Monday, June 18, 2012

Shell shifting attention to pipeline access through NPR-A

Tim Bradner
Alaska Journal of Commerce

U.S. Sen. Mark Begich, right, talks to Shell Oil drilling supervisor Eric Whatley, left, as they stand on the arctic oil drilling rig “Kulluk,” during a tour May 25 as it undergoes extensive work at Vigor Shipyards in Seattle. Shell Oil hopes to use the rig to tap vast oil reserves below the Beaufort Sea off Alaska’s north coast.

U.S. Sen. Mark Begich, right, talks to Shell Oil drilling supervisor Eric Whatley, left, as they stand on the arctic oil drilling rig “Kulluk,” during a tour May 25 as it undergoes extensive work at Vigor Shipyards in Seattle. Shell Oil hopes to use the rig to tap vast oil reserves below the Beaufort Sea off Alaska’s north coast.

AP Photo/Ted S. Warren

With its Arctic offshore drilling likely to actually happen this summer, Shell is now shifting attention to planning and technical work for a 400-mile pipeline across the National Petroleum Reserve–Alaska to the Trans-Alaska Pipeline System.

“We see this as a real challenge, with a lot of stream and river crossings and wetlands, and a need to route the pipeline so that small fields that are likely to be discovered in the NPR–A can be developed,” Shell vice president Pete Slaiby told a business group in Anchorage June 8.

Slaiby spoke to the Anchorage chapter of the Builders Owners and Managers Association at its monthly meeting. Shell is mobilizing across a broad range of scientific disciplines.

“This will be the largest and most complex environmental impact statement ever,” he said.

The company is also concerned with new restrictions that could be put in place on a pipeline corridor by the U.S. Department of the Interior in proposed management plans for the petroleum reserve.

Meanwhile, Shell spokesman Curtis Smith said major elements of Shell’s drilling fleet are set to sail from a Seattle shipyard. Final inspections on two drilling vessels, the drillship Noble Discoverer and the Kulluk, a conical, mobile drilling structure, were under way on June 10.

The company is now watching ice conditions in the Arctic, which are unusually heavy. Slaiby said Shell may be delayed in getting its ships into position in the Beaufort and Chukchi Sea, but any delays would probably be a matter of two weeks or so.

The Kulluk will be drilling in the Beaufort Sea on Shell’s leases roughly north of the Point Thomson area east of Prudhoe Bay. Two wells are planned there. In the Chukchi Sea the Noble Discoverer was to have drilled three wells but Slaiby said seasonal restrictions may limit the drilling to two wells drilled into the potential hydrocarbon-bearing zones.

Shell will still be able to start drilling on other wells, however, giving it a jump-start on 2013 drilling, Slaiby said.

Smith said the company’s focus for this year on its pipeline work is on geotechnical work to determine the best place for a pipeline to come ashore, as well as archeological work.

“The archeological work is very important because most of the early communities were on the coast, and some of these are very old,” Smith said.

Shell has a number of scientific studies under way this year in the NPR-A.

“These include cultural resource surveys, designed to assess current conditions of sites important to residents of the North Slope,” Smith said.

There are also ecological surveys including vegetation surveys, bird surveys, and coastal fish studies.

“This work that will be used to improve our understanding of the Arctic ecosystem and the interrelationship between habitat and wildlife. Hydrology surveys at numerous lakes and rivers as well as coastline sites will involve a wide variety of equipment like time-lapse cameras, acoustic doppler current profilers, and small remote controlled boats to obtain important information on river discharges and coastal erosion,” Smith said.

Shell will assess several options for a pipeline route including a more northern route that will cross areas with potential for oil and gas discoveries as well as a more southerly route.

“No matter which route we take we come in contact with a lot of streams and rivers,” Smith said.

Slaiby said a related issue is whether an all-year road will be built along the pipeline and across the NPR–A. There is support for a road from some coastal villages, he said.

Shell is concerned, however, that land management plans for the petroleum reserve now being developed by the U.S. Bureau of Land Management, which manages the NPR-A, could make getting a pipeline corridor difficult or impossible.

One alternative plan being considered by BLM that is heavily supported by environmental groups “would essentially prohibit development of a pipeline to transfer hydrocarbons to TAPS,” Shell told the BLM in written comments.

Shell also said the “purpose and need” section of the environmental impact statement for the management plans mentions the need to provide for the transportation of oil and gas from the Chukchi Sea to TAPS, “it provides no description of analysis of such an event,” the company said in its comments.

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Gov. Parnell signs bills expanding AIDEA finance ability

Alaska Journal of Commerce

Gov. Sean Parnell signed two pieces of legislation June 12 to promote economic development in economically depressed areas and to facilitate financing for small to medium-sized energy projects in the state.

Both measures expand the ability of the Alaska Industrial Development and Export Authority, or AIDEA, to help finance projects. AIDEA is the state’s development finance corporation.

One bill Parnell signed was Senate Bill 25, the Alaska Sustainable Strategy for Energy Transmission and Supply Act.

Sponsored by state Sen. Lesil McGuire and state Rep. Lance Pruitt, both Anchorage Republicans, the bill establishes a new fund within AIDEA for financing energy projects.

Under the bill AIDEA will be able to make direct loans to borrowers for energy projects or participate in loans through banks or credit unions. The authority will also be able to insure project obligations by offering a loan or bond guarantee. Examples of possible projects include improving energy efficiency in commercial buildings and renewable energy development, Parnell said.

At the bill signing ceremony with the governor, McGuire gave credit to several of her legislative colleagues in helping with the bill, particularly Rep. Lance Pruitt, who led the effort on the bill in the House of Representatives. The measure is a complex and it took two years to draft and get through the House and Senate.

“It is seeded now with $125 million. I would liked to have seen more money placed in the fund, but this is a start,” she said.

Pruitt said the key advantage of the bill is having a mechanism to finance medium-to-small size energy projects in Alaska, so that the loan repayments are made here and the money stays in the state to circulate and finance other projects.

During the past two state budget cycles, the state has funded more than $1.5 billion for energy infrastructure and investments, Parnell said.

“It will bring the state closer to achieving its goal of 50 percent electricity generated by renewable energy by 2025,” Parnell said.

Another bill, Senate Bill 66, introduced by the governor, creates a new markets tax credit assistance guarantee and loan program with AIDEA.

Working under a federal tax credit program, SB 66 allows the state authority to issue guarantees and finance projects in low-income areas or otherwise serving low-income populations.

Hugh Short, chairman of AIDEA’s board and president of Alaska Growth Capital, an Anchorage-based development bank, said there have been several successful projects that have been financed through the use of new markets tax credits including the a seafood plant at Platinum, in southwest Alaska, and the Kotzebue Elder Care Facility and the Yukon-Koyukuk Elder Assisted Living Facility in Galena, Short said.

General Communications Inc., or GCI, has taken advantage of the program to help fund the company’s expansion of broadband service to western Alaska communities, Short said.

The benefits aren’t only for rural Alaska. Businesses in lower-income urban areas, like Mountain View in Anchorage, have been able to take advantage of the tax credits.

“This legislation represents a real hand up, not a hand out,” Parnell said. “Entrepreneurs who want to get businesses up and running in low-income communities should be very excited about this new way to generate capital. By incentivizing development in these regions, our ability to offer an economic boost to areas of the state that need it most is increased significantly.”

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Friday, June 15, 2012

Alaska Prop 2, Alaska Coast Management Plan debate.Juneau Chamber of Commerce

Alaska Prop 2, Alaska Coast Management Plan debate.Juneau Chamber pf Commerce. from Bradley Fluetsch, CFA on Vimeo.

Permanent Fund holds its own despite market turbulence

Tim Bradner
Alaska Journal of Commerce

Alaska’s Permanent Fund has been riding the roller coaster of financial markets and will probably end its fiscal year on June 30 in basically a break-even position, according to the Fund’s executive director Mike Burns.

The monthly performance report prepared for the Fund’s trustees for April 30 showed a 0.76 percent gain in value over the prior 12 months, although the fiscal-year-to-date (July 1 to April 30) was little better, a gain of 2.03 percent.

A target set by the Trustees is for the Fund to achieve a 5 percent real, or inflation-adjusted, return, but this goal won’t be met this year due to the market turbulence.

“The markets have been incredibly emotional in the last 18 months. Sometimes it seems like things are coated with Teflon, so bad news just rolls off. Other times it’s Velco, so that everything sticks,” Burns said.

Not surprisingly, the value of the Fund’s stocks and other liquid assets have taken a beating, with values down 12.78 percent for the 12-month period prior to April 30, according to the report to the trustees.

On the other hand, “illiquid assets” like real estate, infrastructure and some private equity investments have performed much better, Burns said. As of April 30, returns from real estate, as an example, were 13.48 percent up for the 12-month period.

“We’re really quite pleased at how well real estate has stood up all through the downturn. We’re invested mainly in high quality properties and these have never really lost their value, although some of this could also be the lenders just kicking some of the problems down the road, but we don’t think do,” Burns said.

The Fund’s managers are quite proud of some of the real estate investments. For example, 299 Park Ave. in New York is a $1.2 billion office building owned 50-50 with the Fisher Brothers, a long-established and well-known property investment group.

The Fund’s investment in its 50 percent share is $300 million.

Another high-quality property is Tysons Corner Center in Washington, D.C., a major retail center. This is 50 percent owned by the Permanent Fund with the Macerich group as a partner. Macerich is a well-established U.S. firm specializing in major retail properties.

A major expansion at Tysons Corner is now under way that will add a 550,000-square-foot office building, a 450-unit apartment complex and a 300-room hotel, but these additions are mainly seen as adding value to the retail complex.

“The retail is the key. We’re excited about the additions of the apartments, hotel and offices but mainly as they enhance the retail,” Burns said.

The Permanent Fund has $500 million invested in Tysons.

Another major investment is Simpson Housing, based in Denver, which owns and manages 17,000 apartments in several parts of the nation. The Permanent Fund owns 48 percent of this, Burns said, with the State of Michigan’s public employee retirement system as a partner.

Burns said the Fund will invest with partners in real estate in certain cases but the preference overall is to own 100 percent of a property. An example is Parc Huron, a large, high-quality apartment property in Chicago, a $120 million investment for the Fund.

One recent real estate decision of the Fund which has prompted some criticism, mostly in the form of letters to the editor following articles in local newspapers, is an investment in groups of distressed U.S. homes which were foreclosed by banks.

The investment is in American Homes 4 Rent, a group that buys foreclosed homes from banks. Critics feel the Fund is taking advantage of peoples’ misery in foreclosures, “but we’re buying these after the foreclosures. The misery has already happened,” Burns said.

These days the Alaska Permanent Fund’s ability to invest for the long-term and in illiquid assets like real estate and infrastructure is an advantage because many other institutional investors, like public pension funds, are now more focused on short-term cash needs and must pursue an investment strategy that is more short-term, Burns said.

That puts the Permanent Fund in a class of investors more like sovereign wealth funds of countries like Norway and Abu Dhabi. In fact, there is now an association of sovereign wealth funds that Alaska has joined. Having a line of communications with these groups is very important and could someday lead to cooperative investments, Burns said.

Market outlook

Meanwhile, for financial markets today, attention is now focused on the situation in Europe, which Burns describes as “a slow-moving, controlled train wreck.”

If there’s anything good about it, it is that things are moving at a slow enough pace that the markets have time to adjust, he said.

““I don’t think there are any surprises left in Europe. It’s not like we wake up in the morning and Lehman Brothers has gone down,” he said in reference to the debacle in 2008 when that major U.S. financial institution came apart and triggered tumult that helped spark a recession.

Burns is optimistic that the financial markets will manage to sort through these problems eventually, if left to their own. However, some unexpected major event could upset things, something like a major terrorist attack, he said.

The U.S. meanwhile has its own problems to deal with, which mainly have to do with business confidence.

“A lot of companies have strong balance sheets and are sitting on cash, but there is a lot of uncertainty. People are unwilling to let go of cash,” he said.

Much of the uncertainty is politically created by the impasse in Washington, D.C., over federal taxes and debt, although Burns said the agreement by Congress to extend tax-cuts has had a soothing effect.

But the pending elections, the effect on the elections of an expected Supreme Court decision on President Obama’s health care law, and the return to intense debate over the debt ceiling and federal spending cuts next January will continue to add to the uncertainty.

A similar cautious dynamic affects U.S. hiring, and more than anything else it is continued high unemployment that has slowed the recovery. Firms are reluctant to staff up if they may have to let people go again.

“People lose sight of how difficult it is for companies to reduce their workforce and how hard it is for them, as well as for communities,” Burns said.

This is why so many firms are outsourcing work, like major oil companies are doing in Alaska.

“If they have to lay people off, they push this off on their contractors,” he said.

China is, of course, a wild card, but Burns points out that recent news of an economic slowdown is only reduced rate of growth, not a move into negative territory.

There are important fundamentals behind China’s growth, such as an improved diet, that will continue to put pressure on world resources and commodities, Burns said.

When this is combined with the economic and population growth of other developing countries like India, there will be continued pressure on sources of energy, protein and water.

Water is really important,” and it may become the most scarce resource, Burns thinks.

“When you think about it, the U.S. exports a lot of food but what we’re really exporting is water,” because of the water it takes to grow food.

Improving diets in China is expect to lead to per capita consumption of beef and pork increasing to 20 kilograms a year in the next five years, up from 10 to 12 kilograms.

“The amount of water it will take to create that additional supply of beef and pork per year is about the same as Europe consumes in a day,” he said.

Burns is thinking a lot about these long-term trends, and possible scarcities in natural resources, not only because of how they will affect the world and Alaska, a natural resource-producing state, but also as a guide to potential long-range investment by the Fund.

“This is something we’re just thinking about. We haven’t developed it into a strategy in any sense,” Burns said. “If you think about something like water scarcity, how do you position yourself? Do you invest in water-related technologies like companies specializing in water treatment and desalinization, or should you invest in water rights?

“If you do this, you have to keep in mind the security of the investment. If there is water scarcity a government may decide to give its citizens priority access to water over any ownership claims of an investor.”

The Fund is investing in technology firms including those working in water quality, but not yet as part of an overall theme.

The same is true in protein, he said.

“We really like to invest in farmland but you have to do it in scale,” which means that acquiring farmland in North America is problematic because land units of sufficient acreage is less available, he said.

“There is tremendous potential for farmland in places like Brazil and southern Africa, but there is no infrastructure, no ports or railroads.”

Agriculture investments like these will have to be part of a broader plan that includes the infrastructure.

Tim Bradner can be reached at

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Thursday, June 7, 2012

Oil falls, but state expects a rebound

Tim Bradner
Alaska Journal of Commerce

State officials are warily watching market prices for North Slope crude oil, which dropped to less than $100 per barrel June 1 as markets reacted to slumping demand and a buildup of supply.

An average price of $104 per barrel is needed to balance the state budget for Fiscal Year 2013, the state financial year that begins July 1, according to state budget director Karen Rehfeld.

After trading at less than $100 on June 1 and June 4, Alaska North Slope crude edged back to $100.09 on June 5. It had been more than a year since Alaska North Slope crude traded for less than $100.

High oil prices have offset production declines that saw North Dakota surpass Alaska in March for the No. 2 spot in daily domestic oil production.

The U.S. dollar has also strengthened lately as investors hedge their bets against the turmoil in the eurozone, which brings down the price of all commodities priced in dollars.

If prices do remain low the state could technically experience a deficit but there is no immediate financial problem because the state has about $15 billion in liquid assets, mostly in two reserve accounts: the Constitutional Budget Reserve and Statutory Budget Reserve.

The oil price needed to support the state budget has increased gradually in recent years as oil production has declined and the state budget has edged up despite efforts by state legislators to contain it.

Steve Revenue Commissioner Bryan Butcher said oil market analysts are split in their views.

“Some see prices going down further, to the $80 or $90 per barrel range while others think we’ve bottomed out at $98, that the European factor (worry of recession) is already factored it, and that we could see a rebound quickly,” Butcher said.

For the long term the consensus is still that prices will remain above $100 per barrel, that demand will rebound in the U.S. and Europe, and that China will rekindle its economy with stimulus moves, Butcher said.

The state is still sticking with its projected FY 2013 average price of $110.44 per barrel and an average daily North Slope production of 563,000 barrels per day from the spring 2012 forecast, Butcher said.

The next revision in the forecast will come late this year as the state prepares its November revenue estimate, he said. The state prepares two revenue forecasts annually, one traditionally issued in November that includes an updated production forecast, and one in late March or April that focuses mainly on updated price and revenue estimates.

State revenue economist Dan Stickel said state revenues for the 2012 fiscal year-to-date were on track with estimates through April, but that revenue officials noticed a softening in May.

June numbers will not be available until next month.

The total state budget for the current year, Fiscal 2012, is $13.48 billion including federal and state funds. Revenues for the year are estimated at $14.347 billion.

For Fiscal 2013, beginning July 1, the budget as approved by Gov. Sean Parnell is $12.07 billion of all funds, with $12.59 billion in total revenues.

The 2013 budget will inevitably increase to some degree with supplemental appropriations, which are made necessary by unexpected expenditures, such as costs of an unusually intense summer fire season.

Because of the estimated large surplus from Fiscal Year 2012 revenues the Legislature appropriated $1.8 billion to the Statutory Budget Reserve. The projected FY 2013 surplus is smaller, and for that year legislators made a smaller appropriation to the reserve fund of $250 million.

North Slope crude oil is sold mainly on the U.S. west coast. About 50 percent of the fuels used in Washington State are made from crude oil from the North Slope, and about 25 percent to 30 percent of fuels in California are derived from North Slope oil.

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What is "Thoughtful Thursdays?"

Oil and gas, and pipeline issues are complex and can be intimidating. Alaska Energy Dudes and Divas in partnership with Midnight Sun Brewery has launched its "Thoughtful Thursdays" series to help you better understand the issues facing you, your family, and the State of Alaska. Sit down and relax in a fun environment and speak with experts from the oil, gas and energy sectors and have your pressing questions answered monthly. However, every Thursday is "Thoughtful Thursdays" at Midnight Sun Brewery.

"Thoughtful Thursday with Admiral Tom Barrett," President of Alyeska Pipeline Company is in the planning, and scheduled for September. Alaskans will be able to sit down and have one-on-time with the Admiral. The Admiral is excited to meet, and speak with young Alaskans about the Trans Alaskan Pipeline (TAPS) and discuss the future of TAPS, and Alaska.

The purpose and thinking behind "Thoughtful Thursdays," is that the everyday Alaskan will not have to purchase a membership to obtain information in order to have access to speakers/leaders, pay $30.00 for a lunch or breakfast, or take time off from work. "Thoughtful Thursdays" is about YOU Alaskans and no one else. It is not sponsored by anyone, and is supported by Midnight Sun Brewery to build upon Alaska Natural Resource Month. An empowered Alaskan is the goal, so YOU can decide and guide the policies of the the GREAT state you reside.

Your Energy Diva has a decade of experience working in and empowering communities throughout Alaska. There is a right way to engage communities and a wrong way to engage communities. Presently, there is too much rhetoric and noise for you to understand the issues impacting you as an Alaskan to make informed decisions. Alaska Energy Dudes and Divas, and Midnight Sun Brewery are committed to putting an end to that.

Please drop by and have a "thoughtful" discussion with your Alaska Energy Diva, and other members of the Alaska Energy Dudes and Divas team every Thursday at Midnight Sun Brewery.

Photos of "Thoughtful" Alaskans on Facebook

Sunday, June 3, 2012

Fuel regs will raise costs, but by how much?

Tim Bradner
Alaska Journal of Commerce

Correction: This article originally referred to Marvin Buchanan as an employe of Totem Ocean Trailer Express Inc. Buchanan works for Horizon Lines Inc.

New U.S. Environmental Protection Agency rules on fuel standards for ocean cargo carriers go into effect in August and the requirements will add to fuel costs for companies that ship consumer goods to Alaska, sources in the industry say.

There are also more stringent requirements effective in 2015 that are likely to result in additional costs.

On Aug. 1 the companies will be required to use fuel with no more than 1 percent sulfur, according to Richard Berkowitz, with the Transportation Institute, an industry trade association.

“This won’t be cheap. It will be significant,” Berkowitz said.

In 2015 the standards will be tightened further, with a requirement to use fuel with no more than 0.1 percent sulfur.

Berkowitz said he had heard estimates that the 1 percent rule in effect in August could add 25 percent to fuel costs for major carriers operating to Alaska but other estimates have been as high as 40 percent for fuel.

Officials with shipping companies serving Alaska are being cautious on estimates. Higher fuel costs will translate to higher costs for shipping goods, but the companies can’t yet say what the increase might be.

“We are still researching the cost impact of the (rule) implementation on Aug. 1 and are not ready to provide any estimates at this time,” said Marvin Buchanan of Horizon Lines Inc. The company hopes to have more information available soon, he said.

One of the problems shipping companies are wrestling with is how to get the special fuels, according to sources in the industry. Ultra-low sulfur diesel with 15 parts per million sulfur is now available because it is required by EPA for trucks and other equipment operating onshore, but a different requirement for ocean vessels, mainly the 1 percent sulfur limit required in August, may require blending of fuels or custom-processing by refineries, which will add costs.

“The uncertainty is over what the cost of blending the fuel will be,” Berkowitz said.

Alaska Sen. Lisa Murkowski said she has been told by industry executives that the increases may result in a 25 percent increase in overall shipping costs. Murkoswki made the comment in a meeting with EPA Administrator Lisa Jackson May 15.

Most groceries and many other goods for retail sale are shipped from the Port of Tacoma to Anchorage on Totem Ocean Trailer Express Inc., or TOTE, and Horizon, so higher shipping costs will affect the price of groceries and other consumer goods.

EPA has imposed similar sulfur restrictions in recent years for trucking companies and off-road equipment using diesel engines, but this will be the first time low-sulfur rules are applied to large ocean freighters. The agency is acting to reduce sulfur in the fuels because of studies showing a relationship between air pollution resulting from fuels with higher sulfur and human health problems.

The new EPA rules will apply to all vessels operating out to the 200-mile limit from the U.S. and Canadian coasts, as Canada is adopting similar rules, but U.S.-flagged vessels that operate in coastal shipping, like TOTE and Horizon, are affected more than foreign-flagged ships which must switch to the low-sulfur fuels only when they approach the U.S. closer than 200 miles.

Interestingly, the area covered the rule does not include western Alaska or the Aleutians, so Unalaska and Dutch Harbor are not included. The estimated 4,000 foreign ships a year that pass through Umnak Pass near Dutch Harbor are not covered by rule. Neither are the U.S. Great Lakes, which are exempted under a special provision secured by Congress.

In her meeting with Jackson, Murkowski expressed concern over the effect of the increases on shipping costs as well as cruise ships.

“These vessels carry four-fifths of the visitors that come to Alaska every summer,” Murkowski said, and added that increases to fuel costs will be passed on to passengers, which will discourage tourism.

Murkowski told Jackson that she has been told that the marine industry has been trying to work out an alternative compliance plan with the EPA that would give companies more flexibility and provide a different way to meet or even exceed EPA’s goals, but that EPA has not responded.

The issue has been developing for several years. Environmental groups have been pushing EPA hard to enact the low-sulfur rules to ships calling at U.S. ports to reduce harmful air pollution in port areas.

Most of the effort is aimed at foreign ships calling at U.S. ports but EPA’s jurisdiction is currently limited to U.S.-flagged ships. An analysis of the foreign vessel traffic, however, led EPA to conclude that only 15 percent of ship traffic are U.S.-flagged ships that would be covered by the rule, Berkowitz said.

California, meanwhile, asserted state authority to require all ships approaching California ports to use low-sulfur diesel but that was successfully challenged in court by a shippers’ association.

Following that, EPA then stepped in to impose its own rule to cover U.S. ships, as well as foreign vessels out to 200 miles once a similar rule under the International Maritime Organization is agreed upon.

Canada has also adopted similar emissions restrictions for vessels off its coasts, but has delayed its rule. Ships traveling to and from Alaska on a route within 200 miles of shore will fall under the EPA rule. The routes traveled by TOTE and Horizon ships are rarely if ever more than 200 miles offshore.

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