Alaskanomics

ISER Report on Health-Care Benefits: A Survey of Alaska Employers

The Alaska Health Care Commission contracted with the Alaska Department of Labor and the Institute of Social and Economic Research (ISER) to determine what is happening to employer-sponsored insurance in Alaska. Nationwide, the number of employers providing insurance is dropping and Alaska is facing premiums that are 30 percent above the US average. To determine the current state of employer sponsored insurance in Alaska, Mouhcine Guettabi, Rosyland Frazier, and Gunnar Knapp of ISER analyzed the survey results and found the following:

• Two-thirds of Alaska businesses don't provide health insurance, and the reason they cite most often is no surprise: it's too expensive.

 • The share of businesses providing insurance varies a lot among small and large firms. Almost all firms with more than 100 employees provide health insurance, compared with less than 24% of the smallest firms (those with fewer than 10 employees).

 • About 35% of employees at firms covered by the survey work part-time or seasonally, but very few of them have employer-based insurance. Full-time employees account for 95% of the employees carrying health-insurance through their employers, while part-time and seasonal workers make up only 5%.

 • Some businesses that provide insurance, especially the largest, are taking steps they hope will help hold down insurance costs. Close to 40% of the largest firms offering insurance have established wellness programs for their employees and nearly 30% are providing employees with comparative information on the cost and quality of services at different medical facilities.

The full report can be found at http://www.iser.uaa.alaska.edu/Publications/2014_10-AKHealthBenefitsReport.pdf.

There is also a summary report at http://www.iser.uaa.alaska.edu/Publications/2014_10-RS079-AKHealthBenefitsSummary.pdf

Both are great resources in the search for information regarding health-care in Alaska.

State Budget Crunch Highlights

There is a lot of discussion regarding the State’s budget and the crunch that is coming in the near future if things do not change. In the October 13, 2014 issue of the Bradners’ Alaska Economic Report, three trends are discussed that will cause an issue for the state after 2020.

It should be no surprise that the decline in oil production is of concern to many in Alaska. This is nothing new for the state, as the decline started in 1989. The past fiscal year saw the decline go from 6 percent to zero percent and there is hope that the new and increased activity on the North Slope will keep the decline flat for a few years. Scott Goldsmith, from UAA’s Institute of Social and Economic Research (ISER), predicts that production would have to increase 2 percent each year to make a dent in reducing the state deficit.  One year of flat production is good, but far from the needed increase make a difference for the state budget.

In the past four months, the price of crude oil has gone from a healthy $110 per barrel down to below $90 per barrel in October. It is hard to say if the drop is only temporary or a more long term concern. The budget deficit for FY2015 will be increased if the price stays below $100 per barrel for an extended period of time. While lower prices are good for consumers, it is not good for the state. It is possible that prices will remain low because the supply is very high right now and demand has not risen to soak up the extra supply. It is simple Econ 101, the more supply that is available and the lower the demand, the lower the prices will be.

The final trend outlined by Bradner is more complex and involves the state’s operating budget. Last fiscal year, the state operating budget was $6.44 billion, which was up from $4.28 billion in FY10. According to the Legislative Finance Division, state operations spending, including agency budgets and other statewide operations, has almost doubled in the past 10 years. Much of the increases have been masked due to cuts to capital spending, but the increase is still visible.

With these three trends, there is much discussion about how to reign in the deficit. Many believe that a natural gas pipeline would save the state budget. If the project stays on track, it could be operating in the next ten years and would add significant revenue to the state’s stretched budget. Much will be revealed in the coming months/years on the progress of the gas pipeline. There will also be an update on the oil production forecast before the end of the year. This will hopefully show that the production increase seen at the end of FY14 has continued and that there is good news for the remainder of FY15.

Unemployment in Alaska Remains at 6.8 percent during September

The Alaska Department of Labor and Workforce Development released the unemployment numbers for last month on Friday. The seasonally adjusted rate for September remained at 6.8 percent, seeing no change from the August rate. The national average continued to slowly drop from the previous month. The national average was 5.9 percent in September, a significant drop from one year ago when the rate was 7.2 percent.

There were not major shifts in rates throughout the state. The lowest rate continues to be in the Municipality of Skagway at 1.7 percent and the highest rate is still in Wade Hampton Census area with 20.5 percent.

Detailed statistics for labor rates can be found at http://live.laborstats.alaska.gov/ces/.

Resource Extraction 10-Year Project Projection

The Anchorage Economic Development Corporation released its annual Resource Extraction 10-Year Project Projection report on October 16. The report is sponsored by Northrim Bank and the research is supported by Petroleum News and North of 60 Mining News. The projection is in its 10th year after originating in 2004 from a request to the Kenai Peninsula Borough Mayor’s Oil and Gas office from the University of Alaska sponsored Workforce Development Conference. Its goal is to give perspective on what the future might hold for resource extraction projects in Alaska. The original projection spurred a more detailed projection that could be updated annually. This year’s projections focus on the State’s ongoing effort to bring North Slope natural gas to market, as well as other projects in various stages of planning and execution.

2014 has been a big year for Alaska’s resource extraction industry. The enactment of SB21 and the voters electing to keep the tax structure in place has resulted in more clarity of future conditions in the industry. There is optimism throughout the industry that the climate is good for development and production projects. Cook Inlet has already seen an increase in production. Since fiscal year 2010, production in Cook Inlet has nearly doubled going from 8,900 barrels a day to over 16,000 barrels per day in 2014.

The report predicts that the North Slope could see similar results in the coming years. With the stability for the future of the oil and gas industry, there is new hope that the decline in the production curve will flatten out. There are many proposed projects that are now moving forward towards new production on the North Slope.

It’s not all rosy for the oil and gas industry. There are still major issues for projects in the Outer Continental Shelf. With the current federal conditions, it is not likely that increased production will be seen in the near future.

The mining industry has had good progress with the momentum behind the Bokan Mountain and Donlin Gold mines. Both of these projects bring new investment and opportunity to mining in Alaska. There are still significant concerns for the progress of the Pebble Project. There is great uncertainty for the future of this major project.

The industry as a whole is driven by the effort to bring North Slope natural gas to market. The potential for an Alaska gas pipeline is a huge project and will bring significant investment and jobs to the state, both inside and out of the oil and gas industry. There have been substantial investments in this project, which bring hope that the pipeline may be a reality in the next 10 years.

The report shows that there is a potential for roughly 20,000 jobs at peak construction and $68 billion of private sector investments in 14 extraction projects that are proposed for Alaska in the next decade. The Resource Extraction 10-Year Projection outlines projects that are producing units, active drilling and exploration sites, projects in early stages and mining resources. The full report can be read at: http://aedcweb.com/images/10_15_2014_Resource_Extraction_Report-FINAL.pdf

Alaska’s big gas project make progress, but key decisions, uncertainties loom

By Tim Bradner

Progress is being made on a large North Slope natural gas project after years of effort. However, important decisions must made in 2015 and 2016, and the project, actually several “megaprojects” rolled into one, still faces big challenges in the marketplace.

The “Alaska LNG Project” includes a giant gas conditioning plant at Prudhoe Bay, an 800-mile pipeline from the North Slope to Nikiski, on the Kenai Peninsula, and one of the world’s largest liquefied natural gas (LNG) plants at Nikiski.

If the project is built the $4 billion Point Thomas gas project, now under construction to produce liquid condensates and to recycle gas, will also be expanded to support conventional gas production.

Here is what has been accomplished this year:

• The state Legislature approved state participation in the project with North Slope producers BP, ConocoPhillips, ExxonMobil and Trans-Canada Corp., a pipeline company. State participation is vital in achieving alignment on commercial terms, the producing companies have said.

• The consortium, now called the Alaska LNG Project, has begun pre-Front-End Engineering and Design work, a $500 million commitment to more advanced engineering and updated cost estimates.

• Two regulatory initiatives are underway: The consortium has filed for a U.S. Dept. of Energy LNG export license and the DOE has said the Alaska application will get a streamlined review; the group as also made a “pre-application” to the Federal Energy Regulatory Commission, which basically starts the Environmental Impact Statement process.

Here is what must happen next:

• The state must negotiate a transportation agreement with TransCanada to ship state-owned gas though TransCanada’s part of the gas conditioning plant and pipeline. This is a long-term “take or pay” contract needed by TransCanada to finance its share of the project. It is a multi-billion-dollar financial commitment by the state, but it is critical to sales of the state’s LNG share and future state revenues. The contract must be approved by the state Legislature.

• The state must also negotiate an agreement with the three gas producers to assure stability of production tax terms. The Legislature must also approve this. The agreement will cover only the gas production tax, not state corporate income taxes paid by the producers. Oil production taxes are not affected.

The state administration has said that a special session of the Legislature will probably be held in late 2015 to consider both the TransCanada contract and the tax stability agreement. These are “must haves” for the project to proceed.

 

In early 2016, the results of the pre-FEED work will be complete along with updated cost estimates. If the results are favorable the project will proceed to the full Front-End Engineering and Design, a step that requires a commitment of about $2 billion. The revised cost estimate is crucial to this decision.

If the project does go to full FEED it will demonstrate confidence in the project and an increased likelihood that the project will proceed to construction. The FEED would be complete in 2018, and A Final Investment Decision, the go or no-go, will be made in 2018 or 2019. Construction would begin then, if the decision is made to proceed. Construction would be complete by 2024.

Key challenges facing project include total cost, cost-control during construction, and market competition.

Updated cost estimated from the pre-FEED will be important. If costs escalate beyond $65 billion, the upper range of the current conceptual estimate ($45 billion to $65 billion) the project may face difficulties. In cost-control during construction, a critical factor will be the availability and cost of labor. The labor demands of three (actually four, including Point Thomson expansion) large industrial projects being built simultaneously will be significant.

Market competition is also a major challenge. There are many planned LNG expansions and new projects aimed at capturing the growth in the Pacific market. Some of these projects face problems, such as a long shipping distance from the Persian gulf (and desires by Asian LNG importers to not be too dependent on energy from this volatile region), large cost escalation of projects in Australia, permitting and supply uncertainty for projects in British Columbia, and political challenges (LNG export approvals) as well as long shipping distances for proposed LNG export plants on the U.S. gulf coast.

Alaska’s main advantages are the confirmed large gas resources on the North Slope, and proximity to Asia (shorter shipping). The North Slope is also very prospective for new gas discoveries, so the Alaska project, once built, can be expanded very economically. The disadvantages are the high costs of having to build an 800-mile pipeline and the fact that to be economic the project may have to ramp up quickly to its full 17 million/18 million tons per year production rate. This is a lot of LNG to be placed in the Asia market in a short term. Competing projects may be able to start at smaller volumes and gradually expand.

 

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce and is co-publisher of the Alaska Legislative Digest.