30. The tax would hit 90 percent of North Slope production activity that helps support almost 100,000 jobs, she said. “You’re targeting three of the largest investors in Alaska. I mean, what kind of message does that send? I think it’s punitive; it just doesn’t make sense to me,” Moriarty said. “Why would we want to double or sometimes even triple production taxes on three of the state’s largest investors? To me, it just doesn’t make any kind of sense for the economic well-being of the state.” While the tax increase may bring in additional short-term revenue, it will discourage the investments that translate to oil production, which also generates royalty revenue for the state’s General and Permanent funds, she said. “We want to continue to have a strong partnership and presence in the state of Alaska, but if voters decide that they want another billion dollars-plus from the industry, companies will make a business decision and will start shifting their investments elsewhere,” Moriarty added. Brena contends that Alaska has historically received about 28 percent of the gross value of produced oil, which includes royalty payments, while in the nearly six years since SB 21 took effect the state has received less than 20 percent of the gross value of oil. The gross value is the market price at the time the oil is produced minus the pipeline and tanker transportation costs required to get the oil to West Coast markets. Both are less than the oil revenue split envisioned by oft-invoked former Gov. Jay Hammond, who suggested the oil companies and state and federal governments should each get approximately one-third of the value of the state’s oil. Hammond was governor during the late 1970s when North Slope oil production was just beginning and, for better or worse, Alaska became inextricably linked to the oil industry. Brena also points to a slide from a January 2018 presentation to the House Resources Committee by ConocoPhillips representatives that shows the company’s share of oil at current prices of roughly $65 per barrel is 48 percent, compared to 39 percent for the state and 13 percent for the feds. The state’s share of oil matches ConocoPhillips’ at prices in the $90 when each takes 44 percent, according to the company’s chart. The change in the split of revenue is a result of a decline in the federal government’s share after the corporate income tax rate was cut from 35 percent to 21 percent in the 2017 federal tax overhaul. The state’s share includes royalty, corporate income tax, production tax and oil and gas property taxes. “It doesn’t matter what metric; by any metric you choose Alaskans are giving away our oil and we cant afford for it to continue to give away our oil at substantially less than fair rates,” he said, stressing that the intent of the initiative is to add equality back to the financial relationship between the state and its big oil producers. Those against raising oil taxes regularly cite the need to remain competitive with Lower 48 shale oil basins that are often significantly less expensive to operate in than Alaska. The North Slope’s remote location, harsh weather and sensitive environment mean permitting a large oil project can take years and cost millions of dollars, even before sometimes billions of dollars are spent for development. Brena counters that argument by noting that North Dakota — which has led the shale boom along with Texas and produces about 1.4 million barrels per day, nearly three times the amount Alaska does — levies a 10 percent gross tax on most of its oil. The tax increases to 11 percent at prices greater than $90 per barrel. North Dakota producers also pay an average royalty of 18 percent, according to a May 2017 North Dakota State University report on the industry’s economic contribution to the state. The report authors surveyed companies to obtain the figures, as royalty payments are made to private landowners and generally remain confidential. At current oil prices the major North Slope producers are near the gross-net crossover point of Alaska’s hybrid production tax, meaning they are paying the 4 percent gross minimum tax or just slightly more if they are profitable enough to move into the net tax. SB 21 calls for the companies to pay the larger of the 4 percent gross tax or the 35 percent net profits tax after application of the currently $8 per barrel production credit. Several years ago the crossover point was in the low to mid-$70 per barrel range, but it has fallen as companies have reduced their operating costs, partly through workforce reductions but also through lower cost contracts with service companies, according to industry representatives. The historical average oil price since 1980, adjusted for inflation to today’s dollars is approximately $55 per barrel, according to the Energy Information Administration. Alaska’s 4 percent gross tax combined with a primarily 12.5 royalty on state leases in the legacy fields adds to a state take — less corporate and property taxes — of 16.5 percent. The comparable rate in North Dakota is 28 percent, Brena notes. He also emphasizes that ConocoPhillips 2018 Alaska net income of more than $1.8 translates to $27 per barrel of oil equivalent when spread over its share of oil and gas produced in the state last year. “There isn’t any place in the world that has substantial reserves of oil where you can make the $27 per barrel ConocoPhillips made from our oil in 2018,” Brena said in an interview. He also cited multiple references to Alaska being the company’s “low cost of supply resource base” in reports and investor presentations. Much of the broader oil tax discussion is centered on ConocoPhillips, Alaska’s largest oil producer, as the company is required to break out results of its Alaska operations in its regular financial reporting to the Securities and Exchange Commission because its activities in the state account for significant segment of its worldwide business. Company officials dispute the claim as being overly simplistic. They point out that North Slope production is dominated by oil, which is more profitable on an equivalent basis than the natural gas that is produced and sold alongside oil in many other basins. Additionally, the net income calculation includes deductions for reservoir depletion, facility depreciation and other items that are not cash costs and therefore do not represent cash flow, which is what economic decisions are usually based on. An April 2018 ConocoPhillips investor report says the company had an operating margin of $27 per barrel at $50 per barrel prices to start the year. Texas oil averaged $64 per barrel last year. “That is our competition,” ConocoPhillips Alaska Vice President Scott Jepsen wrote via email. “We continue to invest in Alaska because we have been able to stay competitive on costs, and that includes the production tax framework. If the proposed tax initiative were to become law, it would jeopardize North Slope investments.” According to Brena, the state’s production tax revenue averaged $12 per barrel in 2009 under ACES when oil prices averaged $68 per barrel and fell to about $2 per barrel at $72 oil in 2015. “The Fair Share Act will add $6 to $7 per barrel so we will be back up to $9 to $10 per barrel,” he said, adding that the average tax would still be less than it was under ACES. The Fair Share Act would increase the gross minimum tax to 10 percent at prices less than $50 per barrel. It would continue to increase 1 percent for every $5 bump in oil price until hitting a 15 percent cap at $70 per barrel. The tax change would also repeal the per barrel credit, a key part of SB 21, which is up to $8 per barrel at current oil prices and steps down to zero at very high prices. The per barrel credit is used as a means to increase the effective net tax along with oil prices. When the monthly production tax value of oil is equal to more than $50, an additional tax that would be the difference between the average production tax value and $50 multiplied by 15 percent. The new taxes would only be levied on fields with average production of more than 40,000 per day and cumulative production of more than 400 million barrels, meaning it would apply to the big three fields — Prudhoe Bay, Kuparuk and Alpine — owned by ConocoPhillips, ExxonMobil and BP (soon to be Hilcorp Energy). Brena stressed it would do nothing to companies developing and producing oil from new fields unless they eventually reach those high production thresholds. Therefore, it should not discourage new entrants to the North Slope, which he hopes the state can attract. According to documents provided by Vote Yes for Alaska’s Fair Share, the act would increase the state’s production tax revenue by approximately $1 billion per year. That money could be used to help resolve some of the state’s biggest challenges, Brena said. “We are talking about changing the entire quality of life in Alaska and we haven’t even touched half of the deficit,” he said. “In addition, we’re getting half of our PFDs, and we haven’t had a meaningful capital budget in years.” The state’s production tax revenue went from $2.6 billion in 2014 to $381 million in 2015, the first full year under SB 21, but also at a time when average oil prices also fell by approximately one-third. SB 21 brought in $125 million in 2017 after prices bottomed out at $26 per barrel before somewhat higher prices helped the state bring in $741 million in fiscal 2018. The producers have also lowered their operating costs significantly since oil prices started collapsed in late 2014, which can improve the state’s net tax take. Brena disputes that the Fair Share Act will discourage investment. He contends that the “vast majority” of investment over the history of North Slope oil has occurred when the state’s tax rates were higher. Supporters of SB 21 often pointed out as it was being debated that exploration activity was almost nonexistent in 2012 with just one well drilled over the winter despite prices greater than $100 per barrel. According to a February report by Department of Revenue economists, capital spending within Prudhoe Bay has declined each year since it totaled $877 million in 2014 to $210 million last year. Overall North Slope capital spending has been on a decline as well. According to the report, after hitting a near-term peak of more than $4 billion in 2015 it has fallen to $1.5 billion in 2017 and $1.7 billion in 2018. Brena and others have been critical of the stagnant levels of North Slope oil production despite numerous claims at the time SB 21 was enacted that it would lead to more production. With minor fluctuations, North Slope production has generally declined slightly since 531,000 barrels per day were produced in 2013 when SB 21 was passed; though the overall trend has slowed greatly versus the steady year-over-year declines of 5 percent to 6 percent since production peaked in 1988. Despite the low prices at the time, production increased year-over-year in 2016 and 2017; the year-over-year increases were the first since 2002 when the Alpine field came online. Production averaged approximately 498,000 barrels per day in fiscal 2019, the first fiscal year it was less than 500,000 barrels since North Slope oil started flowing; however, the 2013 state production forecast estimated 2019 production to be about 426,000 barrels per day. ConocoPhillips’ Jepsen noted during a Sept. 12 presentation during a meeting of the Alaska Support Industry Alliance that simply holding production relatively flat means producing more oil to counteract the natural decline of Alaska’s old, large fields. SB 21 backers insist the large North Slope projects in permitting — ConocoPhillips’ Willow and Oil Search’s Pikka developments, each with the potential to generate more than 100,000 barrels per day — along with several other smaller projects are proof the current tax system is working. The Fair Share Act would also reinstitute the mechanism known as “ring fencing” which requires companies pay their production taxes on a per-field basis. Brena said ring fencing would prevent the large producers from reducing their taxes on the three large fields by applying deductions earned through capital expenditures on other not yet producing projects. As it stands now, ConocoPhillips will be able to deduct 35 percent of the $4 billion to $6 billion the company is expected to spend developing Willow over the next 7 to 8 years. That could reduce its production tax obligation on the profitable legacy fields, all of which ConocoPhillips has a significant stake in, by several hundred million dollars per year, Brena said. Act sponsors note that ring fencing was a part of Alaska’s tax system for years until 2006, when the ongoing back-and-forth over oil taxes really began. Producer officials say it was workable in part because the state had a more simple gross system and incorporating net profit tax elements to a tax system fundamentally requires at least a portion capital investments be deductible across fields in a given region. Finally, it would make “all finings and supporting information provided by each producer to the (Revenue) Department relating to the calculation and payment of (production) taxes,” the initiative states. The act would also require the cost, revenue and profits for each company in the legacy fields be made public. He said regulations would determine what specific information is made public, but he doesn’t believe there is a need to see details that could jeopardize competition among producers and service companies on the Slope. Alaskans, who own the oil and gas resources, should be able to know how their partners in the effort to develop those resources are doing, he said. Moriarty said it’s unclear at this point if the provision to make tax records public documents would violate federal SEC laws or not, but she said the concept of making oil tax records public should be cause for concern for everyone in business in the state. “It pretty much blows away every confidentiality statute on the books,” she said. Legislative reaction Anchorage Democrat Sen. Bill Wielechowski has been at the front of the push in the Legislature to change SB 21 and specifically repeal the per barrel credit. He has said the simple change could generate up to $1.2 billion per year and has submitted legislation to do it. The bills have not been considered in the Republican-held Senate. Wielechowski said he supports the Fair Share Act and it might be a better way to deal with oil taxes because it removes the per barrel credit but also addresses the low minimum tax. “If we’re going to fix the tax system, let’s make it durable,” he said. Senate President Cathy Giessel, R-Anchorage, said she thinks the sponsors paint an inaccurate portrayal of SB 21. She stressed that production and the associated state royalty revenue — significantly less for oil from federal lands — is what truly generates revenue for the state and more taxes will simply discourage it. “It will be another battle to defend the reasonable, competitive tax structure we put in place,” Giessel said in an interview. The Legislature could kick the initiative off the ballot, presuming it makes it, by passing a law that is “substantially similar,” but just defining the term is nearly impossible, she said. Lt. Gov. Kevin Meyer has until Oct. 15 to rule on the initiative petition application, a decision usually made via guidance from the Department of Law. If the application is approved the sponsors can begin gathering signatures. A rejection is appealed through the court system. Senate Minority Leader Tom Begich, D-Anchorage, said over the summer that he was discussing modest oil tax changes with lawmakers of both parties. It seems likely the issue will be more of a debate than it was in 2019, which has been consumed by the budget and PFDs. However, Giessel said its difficult to make tax changes with significant implications in just a single session, especially when there are many new House members likely unfamiliar with the highly complex issue as there are this Legislature. Democrat members of the bipartisan House Majority said they are happy the initiative addresses the minimum tax rate, while some said the progressivity it adds to oil at higher prices is fairly aggressive. The House Majority formed last year to counter Gov. Michael J. Dunleavy’s plans for more than $1 billion in budget cuts with far more modest reductions, but part of the deal was also that the issue of oil taxes would be set aside by the caucus. “It’s like Alaska is burning and our political leadership has decided not to talk about water,” Brena said.

Homer Electric Association members could soon see the benefit from a renegotiated natural gas supply contract that will save the Kenai Peninsula power cooperative more than $2.1 million. HEA filed an amendment on Aug. 28 with the Regulatory Commission of Alaska to the gas sales agreement it signed with Cook Inlet producer Furie Operating Alaska in 2015. The two-year contract ended Dec. 31, 2018, but HEA exercised a one-year option to continue the contract through this year. An option for gas in 2020 was not picked up. The amendment, which has an effective date of May 24, calls for HEA to receive credit totaling $1.7 million for gas purchases through May 2019. The utility would see another $462,000 in gas price reductions for the 2.2 billion cubic feet, or bcf, of gas it expects to purchase from Furie through the end of the year. Furie has had a rough 2019. In January the small Texas-based producer started having methane freeze-up problems in the pipelines on the new Julius R platform it operates in the Inlet, which prevented Furie from delivering gas to its customers, HEA and Enstar Natural Gas, for more than a month to each last winter. By late June Furie had resumed gas production, but not at volumes sufficient to meet its commitments. HEA Manager of Fuel Supply and Renewable Energy Mikel Salzetti said the $2.1 million in savings does not correlate to the premium it had to pay to find interim gas when Furie’s supply failed. The additional cost for the short-term supply was less than and unrelated to the $2.1 million credit, Salzetti said. Furie is HEA’s only firm supplier. Furie officials did not respond to requests for comment. HEA’s decision not to pick up the 2020 option on its contract with Furie was made in mid-2018, before the recent supply issues, according to the RCA filing. Salzetti said the utility just put out an RFP to Cook Inlet producers and found enough other supply options to go back out to the market. On Aug. 9 Furie filed for Chapter 11 bankruptcy in a Delaware federal bankruptcy court. The filings claim the company has about $450 million in debt and its assets are valued at between $10 million and $50 million. The company also cited $105 million in tax credits it is still owed by the State of Alaska. Elwood Brehmer can be reached at [email protected]

Justices on the Alaska Supreme Court heard oral arguments Thursday morning in the lawsuit over oil and gas tax credit bonds that could have major ramifications for the state’s financial future. Longtime Juneau attorney Joe Geldhof argued on behalf of former University of Alaska Regent Eric Forrer that House Bill 33 — a law passed in May 2018 allowing the state Department of Revenue to sell up to $1 billion in bonds to pay off outstanding oil and gas tax credits — violates the Alaska Constitution’s strict limitations as to what kinds of debt the state can take on and how. If the Supreme Court strikes down HB 331, the Legislature and Gov. Michael J. Dunleavy’s administration would have to find a new way to pay off the remaining refundable oil and gas tax credit obligation, likely through partial appropriations over several years. Revenue officials say the outstanding tax credit certificates the state has not repurchased total roughly $700 million compared to the $1 billion authorized by the bill. That scenario would require the small, oftentimes financially vulnerable companies as well as the investment banks holding the credits to wait substantially longer to be repaid. Several companies have already delayed drilling work, left Alaska or filed for bankruptcy, citing the lack of expected tax credit payments as a reason for their actions. However, Geldhof contended that upholding HB 331 would allow the state to take on debt that is not contemplated in the Alaska Constitution and could have “enormous” fiscal consequences to the state at-large. “If you allow the kind of debt the state seeks to incur here for the state, keep in mind that there’s 162 municipal units that within a week or two of your decision are going to say, ‘Wow, this is a splendid opportunity for us to borrow and spend and we’ll worry about the debt in the future,’” Geldhof said to the panel. The justices subsequently questioned whether he was making a policy debate, which is outside of their purview to consider. Geldhof responded that he wasn’t asking them to second-guess the Legislature’s policy, but stressed that HB 331 is “a clever workaround” to the Constitution that “will allow a proliferation of debt” in Alaska if it stands. Juneau District Superior Court Judge Jude Pate dismissed the suit in January on the grounds that Forrer failed to state a claim upon which the court could grant relief on the grounds that HB 331 “passes constitutional muster,” Pate wrote in his decision. Forrer originally filed the suit in May 2018. Hatched by former Gov. Bill Walker’s administration as a way to pay off the large tax credit obligation, HB 331 would allow the companies and banks holding credits to get their money relatively quickly instead of possibly waiting for the state to pay them off over years of appropriations according to current statute. To get paid sooner the credit holders would have to accept a discount of up to 10 percent less than the face value of the certificates. The state Department of Revenue would then use the difference between the credit values and the discounted amount actually paid to cover the borrowing costs. Supporters of the tax credit bonds insist it is a way to restart investment by small producers and explorers in Alaska’s oil and gas fields that has been slowed by three years of credit payment amounts at levels less than what was applied for as the Legislature and the administration debated how to resolve the state’s large budget deficits. At issue is whether or not the law, which passed with bipartisan support and was signed by Walker, runs afoul of Article IX of the Alaska Constitution as Forrer and Geldhof insist. The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold. State corporations can also sell revenue bonds, but those are typically linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole. HB 331 allows the Revenue Department to set up the Alaska Tax Credit Certificate Bond Corp. specifically for the purpose of issuing the 10-year bonds. But the only revenue the tax credit corporation would have would be direct appropriations from the Legislature, as the bonds would not be sold to support a project that would eventually generate funds to repay the bonds that originally funded it, as is the case in a traditional revenue bond scenario. That’s why Geldhof and other critics of the plan often refer to the state tax credit corporation as a “shell corporation” with the sole purpose of passing money from the Legislature to the bondholders. State officials rebut that language in the bond certificates would notify potential buyers that their repayment would be “subject to appropriation” by the Legislature, which shields the larger State of Alaska from recourse and makes the plan legal. Department of Law attorney Laura Fox argued on the state’s behalf that prospective bond buyers would be aware of the appropriation risk, which is common in state contracts, and that risk would be accounted for through slightly higher interest rates. “Those words tell creditors they can’t legally compel the state to pay,” Fox said of the subject to appropriation clause. She noted the bondholders only recourse would be against the assets of the corporation — which the Legislature appropriated to it. Geldhof questioned whether the state would truly be free from liability if the lawmakers failed to make the bond payments. State attorneys have also pointed to previous court rulings that have allowed the state to take on debt outside the explicit constitutional provisions, but Geldhof asserts those deal with lease-purchase agreements and are not applicable to the bond sale contemplated in HB 331. The intent of the framers of the Alaska Constitution was also contemplated during the arguments. The justices asked Fox if she could discern through Constitutional Convention meeting records whether or not the delegates crafting the Constitution considered the HB 331 plan to be revenue bonds, or if such a plan was even contemplated. Fox responded that revenue bonds in the traditional sense were likely the understanding at the time the Alaska Constitution was granted, but noted that other state corporations occasionally have revenue bond payments supported by legislative appropriations. “Nothing in (Article IX) says where the corporation has to get its revenue from,” she said. She acknowledged the state does not consider the tax credit obligation to be debt, but rather “it is indebtedness,” Fox said, as the Constitution does allow the state to refinance existing debt. “I don’t know whether the semantic debate whether you call it debt or not really matters,” she said. Geldhof said in his closing rebuttal that the state is trying to incur debt to cover operating expenses, which is not what the constitutional framers intended. “We have enough financial problems in Alaska, don’t add to them by green-lighting debt that we can’t sustain,” he said. No timeframe was given as to when the Supreme Court justices will issue their ruling. Elwood Brehmer can be reached at [email protected]

One third of the Alaska Legislature sent a letter to a Canadian mining company on Sept. 9 in an attempt to dissuade a potential investment in the Pebble mine project. The correspondence from the bipartisan and bicameral group of 20 lawmakers is the latest in a series of letters to Vancouver-based Wheaton Precious Metals Corp. CEO Randy Smallwood over the past seven weeks from conservation and Bristol Bay-area Alaska Native organizations opposed to the project and Gov. Michael J. Dunleavy, who sought to counter the negative messaging regarding Pebble with a July 30 letter. The legislators — mostly Democrats, two Republicans and House Speaker Bryce Edgmon of Dillingham, who changed his affiliation from Democrat to independent this past session — specifically responded to Dunleavy’s letter in which the governor stressed his slogan that “Alaska is open for business” and he did not want a potential investor in a major resource development project to be discouraged by those opposed to it. “A fair, efficient and thorough permitting process, without interference and threats from project opponents, is essential to the future economic growth of Alaska,” Dunleavy wrote to Smallwood July 30. “I am committed to making that happen, and once appropriate permits are granted, I am equally committed to removing obstacles that would hinder immediate construction.” The Pebble Partnership is in the midst of the multi-year federal environmental impact statement process to get a key construction authorization from the U.S. Army Corps of Engineers, but the company would still need to obtain numerous other state and federal agency approvals before construction could commence. According to Dunleavy’s letter, the investment Wheaton is purported to be considering would help Pebble get through the expensive permitting process. Pebble leaders have openly acknowledged they need to secure a financially strong partner to move the project from concept to reality, as Pebble’s parent company and junior mining firm Northern Dynasty Ltd. simply doesn’t have the financial wherewithal to raise the several billion dollars that would be needed to construct the large mine and major support infrastructure. The 20 lawmakers responded by retorting that “Alaska is — and always has been — open for business” in their letter to Smallwood, noting that the Alaska Constitution reserves resource ownership in the state to its citizens with a mandate that they be developed for the maximum benefit of all Alaskans. However, they emphasized that “fish are by far the single most important resource” in the Bristol Bay region.” “In his letter, Gov. Dunleavy assures you that the State will actively defend your company’s investment from ‘interference’ and ‘frivolous and scurrilous attacks.’ Opposition to this project is both local and statewide, and is not frivolous, slanderous or interference,” they wrote. “As individual Alaskans our opposition to this project arises from the potentially severe social, economic, and cultural risks that Pebble Mine represents. As elected officials, our opposition to this project aligns with the interests of our constituents.” The lawmakers continued to cite the late Sen. Ted Stevens’ oft-quoted remark that Pebble “is the wrong mine for the wrong place” and highlighted the fact that several large mining firms have already walked away from the project over the years after spending hundreds of millions of dollars to advance it. They also cited figures from a survey commissioned by Bristol Bay Native Corp., which also opposes Pebble, that found approximately 35 percent of Alaskans support Pebble’s development. Pebble Partnership released its own survey early this year with figures showing the majority of Alaskans support its efforts. The back-and-forth started July 24 when Bristol Bay-area commercial fishing and Native organizations along with several national conservation groups, including the Natural Resources Defense Council, sent a letter to Smallwood to discourage a potential investment in Pebble. Next came Dunleavy’s letter, followed by an Aug. 29 letter from BBNC CEO Jason Metrokin, which had much the same tone as the legislators’ letter, and finally the Sept. 9 letter. A spokeswoman for Wheaton did not return calls or emails regarding the correspondence to the company. BBNC Lands and Resources Vice President Dan Cheyette in a brief interview called it “entirely inappropriate” for the governor, who oversees the agencies that would be regulating Pebble, to send a letter “that is essentially cheerleading a potential investment in a project that has not yet been permitted.” Resource development advocates similarly criticized former Gov. Bill Walker for taking a formal stance against Pebble, alleging state agencies under his watch would not give the project a fair shake. Dunleavy has consistently taken a neutral stance on Pebble, while he has backed most all other resource development efforts in the state. “While some in the Legislature may disagree, Governor Dunleavy and a large number of Alaskans believe projects should be allowed to follow a fair and transparent permitting process; one that is rigorous, merit-based and prescribed by law,” Dunleavy’s spokesman Matt Shuckerow wrote in response to the legislators’ letter. Pebble spokesman Mike Heatwole wrote via email that the company has had conversations with several potential investors but he could not comment on specific prospective partners. “We continue to have productive discussions with a range of companies about the project and when we have something formal to announce we will do so,” he wrote. The lawmakers did not reference a 2014 ballot initiative that requires any large mining project in the Bristol Bay region to be formally approved by a vote of the Legislature. Voters approved the measure with 65 percent support. Pebble leaders have repeatedly said they believe it is unconstitutional and the company will challenge it when it is necessary to do so. Heatwole said the measure illegally gives “one branch of government (the Legislature) two bites at the apple” in regards to approving Pebble, as it is the Legislature that sets the permitting standards carried out by state agencies. He added that even if it stands a legal test, he doesn’t believe legislators would want to “go on the record (with a vote) killing a job-creating, economically stimulating project” that had already met state permitting requirements. ^ Elwood Brehmer can be reached at [email protected]

Sen. Dan Sullivan wants Alaskan contractors to know that the more than $200 million expansion project at Fort Greely is moving ahead “full bore,” despite mixed messages coming out of the Pentagon. The Associated Press reported in late August that Department of Defense officials decided to cancel a contract with Boeing to develop a new “kill vehicle” for intercontinental ballistic missile, or ICBM, interceptors housed at Fort Greely because of problems with the aerospace giant’s current design and related cost issues. The contract was officially canceled Aug. 22. Fort Greely is at the center of the country’s ground-based missile defense system with 40 of the 44 active ICBM interceptors housed in underground silos at the Interior Alaska Army installation. Sullivan said in an Aug. 29 meeting with the Journal that he wanted to quell concerns he heard after the news of the kill vehicle contract broke from those working on a project to expand the number of interceptors at Fort Greely from 40 to 60, as Congress directed in the 2018 National Defense Authorization Act. After making calls to Secretary of Defense Mark T. Esper, Missile Defense Agency Director Vice Adm. Jon Hill and other senior Pentagon officials, Sullivan said he was assured the expansion work at Fort Greely wouldn’t be stopped along with the kill vehicle contract. “We continue and will continue into the future to be the cornerstone of America’s missile defense — no ifs, ands or buts,” Sullivan said of Alaska and Fort Greely. “They got silos, the need to put in what they call sleeves; the need to wire them… That’s continuing. That’s a $200 million project, just that expansion. It’s not done yet but it’s getting close.” In addition to the work at Fort Greely, the Missile Defense Agency is in the midst of spending another $325 million over six years at Clear Air Force Station just south of Fairbanks. Clear is a radar base near Nenana along the Parks Highway. The money there is going towards installing a new power plant and missile detection radar system. Clear Air Force Station is on the electrical grid; however, the upgraded power plant is a backup facility that will be protected against electromagnetic pulse weapons that could be used to render electrical systems useless, according to former MDA Director Vice Admiral James Syring. When the long range discrimination radar being installed at Clear —expected to be done in the early 2020s — is done it will be “the most sophisticated ground-based radar system on planet Earth,” according to Sullivan, and is focused on detecting ballistic missile threats. As for the kill vehicles on the interceptors, he said Pentagon officials want updated kill vehicles to match the ever-evolving threats from adversarial nations and a request for proposals should be let soon to the aerospace companies capable of performing the work. Sullivan added that he was assured the new kill vehicles and associated rocket booster are compatible with the infrastructure at Fort Greely. He planned to get detailed, classified briefings on the status of the ICBM interceptor program when he returned to Washington, D.C., in September after spending most of the August recess in Alaska followed by a week of training at Camp LeJeune in North Carolina as part of his duties as a colonel in the Marine Corps Reserve. Sullivan serves on the Senate Armed Services Committee and chairs the Readiness Subcommittee. To him, the worries over whether or not the work at Fort Greely was going to continue came down to a poorly executed communications strategy on the part of Pentagon officials. The incomplete information that came out initially resulted in the ballistic missile interceptors at Fort Greely and California’s Vandenberg Air Force Base being conflated with work to oppose the newer, hypersonic missiles China and Russia are believed to be developing. The hypersonic weapons fly at a faster speed and on a much lower trajectory than ICBMs and therefore are beyond what the current interceptors can respond to, according to Sullivan. He said the interceptors at Fort Greely are meant to counter threats from “rogue nations” such as North Korea. “I was very mad about the rollout. I was not given a heads up about it but I knew they were looking at it,” he said about the interceptor redesign. He highlighted the significance of a successful test in March when two ICBM interceptors were launched from Vandenberg and destroyed the faux warhead exactly as prescribed. The first defense missile struck the dummy threat, while the second honed in on the largest piece of leftover debris and destroyed it. Sullivan described it as “a bullet hitting a bullet in space, essentially.” There are also plans to increase the frequency of missile tests at the Pacific Spaceport Complex in Kodiak. In July, the Israel Missile Defense Organization and the MDA conducted a successful test of the Israeli Arrow-3 Weapon System at Kodiak, according to a statement from the MDA. “Maybe at the end of the day this was the smart thing to do,” he said of the interceptor changes, “but what I’ve been able to tell people here is that on the construction that’s ongoing, which is kind of all over, and the continued use of Kodiak as a really important place, we’re full bore.” Milcon funding to border wall Secretary of Defense Esper issued a memo to Defense agency leaders Sept. 3 that included a long list of military construction projects that will be deferred as money is pulled from them to fulfill President Donald Trump’s emergency declaration to build a $3.6 billion wall along the southern border with Mexico. Trump issued the declaration in February and projects at Fort Greely Eielson Air Force Base near Fairbanks will have $102 million pulled from them to support wall construction. At Eielson, $74 million to repair two of the base’s central heat and power plan boilers and $19 million to upgrade the combat arms training and maintenance, or CATM, range will be redirected. At Fort Greely, $8 million to support expansion of the installation’s Missile Field No. 1 will also be sent south. However, the contracts for that work was not scheduled to be awarded until early 2020 and early 2021, according to Esper’s memo. Sullivan has been critical of congressional Democrats for blocking attempts to fund additional border security through the normal appropriations process. His spokesman, Mike Anderson, wrote via email that the 2020 National Defense Authorization Act, which passed the Senate in June 27 on an 86-8 vote, authorizes $3.6 billion to restore the repurposed funds. “Going forward, Sen. Sullivan will work with his colleagues on the Appropriations committees to fund this initiative,” Anderson wrote. Elwood Brehmer can be reached at [email protected]

As of now there are proposed cargo warehouse and transfer facility developments worth nearly $600 million at the Ted Stevens Anchorage International Airport. The wave of potential developments, which were made public through applications to lease land at the state-owned airport, comes after years of trumpeting Anchorage’s unique cargo transfer opportunities by airport officials and city leaders. Anchorage Economic Development Corp. CEO Bill Popp said he’s not exactly sure what caused the recent burst of interest in the airport but he’s very happy to see it. “There’s been a lot of drumbeating for Anchorage International Airport and it finally appears to be paying off,” Popp said. Specifically, 6A-XL Aviation Alaska LLC is proposing a 500,000 square-foot cargo transfer facility on the west side of the airport across the north-south runway from the passenger terminals. 6A Aviation Inc. is also proposing a 300,000 square-foot air cargo warehouse at the north end of the airport near Point Woranzof. Both of the 6A proposals are estimated as $170 million projects. Szczesniak said 6A Aviation is a contractor doing pre-development work for other companies. The company’s website does not list contact information and state business license records list an Annapolis, Md., address for the company, but little additional information. The largest proposal both in terms of size and value is from Alaska Cargo and Cold Storage LLC, which has plans for a $200 million, 700,000 square-foot climate-controlled cargo warehouse facility on a boggy, undeveloped parcel just north of the terminals. Popp noted the site will be a challenging one to develop because of the ground conditions but said he’s hopeful the company has considered those obstacles and figured out ways to overcome them. Finally, FedEx is planning a $57 million, 98,000 square-foot domestic operations center that would include the company’s administrative offices, according to the lease application. A FedEx spokeswoman wrote via email that the company doesn’t comment on business plans until they are final, but Szczesniak said the package delivery giant is likely to move it’s existing Alaska distribution operations into the new building, which would allow the company to support future growth in its international freight business at other facilities. AEDC is among several groups that for years has pitched Anchorage as a prime place for international air cargo companies to focus their business. That’s because Anchorage — already the fifth busiest air cargo hub in the world — is not bound by the same international trade restrictions as nearly every other airport in the country, or the world for that matter. Cargo options Thanks to the venerable late-Sen. Ted Stevens, since 2004 foreign cargo can be transferred from one aircraft to another without being subject to customs and other trade requirements or tariffs at the airport that now bears his name. The same options are available at the Fairbanks airport but Anchorage has more capacity to handle large aircraft. Air cargo operators have long stopped their Boeing 747s at Anchorage because of its geography. Alaska’s midpoint location between Asian manufacturing centers and North American consumer markets makes it a prime refueling stop; cargo planes can carry more freight if they refuel here as opposed to making a nonstop transcontinental journey. However, few cargo companies have regularly utilized the unusual but potentially significant transfer opportunity — particularly given Anchorage’s geographic location — that in theory could make their operations more efficient. Amazon Air began using the airport for daily stops in June. Airport officials and general Alaska trade advocates have said the open shipping options have not attracted business in part because shippers are often skeptical they’re actually allowed; in most places such cargo transfer would be cabatoge, a federal crime. Airport officials surveyed cargo carriers last fall to gauge the interest in a potential cargo transfer facility and the response was positive enough to investigate the idea further. This spring they sought expressions of interest from cargo industry players. Anchorage Airport Manager Jim Szczesniak said in an interview that the solicitations at least played a part in attracting the potential business opportunities that are now here. “You’ve got a pro-business administration coupled with the airport really driving the potential that this place has,” Szczesniak said, referring to Gov. Michael J. Dunleavy’s mantra that Alaska is “open for business” under his leadership. “That’s going to get a lot of traction in the business community.” The lease applications submitted in July and August do not signal sure-fire projects, but they do prove the demand certainly exists for plenty more warehouse space at the airport, he noted. “We think that these are good, solid projects, to start the transformation of the airport and really take advantage of the cargo transfer rights,” he said. “We, as the airport, are trying to do more.” What substance there is behind the proposals will likely be better known next spring when Szczesniak said he hopes the first construction will start on at least a couple of the projects. He added that cargo industry officials typically correlate 1,000 square feet of warehouse space to one-half to one full-time job. Based on that, the four projects could cumulatively generate between 700 and 1,500 new jobs in Anchorage beyond the initial construction activity. AEDC estimates the Anchorage airport already supports 10 percent of the city’s jobs. “We think that this is the first wave of projects because as of right now the tenants haven’t been announced but once that’s public, then their competitors are going to be like, ‘Hey, what are these guys doing in Anchorage; we need to be there, too,’” Szczesniak surmised. He said airport officials also recently wrapped up a request for qualifications, or RFQ, for developers interested in building a hotel on the airport. They identified an 80,000 square-foot location tucked between the south terminal and airport parking lots. Officials are evaluating the responses and intend to invite the best five respondents to participate in the final request for proposal, or RFP, step, according to an airport public notice. Elwood Brehmer can be reached at [email protected]

Alaska’s financial situation got a little bit tougher Thursday afternoon when Fitch Ratings downgraded a suite of credit ratings tied to state debt. Most notably, Fitch downgraded Alaska’s general obligation, or GO bond rating from AA to AA- on $724 million worth of bonds. Another roughly $1.1 billion in state appropriation bonds was downgraded from AA- to A+ and more than $1.1 billion in Alaska Municipal Bond Bank Authority resolution bonds also went from AA- to A+. Fitch gave the ratings a stable outlook. As with other ratings downgrades from Fitch and other agencies in recent years, the downgrade is tied to the State of Alaska’s continued inability to balance its budget, according to a statement accompanying the announcement. “To date, (state budget) operating revenue remains anemic, and the administration’s commitment to funding a full Permanent Fund dividend despite projected revenue loss has contributed to the enactment of a fiscal 2020 budget that includes deep cuts to core state services,” Fitch analysts wrote. “Fitch expects this will be followed by comparable actions in fiscal 2021. Despite the expenditure reductions, appropriations from the state’s Statutory Budget Reserve Fund and Constitutional Budget Reserve Fund are required to fund the dividend payment and the capital program, reflecting the state’s ongoing structural deficit.” Department of Revenue officials have said a one-notch downgrade such as this one roughly equates to a 0.25 percent increase in the interest rate on money the state borrows often through bonds for capital projects. Local governments and school districts also piggy-back on the state’s rating and use the moral obligation of the state to secure lower interest financing for their projects. The Revenue Department is looking to sell up to $700 million in revenue bonds to pay off the state’s remaining oil and gas tax credit obligation after the refundable tax credit program was ended in 2017 due to budget constraints. However, it’s unclear exactly when, or if, that bond sale will take place as the legality of the plan has been challenged and is currently under review by the Alaska Supreme Court. State debt manager and Alaska Municipal Bond Bank Authority Executive Director Deven Mitchell said via email that he was surprised and disappointed by the downgrade because even though getting to a final 2020 budget was “a painful process” the state ended up with a budget that is pretty much balanced. “The report was based on negative ‘beliefs’ and ‘potentially expected futures’ rather than the reality of today,” Mitchell said. The state’s credit rating has been on a downward trajectory since early 2016 when oil prices dropped to less than $30 per barrel and the state’s budget deficit was more than $3 billion. Alaska had sterling AAA ratings prior to 2016. Moody’s and Investors Service currently has an Aa3 (comparable to AA-) rating for the state’s GO bonds, while Standard and Poor’s has an AA rating for the state. In February, Dunleavy proposed closing the state’s roughly $1.6 billion deficit without tax increases or reducing PFD payments by drastically cutting state services and pulling local tax revenue into state coffers. According to Fitch, Gov. Michael J. Dunleavy’s desire to pay a full, statutorily calculated PFD “elevates the state’s fixed cost burden and reduces its ability to respond to future economic weakness as revenue growth is expected to be modest.” The agency’s analysts also believe that “substantial reductions” to the state’s health care and university budgets could have consequences for future economic growth in the state. A prolonged budget debate resulted in Dunleavy vetoing $50 million from the state’s Medicaid budget in addition to a $70 million cut instituted by the Legislature. Dunleavy agreed to a $25 million cut — part of $70 million over three years — to the state’s support of the University of Alaska. Dunleavy was upbeat in a statement issued late Thursday responding to Fitch’s criticisms of the state’s fiscal situation. “In reading this report, it’s clear this is the result of what has – or has not – occurred over the last several years,” the statement said. “My administration is determined to get our fiscal house in order. Alaska has struggled with fiscal imbalance for years and we must continue moving forward on necessary steps to put in place a stable and reliable fiscal plan. I continue to be optimistic for Alaska’s future: unemployment is at its lowest rate in nine years; GDP is on the rise; billions in new oil and gas investment are being made on our North Slope; the Ted Stevens Anchorage International Airport – the 2nd busiest for air cargo in the US, 5th busiest in the world – continues to expand and bring new business to Alaska. Once our fiscal house is in order, I have no doubt Alaska will once again top the rating agency charts.” Moody’s downgraded the University of Alaska’s bond ratings several notches in July following the governor’s initial $130 million, or roughly 40 percent, cut to its state budget. The agency also lowered the state-owned Alaska Industrial Development and Export Authority’s bond rating two notches — from Aa3 to A2 — in late July despite it’s generally solid financial performance because the authority is ultimately tied to the state’s budget situation, analysts wrote. AIDEA routinely finances infrastructure and real estate development projects through its roughly $1.3 billion Revolving Fund. Dunleavy proposed using a portion of the Revolving Fund to pay for other state government expenses in his original budget plan but the idea was not part of the final state budget. Elwood Brehmer can be reached at [email protected]

Gov. Michael J. Dunleavy wants federal decision makers to approve a fast-tracked permitting plan for one of Alaska’s prime metal prospects. The governor sent a letter to federal Council on Environmental Quality Chair Mary Neumayr Aug. 9 urging the council to classify the Bokan Mountain rare earth metals prospect as a High Priority Infrastructure Project. The “High Priority” designation would provide the Bokan project proponents, Nova Scotia-based Ucore Rare Metals Inc., an expedited federal environmental impact statement process aimed at ultimately accelerating development of a mine. The Bokan Mountain rare earth underground mine prospect near tidewater on southern Prince of Wales Island holds more than 4.7 million metric tons of indicated rare earth ore, according to a 2015 resource assessment by. That translates to approximately 63.5 million pounds of collective rare earth metals, which are used in a plethora of high-tech applications, from smartphones to advanced batteries and fighter jets. There are 17 minerals defined as rare earth elements, but “heavy” rare earths — such as europium, terbium, and ytterbium with a greater atomic weight — are the most sought after and are used in products that rely on high-temperature magnets. More common lighter rare earths are used in a plethora of applications including LED displays. Heavy rare earths account for roughly 40 percent of the mineralization at Bokan, according to Ucore. Dunleavy wrote in his letter to Neumayr that the state understands the country’s need for a secure supply chain of rare earths and deeming Bokan a high priority project would help to “ensure the resource is available for development in a reasonable time-frame.” “America’s dependency on a non-allied, foreign-sourced, critical metals supply chain to support national defense, green energy initiatives, and high-tech product manufacturing is an ongoing concern at both the State and Federal levels,” he wrote. In 2014, the Legislature approved the Alaska Industrial Development and Export Authority to issue up to $145 million in bonds to help finance the Bokan project. Ucore estimated in 2013 that the mine would cost about $220 million to develop. For several years, the U.S. imported all of its rare earth elements until the Mountain Pass rare earths mine in southern California reopened last year. That’s a significant concern for many federal officials and policymakers because China is still the primary source for rare earths globally and the Chinese government — already engaged in a tense trade dispute with the U.S. — could restrict the flow of these critical metals. A drop in rare earth prices in 2015 has shifted Ucore’s attention away from the mine in recent years and towards advancing the processing technologies that would be used its refining complex. Ucore leaders thanked Dunleavy for the letter in formal statements. The company is also working to develop a facility to refine the metals it mines in Ketchikan. Sen. Dan Sullivan said in a recent interview with the Journal that Defense officials told him about 90 pounds of rare earths go into each new F-35 fighter jet. He suggested China manipulates global rare earth markets to keep metal prices low enough to deter development of rare earth mines elsewhere, thus allowing the country to maintain its position as the world’s primary supplier. “A (high priority project) designation would shave significant lead time off of the development of a fully permitted project, prospectively delivering us to construction commencement in just over two years,” Ucore Chief Operations Officer Mike Schrider said. “Our fundamental objective is to establish the Bokan-Dotson Ridge resource as a shovel-ready critical mineral reserve for the rapidly expanding domestic technology and defense industry sectors that are dependent on rare earth metals.” Just four days after taking office in January 2017, President Donald Trump signed an executive order directing the council “to streamline and expedite” the National Environmental Policy Act, or NEPA, process for projects deemed to be a high priority for the nation. The order allows for governors or federal department executives to request the high priority status and specifically lists electric power grid projects as well as telecommunications systems, pipelines and transportation infrastructure as the primary types of projects that could receive the designation, but it does not explicitly list mines. According to the order, Council on Environmental Quality Chair Neumayr has 30 days to decide whether a request for a high priority listing should be granted. Schrider said in a brief interview that Ucore got a letter from Council on Environmental Quality officials Sept. 3 that Dunleavy’s request is being evaluated. A spokesman for the council did not respond to questions in time for this story. Schrider said the company is very appreciative of the governor’s efforts and Ucore is examining ways to move ahead with developing the mine at current metal prices. The next step towards developing Bokan is a detailed feasibility study of the project, according to Schrider. ^ Elwood Brehmer can be reached at [email protected]

Alaska companies and communities aiming to implement new energy technologies or just improve their energy efficiency could see more resources coming their way, according to one U.S. Department of Energy leader. Deputy Energy Secretary Dan Brouillette said during an Aug. 28 press briefing in Anchorage that he wants the department to expand its current footprint in the state and provide more help to Alaskans working with energy technologies. That help could come in the form of additional technical assistance for remote communities that need help complying with the state’s Power Cost Equalization program, for example; additional funding for local energy infrastructure projects; or more cooperative research between the University of Alaska and DOE’s 17 national laboratories; Brouillette said he hopes it all can happen. He spoke alongside Sen. Lisa Murkowski at Cook Inlet Tribal Council’s “Fab Lab” at the end of a five-day trip. Brouillette toured North Slope oil operations and visited Western Alaska villages working to integrate renewable energy technologies into their communities among other meetings. He said he wants to expand the department’s footprint in the state because the applied research done here has implications worldwide. “The lessons that I learn here are very practical and sometimes we lose sight of that. We spend a lot of money at the Department of Energy on some fantastic science, and it’s very important that we do so, but it’s also important that we take the time to come to places like this one to see the actual application of these scientific lessons and that’s what’s so exciting for us,” Brouillette said, adding that Alaska regularly leads the country in energy technology innovation. According to DOE budget documents, the department spent $9.7 million on Alaska programs in federal fiscal year 2018 and has a $16.2 million budget for grants, projects and other work in the state for the current, 2019 fiscal year, which ends Sept. 30. Much of the bump in DOE funding to Alaska was for fossil energy research and development. Last winter, the Department of Energy partnered with the U.S. Geological Survey, BP and Japan Oil, Gas and Metals National Corp. to drill a test well in the Prudhoe Bay oil field for natural gas hydrate research. It was the start of a multi-year endeavor with the ultimate goal of better understanding the viability of commercial gas hydrate production. The department’s funding for energy efficiency and renewable energy projects has increased slightly in recent years, but generally been in the $2.3 million per year range. While it’s a tiny fraction of DOE’s overall budget of more than $37 billion, Brouillette said the department’s work — combined with what other organizations do — on energy efficiency improvements in Alaska is crucial. The Federal Energy Regulatory Commission, an independent arm of the Department of Energy, on May 23 approved a first-of-its-kind, 10-year operational license for a RiverGen in-river power generation system in the Southwestern Alaska village of Igiugig. “We count on that technology; we count on that research; we count on those efforts not only for Alaska, but for the rest of the country,” Brouillette said. “Our energy efficiency program at DOE is very much looking to Alaska to solve some of the problems that we face in other parts of the country.” To that end, Murkowski said she is committed to finding ways to replace $750,000 of state funding for the Cold Climate Housing Research Center that Gov. Michael J. Dunleavy vetoed from the state capital budget as a means of reducing the state’s ongoing budget deficits. Murkowski chairs the Senate Energy and Natural Resources Committee. She stressed that the benefits of the research and building designs developed at the Fairbanks-based center stretch well beyond Alaska. “The work that Cold Climate Housing has been doing is not only important to us in Alaska; this is the facility in the Arctic,” Murkowski said. “Other Arctic nations are looking to what Cold Climate Housing is doing and saying, ‘We want to share your good ideas. We want to use some of your designs because we struggle with the same issues.’” The Cold Climate Housing Research Center is widely known for developing what are believed to be the most energy efficient northern latitude homes in the world. CCHRC founder and CEO Jack Hébert said based on prior conversations with Murkowski that she is investigating whether the center could partner with the Energy Department's national laboratories partly as a means to secure funding. "She's just doing what she can do. She believes in us and we certainly appreciate her for that," he said. However, Hébert said getting federal funding is made more difficult by the fact that the state has cut off its support. He added that the center is also looking a private sources of funding, such as nonprofit foundations. "It's tough, but we'll make our way," he said. Both Murkowski and Brouillette noted that while the center’s work is focused on northern home design, the same construction methods can be used to keep the heat out in warmer climes. Murkowski also said she is working on legislation to allow Department of Energy grants to be more easily passed through quasi-state agencies, such as the Alaska Energy Authority, to local governments and Tribes for renewable energy and efficiency projects. Additionally, Murkowski has long been working to pass an omnibus national energy policy reform package. Such legislation passed both the House and Senate in 2016, but ultimately died on conference committee negotiations. Republican Senate Energy and Natural Resources spokeswoman Tonya Parish wrote in an email that the committee has held several hearings on energy reform legislation, advancing 22 bills to the Senate floor in July. The committee is expected to hold another bill markup soon, “with continued focus on energy-related matters that can be combined into a bipartisan package,” Parish wrote. The pair visited the Kuskokwim Bay communities of Kwigillingok and Kongiganak. “Kwig” and “Kong” leaders, along with officials from other nearby villages for years have been working to not only to integrate wind power into their primarily diesel-supported power grids, but also have been trying new ways to maximize the amount of wind energy they can use through hi-tech battery storage and in-home electric thermal storage units, among others. Murkowski said the work has allowed the communities to get off of diesel-generated power upwards of 30 percent of the time. “When you’re paying $6 a gallon for your home heating fuel every percent that you can get off diesel is money ahead,” she said. Brouillette commented that he was further surprised by the interest residents of Kwig have in hydrogen energy technology. “To see that interest in such a small community (with a population of about 300), again speaks to the entrepreneurial spirit of the Alaskan people,” he said. “If we were able to assist smaller communities like Kwig all throughout Alaska, given the amount of water resources here — that would be a tremendous opportunity. He added that while wind and solar energy projects are helping to immediately reduce energy costs in rural Alaska, the opportunities that could be afforded by economic hydrogen energy “represents a future that none of us today can even imagine.” Elwood Brehmer can be reached at [email protected]

Hilcorp Energy’s pending $5.6 billion acquisition of BP’s Alaska assets has implications well beyond what happens to the oil remaining in the Prudhoe Bay field. That’s because the London-based oil major’s reach in the state isn’t limited to operations at the legendary oil field, which BP holds a 26 percent stake in. ConocoPhillips and ExxonMobil each hold a 36 percent share of Prudhoe Bay and Chevron has the remaining 1.1 percent interest. BP also holds a one-third share of the $4 billion Point Thomson gas field on the North Slope, which is operated by ExxonMobil and is a lynchpin to the proposed roughly $40 billion Alaska LNG Project. A spokeswoman for ConocoPhillips Alaska said company officials heard the same rumors leading up to the deal that everyone else in the industry did, but they have not seen the details of the transaction and could not comment on it. Additionally, BP is one of two companies — Chevron is the other — that knows the results of the only oil well drilled in the Arctic National Wildlife Refuge coastal plain. After 60 years in Alaska, BP had also become one of the largest charitable givers in the state. It contributed more than $4 million last year to education causes and nonprofits in Alaska. Houston-based Hilcorp donated $315,000 to charitable causes in the state last year, according to the companies. BP has long been a primary proponent of the Alaska LNG Project; the company was part of the consortium that started work on the plan to export North Slope natural gas in 2013 through a partnership with the state. Then, when the companies decided in February 2016 to step away from Alaska LNG amid collapsed oil and global LNG prices and let the state continue the work, BP was the first producer to formally reengage the project when it agreed to provide technical assistance to the state-owned Alaska Gasline Development Corp. starting in December of that year. That assistance preceded BP becoming the first company to sign a binding gas sales precedent agreement with AGDC in May 2018. The terms of the confidential agreement, which is still in effect, according to AGDC, include gas price and volume figures. ExxonMobil later signed a similar confidential deal with AGDC last September. Finally, in late May BP committed up to $10 million to help AGDC fund the remainder of the Alaska LNG Project environmental impact statement being analyzed by the Federal Energy Regulatory Commission. ExxonMobil also put up $10 million to finish the Alaska LNG EIS. Scheduled for completion in mid-2020, a favorable decision from FERC on the EIS is seen by most industry experts as a major step towards de-risking the project and one that could help attract investors. Under Gov. Michael J. Dunleavy AGDC leaders have said they plan to finish the FERC EIS process and pitch the project to private sector investors and operators they hope would take it over. It all appears to counter the decision to sell the company’s share of North Slope gas — estimated to be about one-fourth of the roughly 35 trillion cubic feet of available gas resources — which BP Alaska leaders regularly touted as the largest undeveloped gas resource in its broad global portfolio and one they hoped to monetize. It’s worth noting that the BP-Hilcorp transaction is subject to several state and federal approvals and isn’t expected to close until sometime next year. Economist Ed King, who worked on Alaska LNG in its early stages under former Gov. Sean Parnell’s administration, said in an interview that BP’s willingness to exit the state and sell the gas resources as part of that suggests the company didn’t have faith that Alaska LNG would be built anytime soon. “We’ve all known for a long time that it’s an economically challenging project,” King said. In the midst of the transition to state leadership of Alaska LNG in mid-2016, the international energy consulting firm Wood Mackenzie forecast that an oil company-led project would not meet the return thresholds typically required by oil companies to make it economically attractive. However, the tax exempt status a state-sponsored LNG project would enjoy along with other factors could make it viable, Wood Mackenzie representatives said to legislators at the time. BP Alaska spokeswoman Meg Baldino wrote via email that the company plans to honor the $10 million commitment. She also noted that BP would still have the opportunity to participate in Alaska LNG if it’s built, potentially as a purchaser of the project’s LNG. As for Hilcorp, AGDC spokesman Tim Fitzpatrick said the company had not engaged in recent discussions about the gasline project with the agency. AGDC officials speaking on background said Hilcorp had a positive view of the project in its early stages several years ago but also said Hilcorp had not discussed the project with them of late. Spokespersons for Hilcorp did not respond to multiple questions and requests for comment for this story. While Hilcorp’s official view of North Slope gas sales is unclear, the company should also be getting a leg up in the quest for the untapped oil many believe is below the Arctic National Wildlife Refuge coastal plain. According to BP’s Baldino, Hilcorp will get all of BP Alaska’s lease holdings within the boundaries of ANWR and the associated data, which includes the results of the KIC-1 well — the only oil well drilled in the refuge — in 1986. The longstanding leases jointly held by Chevron and BP are over much of the 92,000 acres of ANWR in-holdings that are owned by Kaktovik Iñupiat Corp., or KIC, that surround the Native village of Kaktovik on the northern edge of the 19 million-acre refuge. Arctic Slope Regional Corp. owns the subsurface rights to the acreage. The companies teamed up to drill the well about 15 miles from the village and have managed to keep the well data, and whether or not it hit oil, under wraps. Interior and Bureau of Land Management officials in Alaska have consistently said they intend to hold a lease sale for the roughly 1.5 million-acre coastal plain this year after the environmental impact statement evaluating oil and gas development in the area is complete. Congress also mandated a second lease sale in the 2017 tax overhaul legislation that carried the ANWR rider. When it comes to oil, King said he will be watching how many of the roughly 1,600 BP Alaska employees Hilcorp retains to operate Prudhoe Bay and the company’s nearby fields and prospects, which it also purchased from BP in 2014. Hilcorp is known for boosting production or at least holding it steady in mature oil and gas fields, which is partly why the company’s acquisition of BP’s Prudhoe assets was not a surprise to many industry observers. However, King noted doing so profitably usually means a smaller workforce. He surmised that the number of personnel in the field likely won’t change much and Hilcorp’s smaller corporate structure is also a way the company keeps downward pressure on overhead. “I’m really curious if they’re taking a look at some of the projects that have been on the shelf,” King said of Hilcorp’s plans for the Prudhoe field, adding that some marginally economic infield oil projects have been dismissed while BP has been the operator. Elwood Brehmer can be reached at [email protected]

Hilcorp Alaska’s $5.6 billion acquisition of BP’s assets in Alaska, announced Aug. 27, marks a “crowning achievement” for a Houston, Texas, company that has rapidly risen to become a major player in Alaska’s oil patch, after establishing a foothold in Cook Inlet seven years ago, observers say. The privately held company, founded by billionaire Jeffery Hildebrand in 1989, is known for squeezing more oil out of aging fields, a pattern seen in Cook Inlet after it began buying assets in 2012. There, the company soon became the dominant oil and natural gas producer in the Southcentral Alaska region, where it now runs a collection of offshore platforms and recently spent $90 million to upgrade oil delivery. The company’s Cook Inlet purchases attracted little attention compared to the company’s bold move in 2014, when it acquired two fields from BP, and parts of two other fields, in a $1.25 billion deal. “In Alaska, we’ve seen them double and double again, because they seized the opportunity,” said John Hendrix, former chief oil and gas adviser to former Gov. Bill Walker. “My hat’s off to them.” Hendrix said Hilcorp has strong buy-in from employees — stoked by incentives such as Hilcorp’s $100,000 bonus to all employees in 2015. “They won’t take risks,” but they also won’t burden their business with unnecessary bureaucratic delays, he said. Joe Balash, now an assistant U.S. Interior Secretary, was deputy commissioner for the state Department of Natural Resources when Hilcorp was originally hunting for deals in Cook Inlet. He said the company had bigger plans for Alaska even then. “In our very first conversations we had with Jeffery Hildebrand in Houston, when they were looking at the acquisitions in Cook Inlet, he had his eye on the North Slope,” Balash said. In 2014, Hilcorp proved itself an effective operator in the Arctic Alaska region, continuing to partner with BP on fields where both companies held stakes, he said. “They impressed BP management to the point they were obviously able to develop a relationship necessary to make a transaction like this possible,” Balash said. Hilcorp’s reputation in Alaska took a hit in 2017, after state regulators highlighted a long list of operating infractions, and a subsea pipeline in Cook Inlet leaked natural gas for months, with icy, cold water complicating repairs. But the company has taken steps to improve its operations in the state, regulators have said. The company employed more than 400 people in Alaska last year, and produced more than 75,000 barrels daily of gross oil and gas equivalent. The acquisition announced Aug. 27 cement’s Hilcorp’s position in Alaska, and will make it the second largest producer in the state when the deal is finalized, observers said. “For Hilcorp, buying BPs assets, including assuming operatorship of Prudhoe Bay, is a crowning achievement to the Alaska business they have built since 2012 to become the largest private operator in the state,” said an emailed statement from Enverus, an oilfield data services firm in Texas. How Hilcorp Alaska will integrate BP’s workforce of 1,600 employees is unknown. That workforce is vital to operating Prudhoe and conducting other work, according to an email from Hilcorp spokesman Justin Furnace. “Our plans for that workforce will develop as we determine how we will integrate the acquisition into Hilcorp’s existing operations and we receive a list of eligible employees from BP so we can begin the interview process,” Furnace said. Hilcorp’s next big move in Alaska could be at its offshore Liberty field, another North Slope acquisition from BP, in the Beaufort Sea. Hilcorp has moved rapidly in its efforts to develop the field. It hopes to launch oil production in the coming years. The field could produce up to 70,000 barrels of oil daily.

Bureau of Land Management officials have released the draft review of a proposal by the State of Alaska to build a road that would open a large swath of Interior Alaska to mineral development. The state-owned Alaska Industrial Development and Export Authority is leading the permitting and possibly eventually the financing of the long-sought Ambler Mining District Industrial Access Project, which has drawn opposition from environmental groups and some local stakeholders. Commonly referred to as the Ambler road, the 211-mile gravel road would link the remote Ambler mining district in the Upper Kobuk River drainage to the Dalton Highway near the base of the Brooks Range and the rest of Alaska’s road system. BLM identified AIDEA’s plan for the Ambler road as it’s preferred alternative for the project in the draft environmental impact statement, or EIS, released Aug. 23, but the exact route through or around Gates of the Arctic National Park and Preserve is still undecided. AIDEA applied with BLM to start the Ambler road EIS in March 2017. The one other Ambler road route considered in the draft EIS would start just north of the Yukon River bridge, near milepost 60 of the Dalton. The road would generally angle northwest for 332 miles before terminating near the Ambler River. Fairbanks would be 456 miles from the end of the road using AIDEA’s route and 476 miles from the end of the Ambler road under the alternative route. BLM dismissed the longer route because it would be nearly 60 percent longer than AIDEA’s plan and would have correspondingly more impacts to the environment and be “considerably more costly to construct,” the EIS states. Using a toll road concept, AIDEA would finance the basic gravel road — with an estimated construction cost between $280 million and $380 million — via revenue bonds that would be repaid by the mining companies that would use it to develop the multiple metal prospects in the 75-mile long mining district near the end of the road. According to AIDEA, construction and maintenance costs for the road would total between $475 million and $616 million over 30 years. The authority would return between $988 million and $1.1 billion over that time in tolls, according to its analysis, if the mines are developed. Critics have pointed to the cost of the project, and the fact that there is no guaranteed repayment method, as reasons to scrap the plan. The Wilderness Society contends the current estimate for the road does not consider some of the costs inherent to building in remote northern Alaska, such as constructing a road over permafrost. The group suggests the road could end up costing $1 billion or more as a result. The proposed mines have also drawn scrutiny for potential impacts to salmon and whitefish runs in the Kobuk River drainage and many residents of the area villages are concerned about impacts to caribou in the region that are an important subsistence food source. Numerous village and Tribal governments in the area of the proposed road have issued formal statements of opposition to the project. AIDEA officials insist access to the road will be restricted to mining activity because it would ultimately be paid for through tolls under the plan; there would be no public access to currently isolated hunting areas, which has been another concern of area residents worried about increased activity. The state has spent approximately $26 million of public General Fund money on predevelopment studies for the Ambler road over the years. Rick Van Nieuwenhuyse, CEO of Vancouver-based Trilogy Metals, called the road “crucial to unlocking the incredible mineral wealth” in the Ambler mining district in an Aug. 23 statement. “The development of the Ambler district will lead to generation of thousands of high-paying jobs for the residents of Alaska,” Van Nieuwenhuyse said. “I want to commend the BLM and all cooperating agencies for getting the draft EIS done and look forward to completing the permit for the road.” Trilogy Metals is exploring two multi-metal deposits in the district and Van Nieuwenhuyse has repeatedly stressed that without road access the prospects cannot be economically developed. Trilogy is preparing to start the federal permitting process for the Arctic copper, zinc and precious metal deposit shortly after permitting the road is complete, he has said. Arctic would be an open-pit mine and its expected many of the other prospects in the area would be as well if they are developed. Public comment meetings on the draft Ambler road EIS are scheduled for more than 20 communities during a 45-day comment period. “I realize the importance of this project to the State of Alaska and for the state’s ability to develop its resources and as such, I am committed to ensuring a thorough and comprehensive analysis,” BLM Alaska Director Chad Padgett said in a statement. “This can’t be done without substantive input from stakeholders.” The public comment period is scheduled to start Aug. 30 and run through Oct. 15. Elwood Brehmer can be reached at [email protected]

Alaskans got a sense of what developing one of the state’s largest oil prospects in decades would look like Aug. 23 when the federal Bureau of Land Management released the draft environmental impact statement for ConocoPhillips’ Willow project. The $4 billion to $6 billion proposed oil field is expected to produce up to 130,000 barrels per day at its peak if it is developed as currently envisioned. Willow is expected to cumulatively produce upwards of 590 million barrels of oil over approximately 30 years. It would also be another major step into the mostly undeveloped National Petroleum Reserve-Alaska where ConocoPhillips has been exploring for years. Last October, oil started flowing from the company’s smaller Greater Mooses Tooth-1 project, which marked the first oil production from federal leases within the NPR-A. ConocoPhillips is also in the midst of constructing the $1 billion-plus Greater Mooses Tooth-2 oil project to the east of the Willow development area. All of the aforementioned projects are in the northeastern portion of the NPR-A. ConocoPhillips announced the discovery of the primarily Nanushuk oil formation-sourced Willow prospect in January 2017 and has subsequently drilled multiple appraisal wells in the area. If developed, Willow would be the westernmost oilfield on the North Slope and would be linked to existing infrastructure via a road to GMT-2 based on ConocoPhillips’ current plan. In totality, ConocoPhillips hopes to build 38 miles of new gravel roads to connect five drill sites and a processing facility within the project to GMT-2. Each drill site is designed to accommodate at least 50 production and injection wells. Willow would also have a large operations center with an airstrip for a total gravel footprint of 442 acres, according to the draft EIS. Additionally, the company is proposing to build a temporary gravel island at Atigaru Point in near shore state waters of the Beaufort Sea north of the project for offloading and storing modules. The facility segments would be barged up in summer months and transported via ice roads to the project area in winter, according to the EIS. The 12.8-acre gravel island would be stripped of all manmade materials after several years of use. “It is anticipated the top of the island would drop below the water surface in 10 to 20 years following abandonment as it is reshaped by ice and waves,” the document states. The Atigaru Point island would be the shortest delivery route without needing to dredge marine waters or have additional impacts to the marine environment, according to BLM officials. The island would require 117 miles of ice roads to build and use. The agency selected the company’s plan as its preferred alternative, but BLM Alaska spokeswoman Lesli Ellis-Wouters noted that identifying a preferred plan in the draft stage of the environmental review does not preclude BLM from changing course based on comments it receives on the draft document. If BLM ultimately selects the ConocoPhillips development plan, first oil is expected in late 2024. Development without a field access road would push first oil to early 2026, according to the EIS. The company expects full development to take between seven and nine years. Two other development options considered in the EIS would cut out several infield roads to reduce potential impacts to caribou movements and lessen the number of stream crossings, but those changes would require another airstrip and ultimately lead to slightly more gravel fill. A transfer island farther north and west at Point Lonely is also considered to utilize existing Department of Defense infrastructure there and move the island away from areas frequently used by residents of the nearby village of Nuiqsut for subsistence harvests. Utilizing the Point Lonely site for offloading barges would mean building nearly 230 miles of ice roads for developing the facility and transporting equipment. Developing either island would require crossing part of the Teshekpuk Lake Caribou Habitat Area identified in the 2013 NPR-A Integrated Activity Plan with ice roads. BLM Alaska officials are in the midst of developing a new land-use plan for the NPR-A. Department of Interior leaders have said it will likely have more areas available to oil and gas leasing and possibly smaller areas with special wildlife habitat protections, particularly in the northeastern part of the reserve, which is believed to have more potential for oil and gas finds. Public comment meetings are planned for the northern Alaska communities of Anaktuvuk Pass, Atqasuk, Nuiqsut and Utqiagvik, as well as Anchorage and Fairbanks in mid and late September. Public comments on the Willow draft EIS can be submitted to BLM through Oct. 15. Elwood Brehmer can be reached at [email protected]

Alaska is going to have a new “big three.” BP is selling all of its Alaska assets to Hilcorp Energy in a $5.6 billion deal announced Tuesday morning. For years, BP, ConocoPhillips and ExxonMobil have dominated North Slope oil production. Houston-based Hilcorp will now be taking BP’s place in that group. The sale means the iconic Prudhoe Bay oil field will have a new operator. Hilcorp will also assume BP’s 49 percent stake in the Trans-Alaska-Pipeline System through its pipeline subsidiary Harvest Alaska, according to statements from the companies. Hilcorp will additionally take BP’s 50 percent interests in the North Slope Milne Point and Liberty projects, which Hilcorp currently operates in partnerships with BP, as well as its 32 percent stake in the Point Thomson gas field operated by ExxonMobil. BP CEO Bob Dudley said the sale out of Alaska is a big part of the company’s broader objective to divest approximately $10 billion of assets worldwide this year and next. “Alaska has been instrumental in BP’s growth and success for well over half a century and our work there has helped shape the careers of many throughout the company,” Dudley said in a formal statement. “We are extraordinarily proud of the world-class business we have built, working alongside our partners and the State of Alaska, and the significant contributions it has made to Alaska’s economy and America’s energy security.” Hilcorp executives highlighted the company’s work to revitalize mature oil and gas fields in the state — it’s the primary operator in the Cook Inlet basin — and its workforce in the state, in prepared statements.  “With several years of operational experience in Alaska and an Alaska workforce made up of nearly 90 percent Alaskan residents we understand the importance of this asset to the state,” Hilcorp CEO Greg Lalicker said. “We’re excited about the opportunity ahead and are fully committed to the safe and responsible development of natural resources in such a special place. This commitment is a top priority as we work to ensure a seamless transition process.” The deal includes about $4 billion in near-term payments and $1.6 billion in longer-term payments. It is pending both state and federal approvals and is expected to close next year, according to BP. As a privately held company, Hilcorp has largely tried to avoid the spotlight while in Alaska and kept the details of its financial situation private.  Hilcorp was founded in 1989 by Jeffrey Hildebrand and operates in nine states, including Alaska. The company produced approximately 325,000 barrels per day of oil and gas equivalent in 2018, according to a presentation on its website. In Alaska, Hilcorp currently has more than 500 employees and produced more than 75,000 barrels per day of oil and gas equivalent last year. Company-wide, Hilcorp has more than 2,300 full-time employees, according to a company statement. It has invested roughly $4 billion in Alaska over the past seven years, according to the Alaska Oil and Gas Association. Hilcorp spokesman Justin Furnace wrote via email that BP’s current Alaska workforce of approximately 1,600 employees is vital to operating Prudhoe and conducting other work. “Our plans for that workforce will develop as we determine how we will integrate the acquisition into Hilcorp’s existing operations and we receive a list of eligible employees from BP so we can begin the interview process,” Furnace said in response to questions about how current BP employees will be handled. Hilcorp will assume the lease for BP’s midtown Anchorage office building, according to BP Alaska spokeswoman Meg Baldino. Hilcorp came to Alaska in early 2012 when it bought the Cook Inlet assets of Chevron and Marathon Oil. In 2014 it moved north to the Slope with a $1.25 billion purchase of BP’s offshore Northstar and Endicott oil fields. That deal also gave Hilcorp its 50 percent operator roles in Liberty and Milne Point, which had been solely owned by BP. Hilcorp has been lauded for stabilizing Cook Inlet natural gas production — which supplies Southcentral Alaska with heat and electricity — but also had a prolonged gas leak in late winter 2017 from an old pipeline on the Inlet seafloor. That incident drew widespread criticism for how the company handles the often aging assets it buys, but did not result in significant regulatory action. The existing relationship between BP and Hilcorp helped fuel rumors about a potential sale of Prudhoe Bay, so the announcement does not come as a shock to those within the industry, despite BP Alaska leaders’ recent emphasis on “40 more years at Prudhoe,” a reference to the 40th anniversary of startup at Prudhoe in 2017. Baldino said the deal is in line with that message because Hilcorp specializes in revitalizing declining assets. Oil production at Prudhoe peaked way back in 1988 at just more than 1.6 million barrels per day. Production from Prudhoe and associated satellite fields steadily declined for nearly three decades until stabilizing at about 280,000 barrels per day for the past few years. BP’s ability to stem the production decline is something the company has touted of late.  Cumulatively, more than 13 billion barrels of oil have been pulled out of Prudhoe, making it the most prolific oilfield in the country’s history, according to BP. Last winter BP conducted the first 3-D seismic shoot of the entire Prudhoe Bay field, which was seen by some industry observers as a sort of sales pitch to potential buyers. “This really is about 40 more at Prudhoe. This is what Hilcorp does in investing in mature fields,” Baldino said. She said it’s a tough day for BP employees, but added that they are proud of the work they’ve done in Alaska. “You have an energetic buyer and a valuable asset,” Baldino said. Elwood Brehmer can be reached at [email protected]

Alaska banks are seeing positives in the state economy despite uncertainties caused by the state’s budget situation. The largest in-state banks, First National Bank Alaska and Northrim Bank each had solid results in the second quarter, although Northrim couldn’t match a particularly strong 2018. Northrim netted a $4.2 million profit during the quarter, a 26 percent year-over-year drop largely due to the fact that the second quarter 2018 was a very good period for the bank and higher interest rates helped generate a $5.8 million net income, Chief Financial Officer Jed Ballard said. This year Northrim has felt the impact of an inverted yield curve — when interest rates on short-term debt are higher than long-term debt — according to Ballard, who noted that about two-thirds of the bank’s loan portfolio is in variable-rate loans. “We had some pretty decent loan growth in Q2 that helped offset lower interest rates,” he said. Northrim increased its total lending 5.5 percent year-over-year to a $1.05 billion portfolio, according to records filed with the Federal Deposit Insurance Corp. First National Bank Alaska grew its second quarter net income 3.7 percent year-over-year to more than $13.1 million, according to results posted on the bank’s website. FNBA also eclipsed the $2 billion threshold in total loans in the second quarter with 4.7 percent year-over-year portfolio growth. Both banks increased their total assets as well; Northrim grew 5.6 percent year-over-year to more than $1.55 billion and FNBA ended the second quarter with more than $3.76 billion in holdings, a 3.1 percent increase from 2018. Northrim Chief Credit Officer and Bank Economist Mark Edwards said the positives he is seeing in North Slope oil investments as well as the ever-growing tourism sector have largely been “drowned out” in the noise caused by the state budget debates. Northrim had a 1.12 percent return on its assets in the quarter, while FNBA returned 1.43 percent. Some economists in the state have estimated Gov. Michael J. Dunleavy’s one-time group of budget vetoes totaling more than $400 million would have cost Alaska more than 4,000 jobs across numerous sectors; however, much of that fear has been tamped down as Dunleavy has agreed in recent days to restore significant amounts of funding, most notably to the University of Alaska’s budget. Edwards said he did not think the vetoes would be as damaging to the economy as some did, but added that the compromise the governor has agreed to is preferable to steep immediate cuts. Wells Fargo Alaska Commercial Banking Market Executive Joe Everhart had similar sentiments about the Alaska economy, also noting that commercial fisherman across the state’s many fisheries have generally received good prices for their catch this year. “The budget and legislative issues clearly dampened some of the economic optimism after 40-plus months of being in a recession, but there are a lot of positive steps that are happening on the Slope with Oil Search and (ConocoPhillips) as examples; the state budget conversations did throw a little bit of cold water on better economic indicators,” Everhart said. Wells Fargo held just more than 50 percent of total bank deposits in the state last year, according to FDIC data. Updated figures have not yet been published. Everhart said, “Generally things were positive” for Wells Fargo in Alaska as well, but he did not want to discuss specifics until the numbers were officially public. Some sectors, such as health care and nonprofits, saw a particular lack of investment through the spring, as the state budget remained undecided into July. Dunleavy vetoed $50 million from the state’s Medicaid budget; a cut that came on top of the Legislature’s $70 million reduction to Medicaid. “People didn’t necessarily want to ramp up, buy additional inventory, hire staff if they didn’t have confidence in what was happening in the State of Alaska,” Everhart said Aug. 14. “Fast-forward a couple of days, it does appear there’s been a meeting of the minds to put this conversation to rest so everybody can plan for the future.” Edwards and Everhart also both pointed to low foreclosure and loan delinquency rates in the state as evidence that the underlying support of the Alaska economy is generally strong. Northrim held its loan loss allowance in the second quarter nearly steady at $20.5 million, an increase of 2 percent year-over-year, while FNBA’s increased 8.8 percent to $19.5 million. Northrim had $18 million of loans in nonaccrual in the second quarter and FNBA had $7.3 million of loans in similar status. Elwood Brehmer can be reached at [email protected]

Alaska continues to be at the forefront of an aviation revolution. This time, pilots and scientists from the University of Alaska Fairbanks Alaska Center for Unmanned Aircraft Systems Integration conducted the first official beyond-visual-line-of-sight unmanned aircraft flight in the country approved by the Federal Aviation Administration. The roughly 30-minute flight on July 31 was conducted over a nearly four-mile section of the Trans-Alaska Pipeline System in a sparsely populated area north of Fairbanks. About half of the flight was flown under true beyond-visual-line-of-sight conditions, according to ACUASI Director Cathy Cahill. “Needless to say we were all very excited and we were leading the country. That was the first (flight) where we didn’t have to have a human observer with their eyes on the aircraft,” Cahill said in an interview. “We couldn’t see the aircraft but we knew everything about the aircraft and the airspace around it.” The unmanned aircraft center, often referred to as ACAUSI, is an arm of UAF’s Geophysical Institute, where scientists conduct high-end research on everything from the aurora to Arctic climate conditions, earthquakes, volcanoes and the remote sensing technologies used in unmanned flights, among other fields. Short-range commercial flights with small unmanned aircraft have been authorized for roughly three years now, but it was tests in Alaska that helped FAA officials draft the detailed regulations needed for general commercial unmanned aircraft system, or UAS, flights in the national airspace. Prior to 2016, any UAS flights with a business purpose needed special, case-by-case approval from the FAA. In 2013, ConocoPhillips conducted the first FAA-approved commercial UAS flights in the country when the company flew unmanned survey operations over its offshore oil and gas lease holdings in the Chukchi Sea. Less than a year later, in June 2014, a UAS team working for BP flew the country’s first UAS commercial flight over land to survey Prudhoe Bay oilfield infrastructure. The FAA approved ACUASI’s Pan-Pacific Test Range in late 2013 to be one of the country’s first six UAS testing hubs. The Pan-Pacific Range includes test sites in Oregon and Hawaii. President Donald Trump pushed the FAA to take the further steps to advance commercial remote flights in October 2017 when he issued a Presidential Memorandum directing the Transportation Secretary to establish a UAS Integration Pilot Program. Acting FAA Administrator Daniel Elwell said in a statement that the program is helping the agency continue to develop safe practices for integrating drones into the commercial aviation industry, which is the ultimate goal. “This important milestone in Alaska gets us closer to that goal,” Elwell said. The beyond-visual-line-of-sight flight was observed by a group of FAA officials, Cahill added. She said it was meant to simulate a flight conducted to inspect pipeline integrity and monitor activity in the TAPS right-of-way. However, the Skyfront Perimeter, a 6.5-foot diameter quad-copter, employed to fly the mission was not equipped with a camera or other surveillance instruments; the flight was strictly to demonstrate it could be done safely, according to Cahill. “It was the airspace integration and the detect-and-avoid (demonstrations) that were the complex parts of this mission,” she said. Utilizing UAS to conduct infrastructure inspections, mapping, wildlife monitoring and even fish counting has long been the goal of unmanned vehicle proponents. Unmanned craft are seen as being particularly applicable to Alaska, where vast distances and often challenging terrain and weather regularly combine to make manned flights to conduct the same work costly and dangerous. A lot of this work has been done under current FAA regulations, which require small UAS to be flown within eyesight — without binoculars or other visual aides — and lower than 400 feet, but those limitations still don’t allow operators to capture the full suite of benefits an unimpeded UAS can provide, Cahill stressed. “If I want to go monitor a seven-mile long salmon stream in a canyon I would have to put people at a distance where they could keep their eyes on the (unmanned) aircraft the entire length of that seven miles,” she said of current FAA requirements. “That requires flying people in or them hiking in under dangerous conditions; that’s not safer than flying the manned aircraft we’re trying to replace. So we need to go beyond visual line of sight.” To go further, the ACUASI team used a detect-and-avoid system from San Francisco-based Iris Automation Inc. aboard the Skyfront to alleviate conflicts with birds or other aircraft in combination with a system of eight ground-based Echodyne radars to keep tabs on the aircraft. The area used in the demonstration was also chosen for its usually quiet airspace and general lack of development after consultation with FAA officials, according to Cahill. “We could see (the aircraft) in the telemetry. We could see it in the radar data; we knew where it was. We knew the Iris system was watching the airspace and it all worked really well,” she said, adding that, “the key word in everything we do is ‘safe.’ If it’s not safe, we’re not doing it.” Alyeska Pipeline Service Co. President Tom Barrett said in a statement that even though the Skyfront flight wasn’t technically doing pipeline-related work, it is significant progress towards operating TAPS more reliably, safely and with better environmental protections. “This innovative step forward will advance safe performance not just in our industry, but in multiple disciplines and workspaces across the country,” Barrett said. To Cahill, it was significant, but incremental progress, as she told the FAA’s integration program team that ACUASI wants to gain approval for “365 days a year, 24/7 beyond-visual-line-of-sight operations in Alaska,” for the litany of applications such permission could be used on. The focus now is getting approval for longer flights, she said. “It really is a crawl, walk, run, scenario and we crawled, but we crawled before anyone else did and we’re very, very excited about that.” Elwood Brehmer can be reached at [email protected]

A Medicaid overhaul analysis commissioned by Gov. Michael J. Dunleavy’s administration concluded Alaska could see benefits from shifting a subset of its Medicaid population to private insurance, but the details of potential cost savings and whether or not the change can be implemented remains unclear. Boston-based Public Consulting Group Inc.’s 48-page Alaska Proof of Concept Analysis Medicaid report says the public policy firm believes there is “a plausible path to approval of a ‘Private Option’ waiver for Alaska” from the federal Centers for Medicare and Medicaid Services, or CMS, based on similar approvals for other states. While federal Medicaid officials could be amenable to such a plan, Alaska Department of Health and Social Services leaders would likely have to establish a new pricing system for services provided to Medicaid recipients on private insurance, according to the report. Additionally, the state would probably need to bring at least one other private insurer — and competition — into the individual health insurance market to gain CMS approval, it states. Currently, Premera Blue Cross Blue Shield of Alaska is the only private insurer in Alaska’s individual health insurance market. Under the private-Medicaid concept, a group of relatively low-utilization Medicaid recipients would be moved to private insurance plans and the state would subsidize the premiums and other out-of-pocket expenses paid by those individuals. A new “reference-based pricing” mechanism would be necessary to curb reimbursement costs for procedures paid for by the state through a private insurer that were previously paid at Medicaid rates. According to Public Consulting Group, which cited estimated figures from other recent reports on Alaska’s Medicaid program, Medicaid reimbursement rates in the state are approximately 126 percent of what Medicare pays for particular services. However, commercial insurers in the state pay providers on average 353 percent of Medicare, rates that would significantly increase Medicaid costs to the state. To counter that, state officials could implement reimbursement rates specific to the Medicaid population moved to private insurance, according to the report, but also not without potential consequences. “In selecting targeted (reference-based pricing) reimbursement rates, Alaska will need to consider trade-offs between cost savings and the impact those savings may have on provider network access,” the report states. A 2016 study, known as the Milliman report, and done when state lawmakers were debating a suite of Medicaid reforms, concluded that shifting low-income adults enrolled under expanded Medicaid coverage to the individual private insurance market would cost the state an additional $57 million per year growing to $97 million per year over the first five years of the plan. Milliman Inc., a Seattle-based actuarial and consulting firm, submitted a proposal for the latest study but was not chosen by DHSS officials. The contract for the Medicaid analysis was for up to $100,000. DHSS officials requested the report this past spring, which was obtained by the Journal Aug. 13 through a public records request, after the Dunleavy administration initially proposed cutting $225 million from the state’s Medicaid budget in February. Office of Management and Budget officials at the time acknowledged the $225 million proposed cut was an arbitrary figure needed to reach an overall balanced state budget and DHSS leaders said in March they could cut about $100 million from Medicaid this year largely through regulatory actions, such as cutting provider reimbursement rates. The Legislature ultimately cut the state’s Medicaid services appropriation by about $70 million to $493 million, and Dunleavy vetoed another $50 million before signing the budget. Many legislators were critical of the veto because short-funding the program on the front end without major changes to Medicaid will likely necessitate supplemental appropriations later in the fiscal year — a scenario that has played out in recent years. While overall Medicaid spending in Alaska continues to rise, the state’s part of that bill is shrinking. According to the Legislative Finance Division, overall spending on Medicaid in Alaska has increased from $1.7 billion to more than $2.3 billion since fiscal year 2015, but the state’s portion of that has actually gone down from $724 million in 2015 to $677 million in the just-ended fiscal year 2019, which includes other services such as behavioral health as well as a $15 million supplemental budget request. The Dunleavy administration has also suggested shifting the state’s federal Medicaid funding to block grants as a way to limit overall costs. Public Consulting Group recommended a “global cap” to self-impose spending limits while giving the state flexibility in how it would stay under the cost cap. Doing so could also help the state offset any extra costs from the private insurance option by using a portion of the expected federal savings to cover higher reimbursement rates, according to the report. Any such changes to Alaska’s Medicaid program would require CMS approval. Elwood Brehmer can be reached at [email protected]

Sanctions against Iran and contaminated oil from Russia appear to be giving Alaska a small but much-needed financial boost. Alaska North Slope crude oil is bucking a longstanding trend and is now trading at a premium to Brent crude, a leading benchmark price followed closely by global oil traders. The Brent benchmark originates from London with oil largely sourced from North Sea fields. Alaska North Slope oil has sold for a premium to Brent in every month since last November except for May, when Brent averaged 1 cent more per barrel. Since May, the daily average Alaska price premium has gone from $1.28 per barrel in June to $1.96 per barrel so far in August, according to the Alaska Department of Revenue. The spread peaked on July 9 when Alaska oil sold for $3.25 per barrel more than Brent-priced crude. For years, Brent crude consistently sold for a higher price than Alaska oil. The Brent premium to Alaska oil has typically been in the $1 to $2 per barrel range, but hit a near-term peak in February 2015 when Brent oil sold on average for $4.80 per barrel more than Alaska North Slope crude. More recently, in August 2016 Brent sold for $2.99 per barrel more than Alaska, according to Alaska Department of Revenue data. At that time Alaska oil was also selling for slightly less than West Texas Intermediate — the benchmark for Lower 48 oil — which was also bucking tradition. Over the previous five years, Alaska North Slope crude has sold for a significant premium to West Texas Intermediate. The Alaska premium over WTI peaked at $10.04 per barrel last February and has been more than $5 per barrel for more than a year. Alaska oil is traded on its own price for a variety of reasons, but a major driver is that the vast majority of shipments from Valdez are sent to West Coast refineries. Transportation constraints limit the amount of oil produced east of the Rocky Mountains that can be sent west. That soft barrier has led to the development of ostensibly two oil markets in the U.S. Economist Ed King, who recently served as the lead economist in Gov. Michael J. Dunleavy’s administration, wrote on his firm’s website July 23 that a $3 premium to Brent — going from $2 less to $1 more — correlates to “an extra $100 million or so of financial gain” to the state through extra royalty value and tax collections. According to Alaska Tax Division Director Colleen Glover, every dollar change in the price of Alaska North Slope crude equates to roughly $42 million more, or less, to the state treasury over the fiscal year at the current price band of $60-$65 per barrel. Alaska oil sold for $62.82 per barrel on Aug. 13, according to the state Department of Revenue. Economists say it’s often difficult to pinpoint a specific reason as to why one oil price changes in relation to another, but according to American Petroleum Institute Chief Economist Dean Foreman, the new Alaska premium over Brent oil correlates to increased exports to South Korea from the Valdez oil terminal at the end of the Trans-Alaska Pipeline System. Foreman said in an interview that trade data compiled by the U.S. Census Bureau indicates South Korean oil buyers purchased 42 percent more oil in June than they did a year prior and Bloomberg reported July 23 that two 1 million-barrel capacity tankers —ConocoPhillips’ Polar Adventure and BP’s Alaskan Explorer — were delivering oil to Yeosu, South Korea, last month after being filled in Valdez. BP Alaska officials declined to comment on the exports; ConocoPhillips Alaska spokeswoman Natalie Lowman wrote via email that the company recently sold a cargo of Alaska oil to customers in Asia, its first export of Alaska oil this year. Longtime Alaska petroleum economist Roger Marks surmised that traditionally low North Slope production during the summer months could be straining the ability of West Coast refineries to find adequate supplies, which could contribute to the price premium as well. Foreman noted there is rarely a single explicit answer as to why oil is traded or priced as it is, but he said South Korea is likely buying more Alaska oil because the country’s typical supplies of light crude from Iran and Russia have been choked. President Donald Trump re-imposed economic sanctions on Iran last November that restricted its ability to export oil after his administration chose to withdraw from the Iranian nuclear deal the Obama administration agreed to in 2015. South Korea was one of a handful of countries that the Trump administration granted waivers to, allowing buyers to keep purchasing Iran oil without repercussions until those waivers expired at the end of April. Additionally, about 36 million barrels of Russian oil were contaminated in spring by organic chloride, which curbed Russia’s oil exports and further limited South Korea’s options, Foreman said. “If you increase by 40 percent the amount of crude that South Korea wants, if you have existing supply channels (of Alaska North Slope crude) going into California, it’s going to have to compete against that and that would be the process of bidding the price up,” Foreman explained of the Alaska oil premium over Brent. “We’re talking about 2,000 to 3,000 barrels a day; this is not huge volumes but it is enough on the margins that it would be one source of a possible premium leading to higher prices on the margins.” Glover, of the Tax Division, said via email that China is also purchasing Alaska oil and added that slumping production from Venezuala and output cuts by OPEC members — aimed at increasing oil prices globally — have likely boosted demand for Alaska oil domestically as well. According to Glover, approximatley 40 percent of oil processed in California refineries was sourced from OPEC members in 2018. "The story just boils down to ANS crude being worth more to the U.S. west Coast and Asian refineries," she wrote. Foreman noted that Alaska oil has a similar “weight,” or gravity, to Iranian and Russian crudes, making it a viable substitute for South Korea refineries designed to handle oil from those areas. “ANS was obviously an attractive and available source for (South Korea) to want to take more year-over-year,” Foreman said. Elwood Brehmer can be reached at [email protected]

The battle over a proposed emergency access road through the Izembek National Wildlife refuge is headed back to the federal court system for a third time. A consortium of Alaska and national conservation groups again sued Interior Department leadership Aug. 7 over a land exchange agreement signed with King Cove Corp. that would allow the completion of a road through currently wilderness-designated Izembek lands. The lawsuit comes less than five months after the same group won a nearly identical suit when U.S. District Court of Alaska Judge Sharon Gleason threw out a January 2018 land exchange signed by former Interior Secretary Ryan Zinke. Gleason concluded Zinke didn’t sufficiently justify his rationale for approving the land swap, which went against numerous prior agency decisions on the longstanding issue. Most notably, in 2013 then-Interior Secretary Sally Jewell nixed a land swap between the federal government, the State of Alaska and King Cove Corp. approved by Congress in 2009 that would have cleared the way for a road through Izembek to link King Cove with the nearby village of Cold Bay and it’s all-weather airport. Jewell concluded — following a recommendation from U.S. Fish and Wildlife Service officials — that the road would have unacceptable impacts on the refuge and the world-renowned gatherings of migratory birds that use Izembek’s habitat each year. The conservation groups also argued Zinke did not follow a process for disposing of Alaska conservation unit lands prescribed in the 1980 Alaska National Interest Lands Conservation Act when he made the deal. Opponents of the road largely insist building it would set a terrible precedent of development on land previously designated by Congress as wilderness, one of the highest land preservation classes available. “This deal violates the same laws as the first one and we’re prepared to continue to fight to protect this irreplaceable wilderness. This is another Trump administration public land giveaway that breaks multiple laws and dishonors the public processes that go into protecting the health of the lands, waters and wildlife of the National Refuge and Wilderness System,” said Trustees for Alaska attorney Bridget Psarianos, who signed the 42-page Aug. 7 complaint. Led by Sen. Lisa Murkowski, advocates for the 11-mile segment that would complete an approximately 30-mile road, argue it would provide a safe and reliable way for residents of King Cove — a village shrouded by mountains with notoriously bad weather — to reach Cold Bay’s airport and its 10,100-foot runway. The Cold Bay airport was originally built as a military airfield in World War II and has occasionally been used by commercial jetliners needing to make emergency landings. This time, Interior Secretary David Bernhardt quietly signed a land swap deal with King Cove Corp. July 3 after company President Dean Gould sent a letter and draft agreement to him May 21. The land deal Bernhardt signed is strikingly similar to what Zinke approved less than a year-and-a-half prior but it does not cap the federal government’s land conveyance to 500 acres or explicitly prohibit the proposed gravel road from being used for commercial purposes. According to Bernhardt’s agreement, the land swap would be an equal-value trade not subject to acreage limitations. However, King Cove Corp. would agree to relinquish its rights to 5,430 acres of land it had selected within Izembek under the Alaska Native Claims Settlement Act but has yet to be conveyed. The Native village corporation would still have rights to other yet-to-be-conveyed selections outside of the refuge. Bernhardt also attached a 20-page memo to the latest agreement that details his rationale for the decision. In it, he asserts that there have been more than 70 medevacs out of King Cove to hospitals often in Anchorage or Seattle since Jewell made her decision in 2013 and 21 of those were conducted by the Coast Guard at a cost of roughly $50,000 per mission. Bernhardt also wrote that Jewell in 2014 committed that Interior would work to find alternative emergency transportation options, which spurred a 2015 U.S. Army Corps of Engineers study of a possible King Cove-Cold Bay ferry, King Cove airport upgrades and a helicopter shuttle, but to-date has not amounted to much more. That study concluded that a ferry and two terminals would be more than 99 percent reliable but would cost between $30 and $42 million to build, according to Bernhardt. The State of Alaska estimates the road would cost about $30 million to build. He added that since the report, Aleutians East Borough officials, strong advocates for the road, have said they don’t intend to develop a landing craft. The borough previously operated a federally funded hovercraft as a means of emergency transportation during bad weather to Cold Bay but cited high operating costs and reliability concerns when that operation was scrapped. Bernhardt also noted in the memo that the State of Alaska is instituting drastic cuts to funding for the Alaska Marine Highway System, although it’s unlikely the state would operate a King Cove-dedicated ferry. The Corps of Engineers determined expanding King Cove’s small airport or using a helicopter to be more expensive and less reliable options. Additionally, he wrote that the land exchange agreement is just that; any decision to build a road would be up to King Cove Corp., while state officials have expressed a willingness to fund the construction. “Secretary Jewell placed greater weight on protecting ‘the unique resources the Department administers for the entire Nation,’” Bernhardt’s memo concludes. “I choose to place greater weight on the welfare and well-being of the Alaska Native people who call King Cove home. I value the well-being of an entire community over the impacts derived from the change in ownership of these various parcels of property which are an incredibly small percentage of Alaska’s Wilderness. Although it is not a decision I take lightly, it is one that I believe best serves the public interest, my responsibilities and humanity.” The Agdaagux Tribe of King Cove sued Jewell in 2014 to get her decision to deny a land swap overturned. However, U.S. Alaska District Court Judge H. Russel Holland dismissed the lawsuit the following year, ostensibly ruling that although the tribe disagreed with Jewell, she made the decision within the bounds of applicable federal laws and regulations. Elwood Brehmer can be reached at [email protected]