By: Mark Edwards – EVP, Chief Credit Officer & Bank Economist
Each year, Northrim Bank publishes the Alaska Economic Update. It is an opportunity to review the past year as well as look forward to the current year in regards to oil prices, jobs and housing. We will break the report into four sections for the blog. Once all have been posted, we will post the full report in our ‘Resources’ section for your convenience.
The Alaska economy has been through three consecutive years of a mild recession. There is hope that 2019 will be the year where we begin to grow again and add jobs. A positive indicator occurred when the State Department of Labor reported growth of 500 jobs in January compared to January of 2018. This is the first month of year-over-year increase in employment since September of 2015. The Department of Labor forecasted an increase of 1,400 jobs, or 0.4% growth for the entire year. They expect the major drivers of job growth to be military, oil & gas activity and tourism.
The wildcard in this forecast is the outcome of the state government budget debate in Juneau. The Governor has proposed large cuts to government spending in the operating budget and large increases to the Permanent Fund dividend to compensate for reductions made by the prior administration. An apparent majority of legislators are opposed to the Governor’s budget and prefer a more measured pace to cuts. Conversation has begun again about broad based sales or income taxes to help fill the budget gap. Each of these options will undoubtedly affect the economy in different ways across regions of the state, industry sectors and income classes.
Responsible natural resource development has been, and continues to be, the foundation of the Alaska economy. Royalties and taxes from past projects are the primary reason we have been able to adequately fund government, pay $23 billion in dividends to residents and still have over $60 billion in savings accounts. We need to take the necessary steps to balance the government budget, but we cannot lose focus on helping a number of world-class resource projects advance. This will stimulate new jobs, private sector investment, personal wealth creation, and tax revenue to help fund government.
Oil Prices and Production
Alaska North Slope (ANS) crude oil prices have trended higher over the last two years. The recent low monthly average was $30.22 in January of 2016. Oil prices moved higher throughout 2017 and reached a monthly average high of $80.03 in October of 2018. ANS prices have moderated since then and averaged $68.90 for the month of February 2019. The State Department of Revenue has forecasted an annual average ANS oil price of $67.98 per barrel in fiscal year (FY) 2019 and $66 per barrel in FY 2020.
Alaska’s crude oil production averaged 540,500 barrels per day (bpd) in FY 2017. This was an increase of 9,300 bpd over the previous year and the second year of production growth. This two-year positive trend reversed slightly last year when total output declined 1.2% to 534,000 bpd in FY 2018. The State Department of Revenue forecasts production on the North Slope to decline in FY 2019 by 1.3% and then rise by 3.5% in 2020.
The low price environment experienced between 2015 and 2017 caused companies to cut back on spending as certain projects were no longer economically viable. This led to a reduction in State revenues and a loss of thousands of high paying oil and gas related jobs.
Federal Support for Resource Development
The recent comprehensive change to the U.S. tax code includes a provision opening the coastal plain of the Arctic National Wildlife Refuge (ANWR) for oil and gas exploration and development. There will be at least two large lease sales in ANWR prior to 2028 and 50% of the federal royalties will be provided to Alaska.
There is also renewed optimism for future natural resource development in Alaska due to executive orders supporting domestic energy independence and reducing regulatory burdens. Specifically, there have been reversals of federal positions pertaining to off-shore Arctic oil exploration and regulation in the Beaufort and Chukchi outer continental shelf and climate change policy.
New Oil Prospects
ConocoPhillips has advanced four large-scale developments in the National Petroleum Reserve – Alaska (NPR-A), which is west of Prudhoe Bay and the Trans-Alaska pipeline (TAPS). Greater Moose’s Tooth (GMT) 1 and 2, CD-5, and Willow are all planned to connect through pipelines via Alpine to move the oil east back to TAPS. GMT-2 is under construction this winter and could produce up to 40,000 bpd starting in 2021. GMT-1 has just begun production at about 3,000 bpd and is projected to reach peak production at 30,000 bpd. CD-5 is producing approximately 37,000 bpd, far beyond the 16,000 bpd that was originally forecasted. Willow is the largest find in the area. Discovered in 2017, it is expected to produce up to 100,000 bpd starting in 2024 or 2025. It will require the investment of $2 to $3 billion, including the construction of a new fluid processing facility. Together, these projects are creating thousands of construction jobs, hundreds of permanent positions, and $5 to $6 billion in direct investment. Royalties and taxes also provide significant revenues for Alaska Native Corporations, and local, state and federal government. The expansion of infrastructure further west improves the economics of other exploration targets in NPR-A.
Australian company Oil Search is moving closer to developing the Pikka field into what could potentially produce as much as 120,000 bpd. Fiord West is a series of new wells northwest of Alpine expected to come online in 2021 and produce an estimated 20,000 bpd. It will use improved technology of an extended reach drill rig to reduce the surface impact of the project.
In the next post, we will have an update on the US economy, tourism and military issues.
Written by Mark Edwards, EVP Chief Credit Officer and Bank Economist with Northrim Bank. He was an adjunct professor of economics at Alaska Pacific University. Mark served the State of Alaska as an Economist in the Department of Commerce and the Department of Revenue, and as the Director of the Office of Economic Development. He has a B.A. in Economics from the University of Virginia and a Master’s Degree in International Business from the Thunderbird School of Global Management.
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