Tuesday, August 18, 2015

Alaska; a time of disruption, opportunity and leadership

Deborah Brollini
Alaska Energy Dudes and Divas

Alaska has been turned upside down due to low oil prices. June 20th, 2015 marked the 38-year anniversary of first oil through the Trans Alaska Pipeline (TAPS). For 38 years Alaska has never been able to control global oil prices, and lately our spending.  Our state’s financial house has been disrupted, and we can either play the blame game, or embrace opportunity.  I choose the latter.  I personally do not believe the sky is falling despite low oil prices. However, some do.

Alaska has gotten herself into a real financial pickle. So what are we going to do about it? The legislature is the appropriating body. However, what we need is a Governor who will lead, and do the heavy lifting in regards to state budget cuts because we are alaska.gov, not non-profit.alaska.org.  On July 1, 2015, Governor Bill Walker should of released a 2017 proposed operating budget that is unapologetic in regards to budget cuts, and let the public digest it.

I would never expect the Governor to release a budget that would gut the state, because we do not want to tank Alaska’s economy. But, a budget that included substantial budget cuts to control spending, and restore the trust with Alaska's stakeholders, and constituencies.

Unfortunately, I’m not sure the Governor is up for challenge.

It would seem that the Governor would rather sit around and chat about our fiscal problems than lead e.g. Building a Sustainable Future: Conversations with Alaskans conference, cute fiscal budget game apps, and townhalls with folks breathing the same air who want to raise tax revenue.  Alaska needs leadership not groupthink

Alaska is a wealthy state that is reliant on oil taxes to fund our state government. Hardly a strategy with oil production dipping to less that 500,000 barrels per day in the near term, with 730,000 livelihoods at stake. What we need is a strategic plan, not an increase in oil taxes or the implementation of a state sales tax, or income tax.  The Governor needs to quit being scared of his own shadow, cut the budget, and most importantly lead.

I get the Governor did not create this fiscal mess. But, the fiscal mess is now on his watch. If Bill Walker is not careful, his legacy as the Governor of the state of Alaska will be the Governor who "woulda, coulda, shoulda."

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Mindy Grossman, CEO of HSN speaks with Stanford MBAs about disruption, trust, engaging and inspiring constituencies, and leadership.  Outstanding talk.



Saturday, August 15, 2015

Russia raises tensions; Submits claim for 463,000 square miles of Arctic seabed, including North Pole

Guy Park
For Petroleum News

Eight years ago a Russian polar expedition descended through the waters of the Arctic Ocean in a Mir submarine and dropped a canister containing a Russian flag to the sea bed, 2.5 miles beneath the North Pole.

Per Stig Moller, a former foreign minister of Denmark, which has also staked a claim to the pole, told his Russian counterpart: “Just because you plant a flag there doesn’t mean you own it,” to which the Russian replied: “Just because the Americans planted a flag on the Moon. ...”

Some tended to view the incident as a stunt. Others were less nonchalant and that mood has since been reinforced by the saber-rattling Russia has since indulged in, culminating with its annexation of Crimea, the threat it has posed to the Ukraine and the Baltic states and the combat exercises it has conducted in the Arctic.

That military presence in the Arctic - which has involved 38,000 troops, 50 surface ships and submarines and 110 aircraft this summer - has included the restoration of a Soviet-era base on the New Siberian Islands, along with other military outposts in the region.

Revised submission

Any doubts about the seriousness of Russia’s activities in the region have now been put to rest, with Moscow’s unveiling earlier in August of a revised international submission that lays claim to a broad expanse of Arctic territory, including the North Pole.

The Russian foreign ministry said it is claiming control over 463,000 square miles of Arctic sea shelf extending about 350 nautical miles from the shore.

Russia, the United States, Canada, Denmark and Norway have all been trying to assert jurisdiction over parts of the Arctic, which the U.S. Geological Survey estimates has one-eighth of the world’s untapped oil and a quarter of its natural gas.

Rivalry for development of those resources - which some had once hoped would be a gentlemanly competition - has intensified as shrinking polar ice has opened up new opportunities for shipping and exploration and lowered drilling costs in the process.

Russia was first to submit its claim in 2002, but the United Nations sent that back for lack of evidence.

The resubmitted bid contains “ample scientific data collected in years of Arctic research” to support the claim, the Russian ministry said, indicating it now expects the U.N. Commission on the Limits of the Continental Shelf to start reviewing the bid this fall.

The U.N. Convention on the Law of the Sea allows all coastal nations to extend their jurisdiction beyond 200 nautical miles as long as they can prove the boundary claim is a natural extension.

The submission made by Denmark last December is seen as a test of whether Russia is willing to uphold its commitment and abide by the convention which says countries may control an area of seabed if they can show it is an extension of their continental shelf.

The key element of the counterclaims is the Lomonosov Ridge which bisects the Arctic, starting in Greenland.

Canadian claims

Canada is also developing its own plan to assert sovereignty over part of the ridge.

In late 2013, Prime Minister Stephen Harper ordered officials to rewrite Canada’s Arctic claim to include the North Pole and conduct more survey work this summer before submitting the document.

When Russia released its updated submission, its embassy in Ottawa said that Russia and Canada had previously agreed to allow the U.N. commission overseeing the issue to evaluate and rule on the quality of the hydrographic research “without prejudice to the rights of the other state.”

Rob Huebert, a political science professor and an Arctic expert at the University of Calgary, said it is now Harper’s responsibility to make clear whether his government is willing to negotiate with Russia where claims intersect.

“It is in Canada’s interest to have a safe and stable Arctic,” he told the Globe and Mail.

But he suggested Canada’s recent use of the Arctic Council as a forum to hammer Russia and President Vladimir Putin over tensions in the Ukraine might pose a challenge to serious negotiations.

However, Huebert suggested it is “inevitable” that talks will take place over the next five years, adding that the more reasonable Russia appears to be on the issue the more Canada risks being isolated, especially now that it has been chastised by the United States for making the Ukraine an issue at the Arctic Council.

Read more: http://www.petroleumnews.com/pntruncate/601707706.shtml

Walker wants 51% stake in AK LNG

Alaska Contract Staffing
By Tim Bradner
Alaska Journal of Commerce

Alaska Gov. Bill Walker talks with BP Alaska President Janet Weiss during a May 22 visit to Prudhoe Bay. Walker has briefed legislators that he wants the state to take a 51 percent ownership in the Alaska LNG Project and that he may propose a gas reserves tax as leverage against North Slope gas owners BP, ExxonMobil and ConocoPhillips.

Alaska Gov. Bill Walker talks with BP Alaska President Janet Weiss during a May 22 visit to Prudhoe Bay. Walker has briefed legislators that he wants the state to take a 51 percent ownership in the Alaska LNG Project and that he may propose a gas reserves tax as leverage against North Slope gas owners BP, ExxonMobil and ConocoPhillips.

Gov. Bill Walker is still pushing North Slope producers for a larger share of the Alaska LNG Project, and may promote a state gas reserve tax as leverage against the companies, state legislative leaders briefed recently on the governor’s plans said in interviews.

The governor’s office would not comment on the briefings.

“This is all very deliberative, so it’s too soon for us to comment,” press secretary Katie Marquette wrote in an email.

Legislators were willing to share what they’ve heard so far.

“We were told the governor desires a majority ownership in the project, at least 51 percent, and that the administration is considering the use of a gas reserves tax if one or more of the companies don’t want to play,” said Rep. Mike Hawker, an Anchorage Republican who was one of the leaders briefed.

Hawker is chairman of the Legislative Budget and Audit Committee. He and House Speaker Mike Chenault, R-Nikiski, were briefed by administration officials.

A reserves tax is a property tax on the value of natural gas reserves in the reservoir.

Hawker said his overall concern is that the governor is veering away from a partnership concept in the plan now agreed to by the producers where each owner of gas resources on the North Slope, including the state, finances and owns a share of the project equal to the gas ownership.

Under this arrangement “alignment” on commercial terms among the parties is achieved, Hawker said.

“The governor’s idea (of a larger state ownership) goes another direction, possibly dividing the parties rather than seeking alignment,” he said.

Chenault said, “I know the governor wants a bigger piece of the pie but this project is working now as it was designed,” as a partnership with the state on an equal footing with each of the three major producers.

“For years the three producers tried to figure out a way to make this work having to pay 100 percent of the costs but getting only 75 percent of the revenues,” because of the state royalty and tax share, the Speaker said.

In making the state a partner, the costs and shares of revenues were aligned, “and it made sense,” Chenault said.

On the reserves tax, Chenault said people have talked about it for years and the option for the state is always there, but now is not the time.

“We shouldn’t be threatening them now. We should be working with them,” he said.

State Sen. Anna MacKinnon, R-Eagle River, another legislative leader who was briefed, voiced similar sentiments: “If you want to be partners who work your disagreements out, you don’t hammer people,” with things like a reserves tax.

MacKinnon is co-chair of the Senate Finance Committee. MacKinnon also said her impression is that Walker may be looking to enlarge the state share, or be ready to do it, as a hedge against one of the three producers balking at the last minute on the big project, which is now estimated to cost $45 billion to $65 billion.

MacKinnon and State Sen. Cathy Giessel, R-Anchorage, who was briefed along with MacKinnon, said they are primarily concerned with how Alaska will be able to pay for an enlarged share of the project given the state’s diminished finances and large budget deficits due to a sharp drop in oil revenues.

“For the state, the financing issues with this are mind-boggling,” Giessel said, who is chair of the Senate Resources Committee.

The lawmakers were told that the governor’s plan is to finance the state share — currently 25 percent but up to 51 percent if the state achieves a majority share — with debt through project revenue bonds and with no cash equity invested by the state. If the project cost is $50 billion, the state’s financing share would range from $12.5 billion to $25 billion.

“That is certainly possible, but it could be expensive in the long run,” Hawker said. “I’d also have to be convinced that it could be done without pledging the state’s general credit as a guarantee, particularly our Permanent Fund.”

Alaska’s Permanent Fund is a state savings fund of oil revenues, and now exceeds $55 billion in value. Tapping the fund to backstop a state gas project financing would likely require a constitutional amendment.

“I don’t have a great deal of confidence in this approach,” MacKinnon said, but she is still willing to listen to ideas for creative financing, she said.

Giessel said mentions were made in the briefings of possible state partnering with just one or two companies, including Japanese firms. Walker and senior state officials recently met privately with a senior Japanese government and industry delegation in Seattle and a follow-up meeting is planned in Tokyo in mid-September when the governor is to be there for a major LNG conference.

Total debt financing would leave the state with no equity and no profits earned on an equity share, which would reduce the revenues the project might bring the state over the long term, the legislators also said in the interviews.

Walker also appears intent on not having TransCanada Corp. as its partner in the project.

“This is what we’re hearing,” Giessel said.

MacKinnon said, “The governor has been fairly clear in his public statements that he would prefer that TransCanada not be part of the project.”

Currently, TransCanada would finance and own the state’s 25 percent share of the 800-mile, 42-inch pipeline and the large Gas Treatment Plant at Prudhoe Bay, with the state signing a long-term shipping contract to transport state-owned gas through TransCanda’s capacity in the treatment plant and pipeline.

The state would directly own, and finance, its 25 percent share of the large LNG plant planned at the southern terminus of the pipeline at Nikiski, south of Anchorage. However, the state’s agreement with TransCanada ends in December unless it is extended.

If the state does not extend it, TransCanada will be reimbursed for its investments to date, which are expected to exceed $100 million.

Another change the state is seeking is to enlarge the pipe diameter from 42 inches, in the current plan, to 48 inches, the legislators were told.

In their briefing, Giessel and MacKinnon said administration officials told them producing companies might go along with this if the state were willing to pay for it. Giessel expressed concern, however, about the effect such a change could have in delaying the Federal Energy Regulatory Commission permitting now underway.

Hawker said he has been told there are no U.S. steel mills capable of rolling 48-inch high-pressure steel and only three mills with that capability worldwide. The lack of manufacturing options could raise the price, he said.

MacKinnon said if the state pays for enlarging the pipe it would own the extra capacity and would have to manage it.

“We would be responsible for finding more molecules to ship. What experience do we have in this?” she said.

Chenault said he has told the governor that legislators want a regular flow of information, “so we can see where the administration is heading. We’ve got to get our members up to speed. They (the administration) can’t just dump all this on us a few days before a special session.”

Meanwhile, a reserves tax as a lever on the producing companies would face practical obstacles and would also likely spark lawsuits. The tax is essentially a property tax and while some government jurisdictions, mostly municipalities, levy property taxes on oil and gas reserves in the ground, there are complications.

One complication on the North Slope is that a reserves tax would have to uniformly be applied to all natural gas in a field without distinguishing among lease-owners or companies. To penalize one lease-owner and not another will be complex, although it is possible that a credit against the property tax might be granted for any gas produced.

More fundamentally, because the oil and gas fluids are comingled in the reservoir it would be tricky to have only the gas taxed without also taxing the crude oil.

Also, what is being taxed is the value of the unproduced hydrocarbons, and if there are honest disagreements over a economic viability of commercial production there will be big legal fights over the in-place value of the hydrocarbons.

Finally, having one company producing gas from a reservoir and not another will be complicated under the current operating rules for the fields.

Read more: http://www.alaskajournal.com/Alaska-Journal-of-Commerce/August-Issue-3-2015/Walker-wants-51-stake-in-AK-LNG/

Susitna-Watana studies resume after spending freeze lifted

By Elwood Brehmer
Alaska Journal of Commerce

Researchers walk along the Susitna River in this 2012 Alaska Energy Authority photo. With a spending freeze lifted by Gov. Bill Walker, work is resuming on the Susitna-Watana hydroelectric project. However, the authority will need about $100 million in new funding to get through the Federal Energy Regulatory Commission licensing process and to construction.

Researchers walk along the Susitna River in this 2012 Alaska Energy Authority photo. With a spending freeze lifted by Gov. Bill Walker, work is resuming on the Susitna-Watana hydroelectric project. However, the authority will need about $100 million in new funding to get through the Federal Energy Regulatory Commission licensing process and to construction.

Work is resuming on the Susitna-Watana hydroelectric project under spending guidelines put in place by Gov. Bill Walker’s administration.

The overall cost for the proposed 705-foot dam in the upper reaches of the Susitna River has been pegged at $5.6 billion in 2014 dollars by the Alaska Energy Authority, or AEA.

AEA will need $105 million, maybe more, to get through the Federal Energy Regulatory Commission licensing process and to construction, authority Executive Director Sara Fisher-Goad said during an Aug. 6 board meeting. However, AEA only has the ability to spend the $6.6 million it has in the bank for the project through 2017.

That money should get the project to the study plan determination, at which point FERC would rule whether or not the authority has gathered sufficient relevant data to apply for a project license. The FERC license is the last and largest pre-construction hurdle.

Fisher-Goad said AEA will continue to update data with field studies as necessary to prevent work from becoming stale or outdated. National Marine Fisheries Service officials have questioned the validity of some Susitna-Watana fisheries studies.

“The longer we stretch this out, we’re losing our economy of scale to be able to have logistics support on several studies at one time,” she said. “We’re doing this in more of an incremental fashion.”

AEA has completed 14 of 58 FERC-approved studies so far, according to Dyok.

To date, the project has received $192 million in state appropriations. The Walker administration lifted an administrative order July 6 that halted spending on the dam, one of six large infrastructure projects that were put on hold in late December.

After 2017, once AEA has exhausted its funds for working towards a study plan determination, “the project will be revisited in the context of the fiscal environment and other competing major capital projects,” Office of Management and Budget Director Pat Pitney wrote in a memo to Fisher-Goad.

Mike Wood, president of the lead Susitna-Watana opposition group the Susitna River Coalition, in a July 16 release, called resuming the project a “slap in the face” to Alaskans as state leaders discuss ways to increase state revenue during a time of multi-billion dollar budget deficits.

“The proposed dam has already wasted hundreds of millions of state dollars and needs to be immediately shut down,” Wood said. “It diverts necessary funds for other, more responsible and reasonable alternative energy developments, as well as goes against Walker’s campaign promises of fiscal responsibility and fish-first policies.”

AEA has touted the dam, which would generate about 2,800 gigawatts, as a way to provide half of the Railbelt’s energy demand with clean energy at long-term stable prices.

Continuing at a slower pace to prevent unnecessary spending could end up costing the state if the dam is ultimately built, AEA Project Manager Wayne Dyok said at the AEA board meeting.

At $5.6 billion to build today, inflation on project financing could add up to $150 million to the cost each year construction is delayed, he said.

If everything goes according to the current plan, AEA will be able to submit its license application with FERC in 2019, and hopefully begin construction soon after a typical two-year review, according to Dyok. However, if AEA gets the $100 million-plus it needs to submit its application before 2017, that timeline could be accelerated by two years and potentially save the state $300 million.

The cost of financing the project could also have a direct impact on long-term electric rates.

“What you get out of a constructed hydro project is this inflation-proof aspect, but you don’t get that until it’s constructed and generating,” Fisher-Goad said.

Dyok said the dam would save Railbelt consumers an average of $224 million per year on energy costs over the first 50 years in production, a total savings of $11.2 billion over that time.

Initial electric rates from Susitna-Watana — with first power in 2029 — would be in the 13 cents per kilowatt-hour range, AEA estimates.

That price would continue to drop to an average of 6.6 cents per kilowatt-hour as about $8 billion in principal plus interest is paid off over 50 years.

By contrast, natural gas-generated electricity from the large Alaska LNG Project would be about 11 cents per kilowatt-hour in 2029 and increase to a more stable rate of about 15 cents per kilowatt-hour over several decades, according to Alaska Center for Energy and Power projections.

On the energy savings alone, Dyok said the cost-benefit ratio for the project is 2.39-to-1. When the avoided cost of building new gas-fired generating capacity, generation facility retirement, and greenhouse gas reductions are included, the ratio improves to more than 3-to-1, he said.

Roughly half of the project qualifies for a U.S. Department of Agriculture Rural Utilities Service loan, which is conservatively projected with 4 percent interest, Dyok said.

The rest of the project financing is planned as nearly $4 billion paid in state bonds at 5 percent interest over 30 years a portion of which would be refinanced at a lower rate, according to AEA officials.

Economic, study impacts

As an added bonus, Susitna-Watana would generate billions for Alaska’s economy during construction along with clean, affordable power once its turbines are turning, AEA claims.

The dam would have an economic impact of $3.4 billion and generate about 1,300 jobs each year during construction, according to a Northern Economics study commissioned by the authority.

Preconstruction study work has generated jobs, but also information that is being used by other state agencies.

“This project has advanced the state of science for a number of agencies, particularly the Alaska Department of Fish and Game through some of the salmon work,” Dyok said.

ADFG Mat-Su area sport fish biologist Richard Yanusz said in an interview that AEA’s funding for fisheries studies has provided significant benefit to the department. He said there is relatively little data on chinook salmon in the Susitna drainage, despite the popularity of the species. AEA’s studies in 2013-14 provided drainage-wide abundance estimates through radio telemetry tracking and mark-recapture efforts.

According to Yanusz, some of that information had not been gathered since the first time Susitna-Watana was proposed in the 1980s.

“It’s been a long time between those abundance estimates, so having such a basic piece of information is very helpful to management,” he said. “It is almost new information, very rare information, so just having those reference points will be helpful.”

Similar studies were done for coho salmon, the other primary sport fish in the drainage, on the main stem of the Susitna, without including the major tributaries such as the Yentna.

Dyok said the Department of Natural Resources has also found flow data helpful for other potential projects in the region.

Managing flow below the dam has been an issue of contention for those opposed to Susitna-Watana, because of the potential impacts to juvenile salmon, particularly in winter.

AEA is developing models to better project flow regimes throughout the year, but how much water is let through the dam is ultimately regulated by FERC, according to Dyok.

Average winter flow at the dam site would increase about four times and roughly be cut in half during the summer to retain water during times of lower electric demand based on early projections, he said.

Flow at the dam site currently comprises about 16 percent of the average annual water in the Susitna.

“Fisheries, recreation, and power; you need to balance all of those factors,” Dyok said.

Read more: http://www.alaskajournal.com/Alaska-Journal-of-Commerce/August-Issue-3-2015/Susitna-Watana-studies-resume-after-spending-freeze-lifted/