Alaska’s economy is based on a diverse array of sectors. No other state can boast the same mix of Native Corporations, fishing, air cargo, tourism, timber, mining and oil and gas. The economy remains concentrated, however, in the twin peaks of oil at 26% of the Alaska gross state product and government also at 26%. (1) Alaska’s economy experienced moderate growth in the 1990’s. The population increased by 14 percent between 1990 and 2000, to approximately 630,000. In 2000 per capita personal income, Alaska ranked 15th in the Nation. (2)
The major sectors of Alaska’s economy are:
Oil and Gas
Alaska currently accounts for approximately 18 percent of the daily US oil production. Department of Natural Resources estimates the state’s remaining recoverable reserves at 6.4 billion barrels of oil and 33.5 trillion cubic feet of gas.
North Slope crude oil production peaked in 1988 at 2.005 million barrels per day, and by 2000 had fallen to less than 1.0 million barrels per day. North Slope production has been on the decline since the peak, dropping an average of 5.6 percent per year through 2000. However, exploration and development programs and the adoption of advanced technologies, such as 3-dimensional seismic mapping, coiled tubing and directional drilling, have increased recoverable reserves at existing fields. The Dept. of Natural Resources estimates production will increase from 2002 through 2007, and daily North Slope production remaining above 1million barrels a day through at least 2010.
Natural gas being produced in conjunction with oil production is currently either used as fuel for North Slope operations and pipeline pump stations, or reinjected into the oil fields to maintain pressure.
Production from natural gas fields in the Cook Inlet Basin totals more than 200 billion cubic feet per year. This production serves the energy needs of over 400,000 people in the upper Cook Inlet, in addition to supporting the export of LNG to Tokyo Electric on long-term contract since 1969. Natural Gas is also use to manufacture ammonia and urea for export.
Since the establishment of military bases in the 1940’s, federal spending has been an integral part of Alaska’s economy. Although defense spending continues to be important, more than 70 percent of the almost $6 billion in federal expenditures in Alaska were for non-defense related purposes in 2000.
· Salaries and wages comprise about 23% of the 6 billion
· 55% is grant and contract awards
· 14% is retirement and disability payment
· other direct payments to individuals is 8%
Between 1999 and 2000, federal spending increased by approximately 13 percent. (3) Alaska’s total military population as of June 30, 2000 was 42,000 or nearly 7 percent of the state’s population. (4)
Fishing has long been an important industry in the state’s economy. According to the National Marine Fisheries Service Alaska supplied 48 percent of the commercial seafood landings and 98 percent of the commercial salmon landing in the United States. If Alaska were an independent country, it would rank 11th in the world in the volume of seafood harvests. (5) Although the fishing industry has experienced its ups and downs during the 1990’s it averaged 4 % of gross state product and was responsible for 7% of statewide employment. (6) Unfortunately for Alaska strong growth in the worldwide farmed salmon industry has caused major problems for the state’s natural or wild salmon fisheries.
Mineral production in Alaska reached $1.1 billion, in part due to the increased value of zinc. Development expenditures in 2000 increased to $137 million from $34 million the previous year. This is mostly due to expenditures at Red Dog, Greens Creek, Fort Knox and Pogo mines.
State and Local Government
During the 1990’s, state and local government accounted for 12 percent of gross state produce and 18.5 percent of Alaska’s employment. (7) The Alaska Permanent Fund Dividend pumps around $1.1 billion into the economy each year. The state’s unrestricted general fund budget is at $2.4 billion for the fiscal year ending June 30, 2002.
Because of Alaska’s size, isolation and dependence on natural resource exports, the transportation sector is particularly important. The percentage of private employees in the transportation sector in Alaska is twice as large as in the nation as a whole. Employment in the air transportation sector grew by 37 percent between 1990 and 1998 and accounts for more than 10,000 jobs. (8) Alaska’s location – equidistant between Europe and Asia – has made it an important international hub for airfreight. Ted Stevens International locate in Anchorage is the No. 1 airport in the US in the amount of freight landed. Stevens International is responsible for one of every 10 jobs in Anchorage. (9)
Tourism has seen rapid growth in the past 10 years. For example, from 1990 to 1998, summer visitors increase from 690,000 to 1,135,000. Tourists spend approximately $1 million in Alaska. The tourism industry generated an annual average of slightly less than 16,000 jobs in 1998. (10)
State Government-Fiscal Profile “The Gap”
In examining the state’s fiscal profile, three facts command overwhelming attention:
1) Alaska’s tax base is extremely concentrated – in fact, three tax and royalty payers are responsible for more than 75 percent of the money spent from the general fund.
2) The state is spending more money each year than it takes in as revenue and will soon reach the point where the Constitutional Budget Reserve (Alaska’s budget “savings account”) will no longer be available to balance the state budget.
3) The state has 23.5 billion dollars in a large savings account, the Permanent Fund, the principal of which cannot be spent but which has a very large earning capacity.
The narrowness of the state’s tax base is a result of the state’s reliance on oil and gas to supply almost all of the state income since the beginning of Prudhoe Bay production in 1977. In 1980 the legislature repealed Alaska’s personal income tax and gross receipts business tax. The state has no state sales tax or property tax, except for a property tax on oil and gas property.
Oil industry reliance worked pretty well for a number of years until 1988 when Prudhoe Bay production peaked and state revenue has been in decline ever since. In addition to declining revenue the state is subject to the volatility of oil prices. In the face of declining state revenue Alaska voters amended the constitution to create another reserve account to the Permanent Fund --- the Constitutional Budget Reserve. The CBR was funded with money form settlement of tax and royalty disputes with the oil companies---revenue owed during the boom decade of the 80’s.
The decline in state revenue is not due solely to declining oil production. It’s also a consequence of a provision in the state’s oil and gas production tax, called the Economic Limitation Factor or ELF, which lowers the tax rate on less productive fields. The idea hear is the less productive fields are more costly to operate, so a lower tax rate will keep old fields in production longer and encourage development of marginal fields. Beneficial to the state in the long run.
A bright spot on the state’s financial profile is its Permanent Fund. A constitutional amendment requires that at least 25 percent of the state’s oil, gas and mining lease bonuses, rental royalties and federal mineral revenue sharing are deposited into the Fund.
The fund has grown significantly over the years through its investment earnings. The current market value of the Fund, as of June of this year was approximately $23 billion. The fund expects to earn, on average, about 5 % per year after inflation.
According to the constitutional amendment the earnings of the fund may be spent for any public purpose. As a result the legislature established a dividend program to distribute some of the fund’s earning to Alaska residents. This year the dividend was $1,580.
Another bright spot is the state’s low level of debt. Bonding for capital projects during the early years of the pipeline, were timed to mature with the “Prudhoe Bay curve” such that as oil revenue declined, debt service also declined.
One consequence of the low level of capital spending is that the state is behind in building and maintaining many of the facilities needed by a growing state. In 1998 the Legislature commissioned the Deferred Maintenance Task Force that has issued a report recommending spending $1.4 billion on schools, the university, highways, airports, state ferries, harbors, water and sewer upgrades. About $200 million of these projects have been completed and additional projects totaling $641 million have been identified for future completion.
In summary, although Alaska has a reasonably strong economy, the state’s fiscal profile is in flux. This is not to suggest that the state is facing an insurmountable economic crisis—solutions to problems do exist.
Managing the Margins
Investment challenges in Alaska can be characterized by what Alliance contractors refer to as “managing the margins.” Alaska poses several challenges that exploration and production companies are not use to seeing in other oil and gas provinces around the globe.
Alaska reserves are about as far from markets as one can get. The transportation component from Pump Station #1 to the refinery per a barrel of oil (shipping and TAPS), is between $4 and $5. A module in the Gulf Coast might look much like a module at Prudhoe Bay or Alpine but, the logistical challenges and cost of transportation to Alaska exceed by far Lower 48 costs. A good example of logistical challenges and expense is the 22 – 24 weekly 737 round-trip flights between Anchorage and Deadhorse on Alaska’s North Slope.
Labor and construction costs in Alaska are significantly higher that Lower 48 costs and construction must typically take place in a 90 day window beginning with the construction of ice roads in January. Costs in Alaska can exceed Lower 48 costs by as much as 50% according to some Producers. Due to a lack of infrastructure and exploration in delicate areas, ice roads are constructed costing upwards of $50k to $60k per mile. These ice roads are constructed not only for exploration drilling but also pipeline construction.
Additional challenges unique to Alaska are also observed in industry interface and relationship with Alaska’s Native people. Subsistence hunting, Native culture and their traditional lifestyles must be considered.
For the past decade or more Alaska’s Permitting System has been in trouble, some say the Permitting System is broken. However, Industry has launched a new campaign that will coincide with a new Republican Administration and Republican controlled State House and Senate to fix the system. We in the contracting community are optimistic that positive change will take place.
Our goal: Update and streamline Alaska’s regulatory process without compromising environmental and safety standards.
Industry has identified five factors of an efficient and well-managed regulatory system:
1. Objective and clear standards of review
2. Reliable time schedules
3. Consistent and cost effective application
4. Implementation consistent with Alaska statutes and regulations
5. Policy set and directed by agency management
Three specific programs will be addressed:
1. Air Permits
2. Oil Spill Discharge Prevention and contingency Plans (C-Plans)
3. Alaska Coastal Management Program (ACMP)
Larry Houle is the General Manager of the Alaska Support Industry Alliance a statewide non-profit trade association whose 420 member companies and professionals derive their livelihood in Alaska’s Oil and Gas Industry. He can be reached at 907-563-2226 or via email at email@example.com