Alaskanomics

Cheers to Alaska’s Craft Breweries

Alaskans love their beer, especially local, Alaskan beer. In 2017, there were 35 breweries throughout the state, up from 14 in 2007. While overall consumption is down, consumption of local, craft beer increased 35 percent since 2013. Alaska ranks number 3 among states for gallons consumed per capita (for adults over 21), and seventh for breweries per capita. Anchorage hosts 7 breweries, while 23 other communities have their own brewery. Cities large and small are capitalizing on the trend of locally brewed beer in Alaska.

Craft brewers are establishments that produce less than 6 million gallons of beer a year. Most of Alaska’s craft beer comes from either breweries or brewpubs. Breweries produce beer for distribution. This can be in kegs, bottles, growlers or cans and are sold to the public as well as in retail stores. Many Alaska breweries are open for public tasting, but hours are limited and customers are limited on the amount that they can consume on site. Alaskan Brewing Company in Juneau is Alaska’s largest brewery, as well as the oldest. Alaskan Brewing was the 19^th largest craft brewery in the US and the 24^th largest brewery overall in 2016.

Brewpubs also brew beer to sell to retail stores and customers onsite. They serve a larger variety of food and are often classified as a restaurant and are not limited by the same laws that govern consumption and hours of operation like a brewery.

Craft beer is big business in Alaska. In the 10 years between 2007 and 2017, the amount of locally produced craft beer sold more than doubled. It went from 454,000 gallons in 2007 to 919,000 in 2017. Breweries and brewpubs contributed nearly $36 million in payroll and over 1,250 jobs to the Alaska economy in 2017. Big beer still dominates the market with nearly 70% of beer consumption, but is losing ground to Alaska craft brews and other craft brews. The craft brewing industry doesn’t seem to be fazed by the recession. New businesses continue to open and employment has increased. In 2016, Alaska was fifth in the US for brewery earning per capita with $239 million.

More information can be found in the November Trends magazine.

China Deal Renews Hope for Alaska LNG Line but Hurdles Remain

By Tim Bradner

Alaskans have chased the will-o'-wisp of a North Slope gas pipeline for decades. Several times the prize seemed within our grasp only to slip away, usually because of some unexpected, and adverse, market development. In recent years, the technical prowess and success of U.S. shale gas developers led to a domestic gas supply glut and plummeting prices, ending hopes for an all-land gas pipeline to the Lower 48 states.

Even more recently, a crash of crude oil prices and with it prices for liquefied natural gas, or LNG, has ended an industry-led initiative to build a pipeline and large LNG export project. The state of Alaska, which had been a partner with industry in that, moved to pick up the pieces and keep the LNG project alive, with the state-owned Alaska Gasline Development Corp., or AGDC, leading the effort.

For a period of time the state’s quest seemed quixotic, with a small, untested state agency attempting to develop a $43 billion project amid a worldwide glut of LNG and a host of competitors who are planning big export projects without the burden of having to build an 800-mile pipeline across Alaska.

China deal a game-changer?
Seemingly against the odds, Gov. Bill Walker may have pulled off a coup, landing a potential huge customer, and financier and investor, in Chinese energy company Sinopec, Bank of China and China Investment Corp., that nation’s sovereign wealth fund.

The governor and the AGDC team engineered a deal signed Nov. 9 in Beijing, with U.S. President Donald Trump and China’s president Xi Jiang looking on, for Sinopec to negotiate for 75 percent of the Alaska LNG Project’s 20-million-tons per year of LNG capacity, in which Bank of China would provide financing for the 75 percent project debt and China Investment Corp. an investment in the equity part, planned now at 25 percent.

The underlying concept of the state’s plan, which the North Slope producers say they support, is that while the project does not clear the “hurdle rate” for investment by the large producing companies, it is possible that there are other investors, such as national sovereign wealth funds, interested in long-term infrastructure holdings. These investors would be willing to accept a lower rate of return than would the oil companies, according to this idea. This, combined with possible tax-exempt status of any part of the project actually owned by the state, improves the economics of Alaska LNG Project, it is argued.

There are still doubts among Alaskans, and observations that the “Joint Development Agreement” signed Nov. 9 is non-binding and similar to the several “Memorandums of Understanding” signed previously with potential buyers including Korea Gas Corp. and, most recently, Tokyo Gas Corp. Like the MOUs, the joint development agreements simply set the ground rules for further talks.

Governor Walker argues that the high profile given this agreement, which is seen to be supported by the top U.S. and Chinese political leaders, gives this deal a good chance of actually happening.

Independent observers who are experienced in Asia energy markets, like former ARCO Alaska president and state natural resources commissioner Harold Heinze, gives high marks to the signing. China has a huge need for clean-burning gas and an ability to pay for it, Heinze told me, and Sinopec and the two China financial entities are large and experienced. “This is the dream team,” among potential customers and investors, he said.

Huge uncertainties remain
There are still huge uncertainties, however. In his telephone press conference with Alaska reporters on Nov. 9 Gov. Walker acknowledged that this is not a done deal, and a lot of work remains to be done. The target is for the roles of respective parties to be agreed by May and a final agreement by the end of 2018, but this is a huge, complex undertaking and the December goal may prove ambitious.

The governor also said he hopes for a final investment decision by the end of the first quarter of 2019 (the “FID” is what will trigger procurement and a start of construction) but that seems unrealistic because final engineering on the project cannot be done in such a short timeframe.

When it led the project, ExxonMobil said the final engineering could take one and a half to two years and could cost $1 billion to $2 billion. After it took over the project, AGDC said there might be ways the final engineering could be speeded, and done for less, because the preliminary engineering done by the industry/state consortium was very detailed and to the point that some of it could be considered part of the final design.

Still, the remark raised concerns among some industry professionals who worry about AGDC attempting to hurry the project to meet artificial deadlines. There is ample experience with large industry projects that hurried work at the beginning can lead to mistakes and cost overruns. Chevron Corp.’s Gorgon LNG project in Australia, which suffered huge cost overruns, is cited as an example of inadequate front-end planning, senior Chevron officials have acknowledged. Alaska had its own experience with the Trans Alaska Pipeline System in the 1970s, which was hurried mainly for national security reasons. Luckily for TAPS the margins enjoyed in oil production were enough to absorb the cost increase. Margins in gas production will be much narrower, however. There is less room for mistakes.

Small Alaska labor pool
One reason why there is a concern for cost control is that the Alaska skilled labor market is very small compared with the needs of this large project, which means most of the project workforce will have to be imported from outside Alaska, mainly from the Lower 48 states. Although Chinese investors and customers will push for Chinese “content” in construction, this is most likely in materials and equipment, and some engineering services.

There would be skilled Chinese labor among the professional technicians and engineering staff, but the bulk of the rank-and-file labor would be U.S. particularly if there are project labor agreements, which will almost certainly be the case. However, the labor demand could result in some upward push on wage rates and benefits in Alaska, which happened during TAPS construction. This could lead to higher project costs (labor scarcity was also a factor in Gorgon’s overruns).

Construction management
Finally, there are concerns over the project construction management. The state gas corporation, AGDC, aspires to grow to meet this demand and would in any event rely on experienced contractors. However, Sinopec would also play a role and while this company is very experienced in large energy projects it has not built a large project in the U.S. nor in the Arctic and is therefore unfamiliar with Arctic conditions as well as U.S. labor and environmental rules, all of which could create some problems in management of the project. Harold Heinze believes this could be mitigated if North Slope producers, who are experienced and familiar with the Arctic, are somehow involved in the project management. Just how to do this is unclear if these companies are not also equity owners.

Can the project withstand competition?
There is no doubt that there is formidable competition among world LNG suppliers for any market opening in Asia, and that the need to build the 800-mile pipeline is a disadvantage for Alaska. The most serious competitors are the new shale gas export plants on the U.S. gulf coast, who can tie into existing pipelines and access gas from the large domestic supply, which is now very inexpensive. Gulf coast LNG suppliers will be able to land their product in Asia for about $9 per million British Thermal Units (mmBtu is the international energy unit used in international energy transactions, and it is equal approximately to the U.S. standard unit, one thousand cubic feet, or mmcf).

AGDC argues that the disadvantages of the pipeline are overcome by the shorter shipping distance from Alaska to Asia, which is about one-third the distance from the U.S. gulf and with no Panama Canal transit fee. Alaska has the advantage, however, of an assured gas reserve that could be made available at a long-term price that can be locked in by contract, compared with gulf coast competitors who are subject to variations in U.S. domestic gas prices. These are low now but they were very high in recent years. The potential for more stable pricing was mentioned by China Investment Corp., one of the potential investors, in its statement when the agreement was signed Nov. 9. While the North Slope gas producers would negotiate their own gas sales agreements they would no doubt see the advantages of this approach, but the state itself owns about one-fourth of the North Slope gas as its royalty and tax share of production and is in a key position to influence commercial terms.

AGDC foresees possible $1/mmBtu “netback” gas value
On a straightforward comparison AGDC feels it can land Alaska LNG in Asia for a price equal to or below U.S. gulf competitors, or $9 per mmBtu, mainly because of the shorter shipping. However, after the expenses of the pipeline and LNG shipping are paid from a hypothetical $9 per mmBtu sales price, the “netback” value of the gas on the North Slope would be about $1 per mmBtu for the gas supplied by the producers and the state. Whether this is enough for the producers is unknown but this must be weighed against what alternatives there might be for the gas, which are few.

A $1 per mmBtu price would translate to $1 billion per year paid for the gas, of which the state share would be $250 million per year, or one fourth. AGDC points out that this would increase substantially for the state and producers once the debt on the project infrastructure is paid, which is estimated at 25 years. After that is paid the payments for gas would be several billion dollars a year, AGDC has said in briefings. At that point, once the infrastructure is paid for, the Alaska LNG Project will be very competitive against international competition. When this is combined with the large “upside” potential for new gas discoveries – geologists estimate as much as 100 trillion cubic feet of conventional gas could be discovered once gas exploration begins – the Alaska project is very attractive. The 35 trillion cubic feet (tcf) of proven gas reserves occurred as a byproduct of oil exploration and discovery.

What could go wrong?
There are still challenges. One is still the risk of cost overruns and the problems of managing construction of such a large project. One issue that will have to be resolved early in the commercial negotiation is who carries the risk of non-completion or a delay, or added costs, the China partner or Alaska? Secondly, where will the 25 percent equity investment come from? The assumption is that China Investment Corp. would make an equity investment but AGDC has said that Alaska will maintain “control,” presumably 51 percent of the equity. If the 25 percent equity requires $10 billion, what Alaskan entity would invest 5 billion? AGDC? If so, could that agency issue revenue bonds to raise funds (it has bond authority)? Would bond buyers require the Permanent Fund or, more likely, some of its earnings, to guarantee the bonds?

There is also the danger that China itself may switch course. Alaska’s LNG project is not the only place where Chinese energy companies and banks are investing. They are in projects on the U.S. gulf, Australia and most recently in Russia’s Yamal LNG project, which will soon be shipping LNG to Asia and Europe through Arctic waters.

Since China’s big energy companies and banks are basically under government direction, if one of these projects looks more attractive than Alaska, and if Alaska LNG appears to have more risk, it’s plausible that China could change course. Alaska is still not insulated from competition.

Tim Bradner is co-publisher of the Alaska Economic Report and Alaska Legislative Digest

Fishing Industry Update

Alaska’s commercial fishing industry is very important to the health of Alaska’s economy. The industry has seen a decrease in jobs for the past two years. Even with the decreases the past two years, employment is still above the historic average. The preliminary numbers for 2017 look good, and suggest an increase within the salmon fisheries this year. Other catches appear to be down in 2017. This would be good news for a portion of the industry that has taken a hit in the past few years.

Salmon harvesting is the majority of commercial fishing jobs in the state and lost 6.4 percent in 2016. Groundfish (walleye pollock and Pacific cod) makes up nearly half of the state’s catch value and is the leader for poundage from Alaska fisheries. Even though groundfish poundage is high, salmon has a higher return per pound. In 2016, groundfish accounted for 88.3 percent of Alaska’s total catch, but only 48.2 percent of the gross earnings.

Crab fisheries were similar to salmon fisheries in that they saw growth through 2014 and have now declined in employment. It is currently at its lowest level since 2009 and below the 10-year average.

Southeast Alaska continues to have the highest percentage of fishing industry jobs in Alaska, followed by Southcentral. In 2016, Southcentral, which includes Prince William Sound and Cook Inlet, salmon fisheries and halibut recorded the second highest year for total employment.

More details on Alaska’s fishing industry can be found at http://jobs.alaska.gov/seafood/

 

The Mat-Su Economy

In a recent issue of Trends, the Alaska Department of Labor and Workforce Development highlighted the growth in the Mat-Su economy. The borough has seen a large increase in population, while the state saw a modest growth. Since 2010, population in the Mat-Su has grown by 15 percent, which is much higher than the 4 percent that was seen throughout the state in the same time frame. New home construction is also strong and even during the state’s recession, the Mat-Su saw job growth.

The Mat-Su Borough is now the 2^nd most populous borough, surpassing Fairbanks in 2015. It is also the only other region other than Anchorage with more than 100,000 people. The borough is quite large and its three incorporated cities, Palmer, Wasilla, and Houston, only account for 17 percent of its population. There are 26 other unincorporated communities that make up the rest of the borough.

Housing prices make the Mat-Su Borough very attractive and is one of the reasons that many people have moved out to the Mat-Su while continued to work in Anchorage. In the first quarter of 2017, the average price of a single-family home in the Mat-Su was $283,156. This is nearly a third less than the average home in Anchorage. For those who live and work in the Mat-Su, houses are no more affordable than they are in Anchorage. There are lower wages in the Mat-Su, so workers who choose to live and work in the Mat-Su face the same challenges as they would if they lived and worked in Anchorage. The savings comes if a worker is willing/able to make the daily commute into Anchorage. There are also many people who live in the Mat-Su, but work on the North Slope. Only 56 percent of Mat-Su residents also work in the Mat-Su.

There has been slight growth in the Mat-Su in the past few years, even with the recession. In early 2017, employment grew by a half a percentage point, which is down from 2 percent the year prior. The unemployment rate has begun to rise in the Mat-Su, but at a slower rate than other places in Alaska. There is a diverse mix of industry throughout the Mat-Su. Government employees account for 22 percent of the workforce, while the rest are spread fairly evenly throughout other sectors.

The Mat-Su Borough seems to be avoiding most of the signs of recession, but the true extent of the State’s recession won’t be seen until the full 2016 and 2017 numbers are available.