Testimony before the Alaska Department of Natural Resources on applications to reserve water in the Chuitna River watershed in Upper Cook Inlet August 21, 2015 I. Overview Thank you. My name’s Bob Shavelson1 and I’m the Executive Director of Cook Inletkeeper, a nonprofit organization founded twenty years ago that works to protect clean water, healthy salmon and a vibrant democracy in Alaska. We have been focused on the Chuitna coal strip mine since around 2004 when the project proponents dusted off their old plans and started another run at exporting coal from the Beluga coalfields in Upper Cook Inlet to Asian markets. Today I will talk about several topics to show the proposed reservations of water in middle Creek are in the public interest. First I will review studies on international coal markets and pricing structures to show why the Chuitna coal strip mine is not financially viable, and therefore, will not occur within a “reasonable time” to affect alternate uses of the water.2 Next, I will provide information showing that DNR under-valued Middle Creek and the surrounding Chuitna watershed, and that the proposed reservations will have positive benefits to the applicant and on economic activity, fish and game resources, recreational opportunities, and public health.3 Finally, I will discuss our permitting process, including salmon stream restoration and how a grant of the instream flow applications does not derail state and federal permitting processes to harm other persons.4 In conclusion, I will make the case why Commissioner Myers and the Walker Administration have a legal, moral and scientific duty to grant the requested instream flow applications. II. The Proposed Reservations of Water Will Not Preclude or Hinder Other Alternate Uses of the Water within in a “Reasonable Time” Because the Chuitna Coal Strip Mine is Not Financially Viable for the Foreseeable Future The Chuitna coal project dates back more than 40 years, when the original leases were let in the 1970’s. Throughout this time, coal markets have fluctuated, with prices for Pacific Basin coal peaking in early 2011. Yet over all this time, PacRim Coal – and its predecessor - moved slowly; they refused to conduct studies state and federal agencies said were necessary, they never hired sufficient staff to make a real play on the project, and they limped their way through the permitting process. Now, in the past 4 years, with substantial shale gas coming online and climate change considerations affecting market forces, coal prices have plunged 1 I have been the Executive Director at Cook Inletkeeper since February 1996, and I hold degrees in Biology & Chemistry (B.A., Boston University, 1986) and Law (J.D., University of Oregon, 1993). 2 See AS 46.15.080(b)(5). 3 See id. at (b)(1)-(4), (8). 4 See id. at (b) Page | 1 Cook Inletkeeper Testimony, August 21, 2015 roughly 70%5 and the market adjustments we’re seeing now appear long term according to most market analysts. As one analyst put it “It’s kind of the ultimate irony that market forces, and not the [Obama] administration or environmentalists, have displaced coal.”6 To follow on that, we asked Tom Sanzillo with the Institute for Energy Economics and Financial Analysis to provide a market assessment for Chuitna coal, to get a better sense if this is a real project. Mr. Sanzillo previously managed a $156 billion dollar globally invested public pension fund for the state of New York, and he’s an expert on the U.S. coal industry and international coal markets. Mr. Sanzillo’s analysis is sobering. He found that global coal prices are collapsing and the market is oversupplied; that leading coal analysts see no market signals for new coal mine development and they project severe retrenchment in the global thermal coal market; and that Chuitna coal would face stiff competition from existing U.S. and Pacific Basin coal producers, including the Usibelli Coal Mine in Healy. In conclusion, Mr. Sanzillo found that “The Chuitna coal project would serve little purpose in this shrinking market over the next several decades. There is no need for the mine and no price structure to support it.”7 PacRim, however, states that its coal is somehow immune from these market forces because of its “low sulfur” content, which produces less sulfur oxide (SOx) emissions than other coals and is presumably more desirable. That’s the line PacRim told an industry support group in January 2015.8 Mr. Sanzillo’s analysis, however, lays bare these claims. Mr. Sanzillo compared the sulfur levels in Chuitna coal to those in other domestic and international coals, and finds: “[T]he coal from the proposed Chuitna mine has no inherent competitive advantage over other coal products currently competing in the global marketplace. Chuitna coal contains average levels of sulfur for a low-sulfur product. Chuitna coal contains a low heat value. Companies that produce similar coal, with similar sulfur levels and better heating values, are having difficulty in today’s marketplace, and coal with similar sulfur levels and similar heat levels to Chuitna coal has no export potential for the foreseeable future… Global coal markets are oversupplied and there is no evidence that an Alaskan mine with no 5 James B. Stewart, King Coal, Long Besieged, Is Deposed by the Market, New York Times, Aug. 6, 2015 (available at: http://www.nytimes.com/2015/08/07/business/energy-environment/coal-industry-wobbles-as-market-forces- slug-away.html?_r=0). 6 Id. ((quoting Jorge Beristain, head of Americas metals and mining equity research for Deutsche Bank). 7 Letter from Tom Sanzillo, Director of Finance, Institute for Energy Economics and Financial Analysis, to Kimberly Sager, ADNR, Apr. 6, 2015. 8 Tim Bradner, Alaska Journal of Commerce, U.S. demand slipping, Pacific market still strong for coal, Jan. 15, 2015 (available at: http://www.alaskajournal.com/Alaska-Journal-of-Commerce/January-Issue-3-2015/US-demand- slipping-Pacific-market-still-strong-for-coal/). Page | 2 Cook Inletkeeper Testimony, August 21, 2015 product advantage would succeed as a new entrant in the global thermal market place.” 9 I encourage the State to carefully review Mr. Sanzillo’s analysis, because it clearly shows Chuitna coal sulfur levels are comparable to those found in the Powder River Basin, and that established companies in the Powder River Basin, with established Pacific basin buyers – companies such as Alpha Natural Resources, Arch Coal and Peabody Energy - are all dramatically losing value as their exports disappear.10 And as mentioned previously, these market adjustments – according to market analysts and coal company executives alike – appear permanent for the foreseeable future. But we don’t have to look to the Powder River Basin or to Pacific Basin producers to know there’s been a regime shift in coal markets. In Alaska, the state’s only operating coal mine – the Usibelli Coal Mine - has seen a 57% drop in exports between 2011 and 2014, and a workforce reduction of 15%. According to a news story published just last week, Usibelli’s Vice President of External Affairs “expect[s] to continue to see softening in the export market…”11 And it should be noted, Usibelli produces similar low sulfur, low BTU coal as that found at Chuitna, and Chuitna coal would compete directly with it. The writing is all over the wall – coal is a dying commodity, and it makes no sense to hold out the grandiose specter of jobs and revenues when the fact remains Chuitna coal is unmarketable at any foreseeable price structure over a reasonable timeframe. Jeff Jessee, the Executive Director of the Alaska Mental Health Trust, recognized the tenuous position of coal in the global marketplace just after coal prices peaked in 2011. During a meeting of the Board of Directors of the Alaska Mental Health Trust in May 2012, Mr. Jessee said: "...you know there are people that, for whom the concern is the fish, and with Chickaloon and Chuitna we're going to have a very good story to tell about that. There are however a big group in that negative who are against coal because of the global warming issues and the carbon emissions issues. That's the one issue we can't do anything about other than sell our coal before the environment becomes so negative towards that that it's no longer an economic resource, like asbestos. Now is not a good time to invest in asbestos, but there was a time when asbestos was a good, a good resource to own. And we don't want to be in that position with coal…”12 While I won’t get into the moral dimensions of whether coal should be a marketable commodity – including issues such as climate change, ocean acidification, increased asthma 9 Letter from Tom Sanzillo, Director of Finance, Institute for Energy Economics and Financial Analysis, to Kimberly Sager, ADNR, Aug. 19, 2015, p. 1-2. 10 Id. at p.3. 11 Jeannette Lee Falsey, Sagging exports hit Usibelli coal production for fifth year in a row, Alaska Dispatch News, Aug. 15, 2015 (quoting Lorali Simon, Usibelli’s Vice President of Extrnal Affairs) (available at: http://www.adn.com/article/20150815/sagging-exports-hit-usibelli-coal-production-fifth-year-row).. 12 Jeff Jessee, Executive Director, Alaska Mental Health Trust, Board of Directors Meeting, May 10, 2012. Page | 3 Cook Inletkeeper Testimony, August 21, 2015 deaths and the myriad problems we know are linked to coal - it’s clear coal is now no longer a good investment choice either. But it would be hard to understand that if you listened to the chorus of objections from the corporate world, which have all touted the considerable jobs and sizable revenues the Chuitna strip mine will generate.