Alaskanomics

Don’t Confuse Alaska’s State Government Budget with the Alaska Economy

If you listen to the rhetoric in Juneau, the focus appears to be on the State government budget and legislators working to maximize the dollars that flow to Juneau.  That amount has been growing significantly over the past several years and has led to large spending increases that seemingly put government budgets on an unsustainable path.  Oil production continues to decline and the high production tax rates at the current high prices are leading companies to invest more elsewhere.

It’s important to not confuse the State government budget with the Alaska economy.  The State and Federal budget only account for under 10% each of our total gross state product, and the private sector accounts for about 81%.  We need to broaden our focus so that we are not looking through the prism of Juneau, rather what’s best for the overall economy.  This includes high-paying jobs in the private sector, opportunities for construction and service-based industries, and infrastructure development projects. 

Capital investments from the large natural resource companies are what drive our economy, and our largest industry is oil and gas.  Uncompetitive tax structures may bring in large State revenues in the short term, but dampen private sector investments in the long run and hurt the largest part of Alaska’s economy.  Government revenues are a result of a successful economy; not its purpose.  If the private sector is thriving, there will be plenty of options for the government to obtain the revenues it needs for operations.

We recently spoke at Northrim Bank’s annual economic luncheons in Fairbanks and Anchorage with an update on our economy and the opportunities before us.  We were joined by Bob Heinrich of ConocoPhillips who presented their challenges and opportunities in Alaska.  Click Here to view the presentation on Alaska’s economy.

State’s new oil production forecast model less rosy; too early to tell if it is more accurate

By Blythe Campbell
Director of Communications and Marketing
NANA Development Corporation

The Alaska Department of Revenue released their Spring Revenue Forecast last week, reducing their estimate of Alaska North Slope oil production for FY2013 and FY2014 by 14,500 and 11,800 barrels per day, respectively, over their fall forecast.

The Department of Revenue (DOR) began to refine its production forecasting methodology three years ago, and the new model has proved to more accurate. For the Fall 2012 forecast, DOR contracted with an independent engineering consultant to build a well-by-well evaluation of all currently producing wells. They also began to make “risk adjustments” to forecast the eventual production from projects underway to develop new oil – in the past the forecasts assumed all projects would produce their full potential value.

The chart above shows the DOR’s forecasts from FY2006 to FY2020, and actual production from FY2006 to FY2012. Since the Fall revenue forecasts are produced five months into the fiscal year, those same-year forecasts have been quite accurate. In most years, the second year’s forecast has also been fairly accurate. After that, the forecasts on the whole were considerably more optimistic than reality, because they counted on lower field decline rates and a significant percentage of new oil that did not materialize.

The FY2006 forecast was particularly optimistic, with an FY2012 prediction of 831,000 barrels per day. Actual production for FY2012 was 579,400 barrels per day. The difference of nearly 300,000 barrels per day was, for the most part, from inaccurate forecasts of new oil from projects the DOR expected to ramp up to peak production in FY2012.

Because 90% of the state’s unrestricted general fund revenue comes from petroleum, production forecasts are particularly important to state policy makers. The DOR’s new methodology tries to incorporate many of the factors that impact oil production in Alaska – decline rates, risks of delay, and performance risks.

However, DOR does not explicitly analyze, or report on, some of the additional factors that drive oil production in Alaska, including the level of oil prices and the state’s fiscal regime. High oil prices make more projects economic, especially considering the high cost of doing business in Alaska. However, the state’s high oil taxes, particularly the progressivity feature of ACES, erase much of the benefit of high prices on project economics.