Alaskanomics

The Future of Oil and Gas Investment in Alaska

Alaska Governor Sean Parnell has proposed changes to Alaska’s tax regime designed to increase the global competitiveness of the state.  The Consumer Energy Alliance (CEA) – Alaska, recently testified at a Senate Special Committee hearing on this issue. An important point outlined is that oil production has declined from a peak of over 2 million barrels a day to about 500 thousand barrels a day – and continues to fall at the rate of 5-7% per year – all while oil prices remain high.  The Alaska Department of Natural Resources has, since the Alaska’s Clear and Equitable Share (ACES) tax regime became effective, reduced by 600 million barrels its projected Alaska oil production for the ten year period ending in 2020.     

• 30% of Alaskans are dependent upon oil and gas exploration and development for employment.
• More than 80% of state revenue used to provide services to the people of Alaska is derived from taxes on oil production.

The tax rates and progressivity structure of Alaska’s current tax regime serve as a disincentive to attracting risk capital to the state.  We can see this evidence by declining oil production during a time of high oil prices.  Included in CEA's tesimony is a telling chart showing the decline of oil production while state spending has increased. 

The increased prices in oil and gas have resulted in large increases in production in other regions, but not in Alaska, and not because more oil is not available.  Alaska’s unique remoteness from the markets, arctic climate, high labor and logistical costs make the case for a more competitive tax and regulatory structure. 

The Consumer Energy Alliance (CEA) is a nonprofit, nonpartisan organization that supports the thoughtful utilization of energy resources to help ensure improved domestic and global energy security and stable prices for consumers.

New housing permits increase after several years of decline, up 16% as of November

According to the U.S. Census Bureau, the number of building permits for new, privately owned housing of 1 to 5 unit buildings is remaining low for the fifth straight year.  It has been under 1,000 units since 2007.  Through November of 2012 there have been 979 permits reported.  This is 138 permits or 16% more than last year at this time and the most since 2007.  This is a positive sign for the construction sector that we may have reached the low point in previous years and a recovery has started.

Home Loan and Refinance Activity Increases as Interest Rates Continue to Fall

The Alaska Housing Finance Corporation (AHFC) released their third quarter report on Alaska housing indicators. It tracks new loan activity for single family homes and condominiums in Alaska.  The data is based on a survey representing approximately 95% of mortgage lenders in Alaska and also includes AHFC loans.

It reported 6,014 loans were originated statewide for single family homes and condominiums for a total amount of $1.5 billion. This is an increase compared to 5,538 loans for $1.37 billion in the first nine months of 2011. 2012 loans were done with an average down payment of 10%, in line with the last two years. Single family homes accounted for 89% of statewide mortgage lending activity, with 55% of those loans occurring in Anchorage. The Mat-Su contributed 14% of the volume, 11% in Fairbanks, 7% in Kenai, 5% in Juneau, 1% in Kodiak, and 1% in Ketchikan.

Condos account for the remaining 11% of the total loans with 90% of condos being financed in Anchorage. Juneau accounted for 3%, while Fairbanks and the Mat-Su accounted for less than 2% each. Additionally, there were 362 units of multi-family housing financed by 66 loans in the first nine months of 2012.

30 year conventional fixed interest rate mortgage loans have been getting less expensive for the past three decades.  In 1981, they peaked at 16.6% and have undergone a slow and steady decline ever since.  In early 2009 rates dipped under 5% on average for the first time, and a surge in refinance activity began. 

According to AHFC statistics there was less than $200 million in refinance loans completed per quarter in Alaska in 2006 and 2007.  In 2008, the average rose to $400 million.  Then in the first quarter of 2009 the activity spiked to $1.4 billion, followed by $1.2 billion in the second quarter.  During this time the average 30 year interest rate declined nearly 1.5% in six months.  The refinance pace slowed somewhat in the last half of 2009, but still finished the year with $3.7 billion in refinanced mortgage loans according to AHFC statistics. 

In 2010, the refinance volume declined to $2.4 billion, followed by $2.1 billion in 2011.  This is still far above historical levels.  Through September of 2012 the volume has been higher at $2.2 billion in only nine months.  According to the Federal Reserve, conventional 30-year mortgage rates nationwide averaged under 4% for the first time in November of 2011 and has fallen to 3.35% in November of 2012.

Alaska foreclosure and delinquency rates remain low compared to the rest of the U.S.

The recently released survey by the Mortgage Bankers Association shows that Alaska continues to have some of the lowest levels of foreclosures and delinquencies on residential mortgage loans in the United States. Through the third quarter of 2012, Alaska ranked 3^rd best in the nation out of 50 states in both foreclosures and delinquencies of all loan types.

The total inventory of foreclosures in process is 1.2% in Alaska, while the country has a much larger lingering foreclosure inventory at 4.1% due to higher rates during the recession and longer resolution times. These rates are nearly the same as the second quarter of 2011, but a small improvement from two years ago when Alaska’s rate was 1.4% and the U.S. foreclosure rate was 4.6%.

Delinquent loans are more than 30 days past due, but not yet in foreclosure. Alaska is third best behind North Dakota and South Dakota in the overall level of delinquent loans. Alaska’s delinquency rate is 4.1%, while the U.S. average is 7.6% for all loan types. This is an improvement for Alaska from 4.8% two years ago. The U.S. delinquency rate has also come down from 9.4% at this time two years ago, to 8.4% last year.

Subprime lending to traditionally non-qualified borrowers was a large contributing factor to the national mortgage problems. The survey covers 94,339 mortgages in Alaska. 6,781 or 7% were considered subprime, compared to 9% nationally. The rate of delinquencies and foreclosures on subprime loans is significantly higher. However, Alaska is in a far better position and again leads the nation as having the lowest level of foreclosures and delinquencies in this important category. Subprime foreclosures in Alaska are at 3.2% while the national average is 12.4%. Alaska’s subprime delinquency rate is 10.4% compared to the national average of 21.1%.

Video Clip: Time will be crucial if Alaska is to remain competitive in the natural gas market

Mikkal E. Herberg is the Research Director of the Natural Bureau of Asian Research (NBR) Energy Security Program. He is also a senior lecturer on international and Asian energy at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. In this clip, Mr. Herberg discusses natural gas projects in Australia set to come online in 2016, years before any Alaska natural gas pipeline could be completed. Therefore, time will be crucial if Alaska is to remain competitive.

Mikkal Herberg spent 20 years working in the oil industry; he writes and speaks extensively on Asian energy issues to the energy industry, governments, and major research institutions in the Asia-Pacific region and Europe, including the U.S., China, and Japan. He recently spoke at the Northrim Bank Oil & Gas Speaker Series presented by the Alaska World Affairs council.

Video Clip: Oil industry expert encourages Alaska to move forward with natural gas pipeline project

Mikkal E. Herberg is the Research Director of the Natural Bureau of Asian Research (NBR) Energy Security Program. He is also a senior lecturer on international and Asian energy at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. In this clip, Mr. Herberg encourages Alaska to move forward with the liquefied natural gas pipeline project.

Mikkal Herberg spent 20 years working in the oil industry; he writes and speaks extensively on Asian energy issues to the energy industry, governments, and major research institutions in the Asia-Pacific region and Europe, including the U.S., China, and Japan.  He recently spoke at the Northrim Bank Oil & Gas Speaker Series presented by the Alaska World Affairs council.

Video Clip: Alaska Liquefied Natural Gas Opportunity

Mikkal E. Herberg is the Research Director of the Natural Bureau of Asian Research (NBR) Energy Security Program. He is also a senior lecturer on international and Asian energy at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. In this clip, Mr. Herberg discusses how the demand for natural gas has steadily increased over the last 20 years. With that demand expected to expand over the next 20 years, Alaska is in position to tap the market.

Mikkal Herberg spent 20 years working in the oil industry; he writes and speaks extensively on Asian energy issues to the energy industry, governments, and major research institutions in the Asia-Pacific region and Europe, including the U.S., China, and Japan.  He recently spoke at the Northrim Bank Oil & Gas Speaker Series presented by the Alaska World Affairs council.

Is Alaska on a path it can't sustain? "Growing spending and falling revenues are creating a widening fiscal gap," according to ISER.

The University of Alaska's Institute of Social and Economic Research (ISER) recently published the FY 2014 Update on the Maximum Sustainable Yield. In this update, Scott Goldsmith writes that Alaska's state government can afford to spend about $5.5 billion in fiscal year 2014, based on the petroleum net egg of about $149 billion.  ISER presents the latest estimates of the maximum amount Alaska can spend while maintaining a sustainable budget. 

"Right now, the state is on a path it can't sustain," writes Goldsmith.  "Growing spending and falling revenues are creating a widening fiscal gap." 

Right now it looks like the state continues to increase spending, even though estimates are pointing toward a looming fiscal crunch after 2023.  According to Goldsmith, the state should save more and restrict the rate of spending growth - and start doing it now.  It's estimated that if Alaska had $117 billion in cash reserves and the Permanent fund by 2023, we would be on a sustainable path far into the future.  The reality is that today we have half that much in financial assets.  

To read the full report, click here.