Alaskanomics

Alaska's Total Net Assets Up 16% in FY2011; each Alaskan's share is $93,000

In January, Commonwealth North presented their annual review of Alaska's assets. The net worth of Alaska's state-owned enterprises and financial investments was $66 billion in fiscal year (FY) 2011, up 16% from FY2010 - or $93,000 per Alaskan. The state has assets in a number of financial funds:

• Alaska's Constitutional Budget Reserve fund
• Alaska's Department of Revenue
• Alaska Permanent Fund
• Alaska Industrial Development & Export Authority
• Alaska Housing Finance Corporation
• University of Alaska Endowment

Alaska also holds assets in the following enterprises:

• Alaska Marine Highway
• Alaska Energy Authority
• Alaska Railroad Corporation
• International Airports
• Alaska Aerospace Corporation
• University of Alaska

 

 

 

 

Forbes: Alaska's energy tax structure is among "Worst in the World"

At the Anchorage Economic Development Corporation annual economic forecast luncheon, keynote speaker Steve Forbes characterized Alaska's energy tax structure as one of the worst in the world - second only to North Korea. Forbes believes that oil prices will not stay above $100 per barrel forever, and suggested that a "sensible" tax structure will attract more capital and result in more long term revenues to Alaska.

Forbes, chairman and editor-in-chief of Forbes Media, also believes the U.S. could be a major energy exporter, saying "The abundance (of energy resources) has barely been scratched." With a changes in Congress that Forbes predicts will take place in the fall elections, he said it was possible that ANWR could be opened to oil exploration and development.

From 2006 to 2011, State North Slope Oil Production Forecasts Increasingly Pessimistic

The State of Alaska Department of Revenue released their Fall Revenue Sources book this month. By FY2015, the state forecasts that total Alaska North Slope production will be 538,000 barrels per day (bpd), down from 603,000 bpd in FY2011. Five years ago, the Fall Revenue Sources book forecast 782,000 bpd of production in FY2011 - a forecast that was off by 179,000 bpd. Because the oil production forecast is a key driver of state government revenues, elected officials may have counted on revenues, particularly in the out years, that did not materialize.

Since those very optimistic projections in FY2006, the state has, for the most part, lowered the oil production forecast each year as shown in the chart below.

Alaska's Department of Revenue noted this trend in the latest forecast: "When reviewing forecasted production versus actual production in previous production forecasts, it is apparent there has been a significant trend towards higher anticipated levels of production than those actually realized." The state incorporated a more in-depth review of the forecast, resulting in lower estimates this year.

Alaska's "Post-Prudhoe Economy": Will we Make the Right Choices?

The University of Alaska's Institute of Social and Economic Research (ISER) released a new publication as a part of the the organization's 50th anniversary celebration. Author Scott Goldsmith points out that, over the last 10 years, a combination of high oil prices and revisions in Alaska's oil production taxes have caused state government revenues to "skyrocket" despite a 40% drop in oil production over the same time period. Goldsmith lays out a strong case for Alaskans to proactively manage our assets to ensure that Alaska has a good economic future not only for the current generation of Alaskans, but for generations to come. That will require long term thinking on the part of all Alaskans, but particularly by our elected officials. Read the publication here.

Oil Production: What we can agree on

I believe that declining production is the biggest long-term risk to our economy and to state government revenues. Just slowing the rate of decline will require significant new investment by the oil industry.

Northrim took an active role in advocating for changes in the State’s tax policies in the last year, including helping to found the Make Alaska Competitive Coalition to educate more Alaskans about the critical need to increase oil production. The results of the most recent legislative session were mixed, with the Governor stepping up to propose changes to ACES and the House of Representatives passing a version of the Governor’s bill. The Senate, on the other hand, continued the divisive politics of the past, pitting Alaskans against our most important industry.

While other states must grapple with economic forces outside of their control, Alaska’s policymakers have the ability – and the responsibility – to take a long term view of Alaska’s revenues and expenses. We need to create better alignment between the State of Alaska and the oil industry.

We hope that over the next few months our leaders can return to a productive dialogue about this issue – starting with the points I believe we can all agree on:

• We need to increase oil production to support our private sector economy and state government. There is a real risk that in just a few years, production may decline to a point where the pipeline is not technically viable, and we will have no way to get our resources to market. We are closer to that point than we want to be.
• We can get increased oil production through new exploration, more development in older fields, and new technology to produce heavy oil, but all of these will require significant additional investment because the easy oil is gone and operating costs have increased significantly.
• The three major items under the State’s control that impact investment decisions are taxes, regulation, and access to resources. We need to make meaningful changes to all of these things.

If we can start from these points of agreement, we can move forward to the more difficult discussions, and decisions, that must be made soon to increase oil production. The Governor’s “million barrels per day” goal is a good one – let’s all work together as Alaskans to achieve it. 

ISER: Four Scenarios for Alaska's Future

Alaska's Institute of Social and Economic Research (ISER) has just released "Four Scenarios for Alaska's Future," a paper based on ISER's Investing for Alaska's Future research initiative. Author Scott Goldsmith describes four potential directions for Alaska's economy, given declining oil production, lower prospects for a natural gas pipeline, and challenges for petroleum development on federal lands and in federal waters.

We are the Chosen Ones or No Room at the Fishing Hole

This scenario relies on continuing good luck - high oil prices, the opening of ANWR to development, better royalty terms with the federal government, lower petroleum taxes leading to higher petroleum industry investment, and a gas pipeline to the Lower 48. These factors result in an "affluent Alaska economy" with some negative consequences, like traffic congestion and combat fishing.

The Big Crash or I Can Handle the Hangover because the Party was Awesome

In this "boom and bust" scenario, the good times continue for awhile, but the price of oil plummets and state government, which is 90% dependent on petroleum revenues - runs out of cash. State budgets are slashed, the Permanent Fund is tapped, personal income taxes return, and taxes on business increase. People flee the state for better economic opportunities elsewhere.

The Slow Squeeze or Up a Lazy River

This scenario envisions flat commodity prices as world supplies increase, reducing the calls for increased domestic production that might spur more development on federal lands. This scenario also assumes that Alaska is unable to craft a tax policy that stimulates investment, and instead Alaska's leaders adopt a "get it while you can" policy to maximize short-term revenue. The short-term surpluses are invested in dubious "economic development" projects that, like the projects before them, fail to live up to expectations. The economy shrinks and young people leave the state. Those who are left return to the pioneer Alaska lifestyle, living out their days enjoying the scenery.

Strategic Planning or Socialist Takeover

The fourth scenario envisions Alaskans actively managing the state's nonrenewable petroleum resources for the maximum benefit of Alaskans. Rather than let world oil markets, the federal government, or other outside interests determine Alaska's fate, the state's leaders look to the future and 1) maximize long-term revenues from petroleum production, 2) control growth in state spending, and 3) diversify revenue sources. Following this scenario would result in less petroleum revenue and state spending today in exchange for a more stable future with benefits for future generations of Alaskans.

While ISER points out that these scenarios are not predictions, the paper describes each scenario in detail, supported by examples from Alaska's history. Read the full paper here.

Shale supply, electricity demand explored at pipeline conference

Note: Federal Pipeline Coordinator Larry Persily attended and presented at the Pipeline Opportunities Conference in Houston on April 19. The discussion centered on increased supplies from shale gas production and rising demand from electricity producers. Here is his report from the conference.

“We don’t know what hydraulic fracturing regulation will look like over time,” said Ed Kelly, vice president for North American Natural Gas and Power with international consulting firm Wood Mackenzie. “We’re all making a lot of assumptions.”

“Environmental resistance and political attention continue to build,” adding uncertainty to shale gas production, he said. “Regulatory costs and permitting delays could slow development considerably.”

Despite that uncertainty, there likely will be enough shale gas in the market for the next 20 years to push completion of the Alaska natural gas pipeline past 2030, said Kelly, one of several speakers at the Pipeline & Gas Journal’s annual Pipeline Opportunities Conference in Houston April 19.

But that could easily change, he said, depending on regulation of fracking and increased demand for gas. “Close to 50 percent of total supply longer term will be affected by regulations on hydraulic fracturing,” he said.

“By 2013-2014, we will know much more about how shale wells perform longer term, and will have a much better idea of ultimate recoveries and production potential.”

Bruce Henning, vice president for regulatory and market analysis at consultants ICF International, also talked about shale gas production and the high-profile opposition to fracking. “There are real environmental concerns,” he said, though ICF, just as Wood Mackenzie, predicts shale production will continue to grow and dominate the U.S. market for years to come.

However, he also offered a warning: “Industry is only as good as its least diligent player.”

AGING PIPE INFRASTRUCTURE

Several speakers at the conference talked about the need for the oil and gas industry to prove to the public that it can operate pipelines safely and without leaks and spills. More than half of the pipes in the ground were buried more than 40 years ago, said Peter Lidiak, pipeline director at the American Petroleum Institute. Corrosion is the single largest cause of pipeline leaks, he said.

The industry will have to work with the Federal Energy Regulatory Commission to ensure it can recover its costs of pipeline repair and replacement, estimated in the tens of billions of dollars, said Daniel Martin, senior vice president for pipeline safety at El Paso Corp.

PRICES AT $6 TO $7 PER MCF

Much of the day’s discussion, however, centered on gas demand, supply and shale. An estimated 450 people attended the one-day conference.

The Interstate Natural Gas Association of American Foundation sees gas demand growing by 6 billion cubic feet a day by 2020 and an additional 5 bcf a day by 2035, with most of that demand growth coming from power plants. INGAA sees long-term gas prices settling in a range between $6 and $7 per thousand cubic feet, said Richard Hoffman, executive director of the trade group’s foundation.

The key, Hoffman said, will be to get a high enough price to cover costs and make a profit, but not so high as to stifle demand growth. Wood Mackenzie predicts gas will settle into a long-term price around $6.50 per thousand cubic feet (2010 dollars).

Coal-plant retirements and a resumption of economic growth could add 1.5 bcf a day to U.S. gas demand each year through 2020, according to Wood Mackenzie.

“It’s really looking pretty good for gas,” Kelly said. The “silver bullet” to creating more demand, he said, would be carbon regulation on the federal level. “That could have added 10 bcf a day to the demand side,” joking that independent gas producers could have helped themselves had they voted for Al Gore for president in 2000.

New federal legislation probably will not happen, especially after the 2010 Republican gains in Congress, but EPA carbon-emissions regulation is entirely possible.

The long-term prospects for natural gas are favorable, Kelly said, based on the anticipated retirement of a lot of older coal-fired power plants. “Carbon and environmental policy, coal retirements are the lever” on the demand side, according to the Wood Mackenzie presentation.

PETROCHEMICAL DEMAND UP

There also is good news for gas on the industrial side, Kelly said. After years of reduced demand and shuttered plants, “industrial demand redevelopment really is happening,” with even the petrochemical industrial seriously considering expansions to take advantage of affordable, plentiful domestic gas supplies.

Shale gas production is behind the talk of new petrochemical and industrial demand. But the unknowns of future shale production, its costs and environmental constraints maybe could help prospects for the Alaska gas line, Kelly said. Maybe.

Alaska gas does not compete with today’s shale plays, he said. Rather, Alaska’s competition in the 2020s and beyond will be shale plays not yet under production, plays possibly with higher costs. Alaska competes “with the next most costly shale,” he said.
 

Commonwealth North Issues Oil Tax Study; Calls for Changes to ACES

Commonwealth North released their oil tax study report, "Alaska's Oil Investment Tax Structure: Establishing a Competitive Alaska." The Board of Directors and members of Commonwealth North engaged in a four month study to evaluate the primary public policy concerns associated with Alaska's oil tax structure. The study group was headed by Northrim Bank President Joe Beedle and Municipality of Anchorage Office of Management and Budget Director Cheryl Frasca. Study group members heard from oil tax payers, legislators, economists, and informed Alaskans. The data was analyzed, compared, discussed, and the final report produced. The study group determined that the current oil production tax, ACES, adversely affects investment in oil production on the North Slope.

The Commonwealth North Board of Directors approved a resolution supported by the findings of the oil tax study report, urging the legislature to reduce the ACES progressivity rate. Many of the presentations from individuals who met with the study group are available on the study group page.

$5 Billion Maximum Draw from Oil Revenues Preserves Wealth for Future Alaskans

In a Web Note published by the University of Alaska Anchorage Institute of Social and Economic Research, economist Scott Goldsmith calculates that State government can draw $5 billion per year from petroleum wealth while preserving that wealth in perpetuity for future Alaskans. Any state spending above the $5 billion annual draw would need to be funded by non-petroleum taxes and other revenues.

Goldsmith's calculations assume that our current petroleum wealth includes the $45 billion currently in the Alaska Permanent Fund, Constitutional Budget Reserve and other accounts - plus $81 billion of oil and gas revenues still in the ground. He also assumes that Alaska's population will grow at 1% annually, and that we can invest our petroleum wealth at a 5% return, net of inflation.

Goldsmith suggests Alaskans adopt a target of "equal and sustainable wealth for all generations of Alaskans" with a $5 billion annual benchmark - if we draw and spend more than the $5 billion, future generations will enjoy less per-capita petroleum wealth than we do today. If we draw less, future earnings will be higher and future generations will be better off than us.

Because more than half of the wealth in this calculation is based on oil still in the ground, the benchmark could be higher or lower depending on how much is ultimately produced, the price of oil, and the state's fiscal terms.

Read the full 18-page Web Note here.

Oil Pumps Alaska's Economy to Twice the Size - But What's Ahead?

In a new paper published by the University of Alaska's Institute of Social and Economic Research, economist Scott Goldsmith explains the importance of oil money to Alaska's economy. In earlier research, ISER estimated that one-third of Alaska jobs are oil related, but close to 20% more jobs can be traced to the "spinoff" benefits of oil weath, including:

• A stable economy that's twice the size it would be without oil revenue
• Economies of scale from a population that's double what it would be
• No state income tax for individuals, and much lower taxes for non-oil businesses
• The nation's highest per capita state government spending

ISER's analysis shows that the State of Alaska has collected $157 billion (in today's dollars) from oil since 1959. Where has it gone?

• $70 billion went to new and expanded operating programs, including Permanent Fund dividends
• $37 billion went into savings, mostly in the Permanent Fund and the Constitutional Budget Reserve
• $31 billion provided tax relief for households, which pay no state income or sales tax 
• $19 billion provided tax relief for non-oil businesses, which pay less than half of the taxes they'd pay if their taxes made up the same share of revenues as in other states

ISER concludes that, while other economic drivers are critical to Alaska's economy, Alaska's future prosperity depends on continued oil production - because none of the other economic drivers can replace the economic value of oil. There is still a lot of oil on the North Slope and offshore, but how much of that oil is produced will depend on a number of factors - including politics. ISER suggests that Alaskans focus on a strategy to maximize the long-term benefits, considering the following:

• Alaskans need to have realistic expectations about future oil production - we aren't likely to have another Prudhoe Bay
• Policy makers need to find the "sweet spot" of oil taxation that provides maximum long-term benefits in oil production, employment and state revenues
• Alaska's leaders must resist the temptation to use the state's oil wealth for economic diversification projects, considering the state's lack of past success.