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Shipping News: There’s an uptick in Alaska

SB21 and the transportation industry

Jim Jansen, chairman of Lynden, Inc.

Jim Jansen, chairman of Lynden, Inc.

Photo courtesy of Lynden

Over the past year, Jim Scherieble has been having the kind of problem that every business manager wants to have: almost too much business.

Scherieble is general manager of Kenworth Alaska, which sells and services the vehicles that do much of the heavy transportation and field work for Alaska mining, oil and gas industry, hauling, and shipping. After a series of slow years during the Great Recession, Scherieble saw truck sales double and then rise even more in just a matter of months. The trend continued into this year.

“Business is crazy right now,” Scherieble said in spring 2014. “I had to hire another salesman because my main salesman was swamped. I had the paperwork for twenty-eight truck orders piled up on his desk.”

The numbers bear him out. In 2009, 2010, and 2011, Scherieble’s dealership sold fewer than 50 trucks annually. In 2012, that number jumped to 108, which he attributes mostly to an improved economy and businesses upgrading their fleets, which had stagnated after an emissions regulation change spurred fleet changes in 2006, followed by the economic downturn.

Then came 2013 and business boomed. Scherieble places the uptick squarely on an oil tax revision passed by the Alaska Legislature in April 2013.

 

More Alaska Production

Governor Sean Parnell’s More Alaska Production Act, generally referred to as Senate Bill 21 or SB21, replaced the ACES system championed under Governor Sarah Palin. Implemented in 2007, ACES featured a complicated tax levy that began at 25 percent and a progressivity clause that raised the tax rate to more than 50 percent as oil prices rose. It immediately boosted state coffers, but oil companies said it ate too deeply into their profits when oil prices were high, which made them less likely to consider new investment in Alaska.

Critics of ACES said falling oil prices and declining production threatened Alaska’s long-term ability to provide services. Oil taxes and royalties make up more than 90 percent of Alaska’s budget.

Alaska oil production is only a quarter of its 1988 peak of 2 million barrels per day and is declining at a rate of 6 to 8 percent annually. Despite estimates that Alaska’s oil fields still contain billions of barrels of recoverable oil, production has been declining. Once the top oil producer in the United States, Alaska is now fourth—after North Dakota, Texas, and California.

When he unveiled SB21, Parnell said the only way to increase oil production in Alaska is to cut taxes. SB21 replaces ACES with a 35 percent flat tax and credits for production as incentives to encourage oil companies to invest in Alaska oil fields to increase future production. ConocoPhillips immediately announced plans to increase investment in North Slope oil fields, where it will add two more oil rigs, and other companies followed suit.

Scherieble’s business immediately felt the effects.

“In the first quarter of 2013, we sold twenty-six trucks and eight of them were Slope trucks,” he says. “Almost one hundred trucks were ordered after the first quarter after the oil tax passed. We sold four times as many trucks in the next three quarters as we did in the first quarter.

“Right now we have seventy-five trucks on order since January 1,” he adds. “That’s a 300 percent increase over first quarter last year. And forty-eight of them were Prudhoe trucks.”

Kenworth trucks are workhorse vehicles on Alaska’s North Slope oil fields, as well as throughout the state. Scherieble estimates most of the trucks on order now are destined for work on the North Slope.

“You’ve got everything from a tractor that will haul some kind of a tanker trailer or a material trailer like a side dump all the way up to a vacuum truck, a crane truck,” Scherieble says. “Some are bed trucks. They are the ones that move the real heavy loads. They winch it up and pull it up like a drill rig, and they haul this great big monster from field to field.”

 

Business Surge

In addition to truck sales, transportation companies around the state are reporting a surge in business relating to Alaska’s oil fields, and most point to passage of SB21 as the reason for the surge. Jim Jansen, chairman of Lynden, Inc., a shipping company that provides services around the world, estimates business in Alaska is up 10 percent.

“The uptick in transportation activity to Prudhoe Bay is a direct result of SB21,” Jansen says. “Not only is there more direct drilling activity, there is a renewed optimism that Alaska has reopened for business on the North Slope.”

Jansen says Lynden Transport and Alaska West Express, both owned by Lynden, have been extremely busy between Fairbanks and the North Slope this year. Alaska Marine Lines is moving record volumes of rail cars from Seattle to Whittier and rail cargo is way up.

“This volume is a direct result of renewed Prudhoe Bay activity, based on new commitments from the oil industry,” Jansen says.

Statements from oil company executives reflect that view. After SB21 passed, ConocoPhillips immediately announced plans to boost North Slope investments, noting it planned to allocate $1.7 billion more in capital projects in Alaska in 2014, compared to 2013.

Janet Weiss, BP Alaska president, told the annual meeting of the Resource Development Council that Alaska has taken “an important step toward an ‘energy renaissance.’ The passage of SB21 in the last legislative session signaled something important to industry: that Alaska wants to be a globally attractive place for investment,” Weiss states. “It’s already having a profound impact on the pace and scale of projects that BP, our partners, and the rest of the industry are pursuing on the North Slope.”

BP says it plans to add two drilling rigs to its Prudhoe Bay fields in 2015 and 2016 and boost new investment by $1 billion. That would result in thirty to forty new wells being drilled annually and an increase of about two hundred workers.

It is also considering investing another $3 billion to develop projects in the western part of Prudhoe Bay. That development could last for decades and provide thousands of jobs, Weiss says. SB21 also provided the momentum behind plans to develop the Sag River formation, which could provide 200 million barrels of new oil.

 

Feeling the Effects

Northrim Bank’s 2014 construction forecast shows Alaska’s oil and gas sector leading a construction uptick, accounting for $4.3 billion in new construction, up $1 billion over 2013. That means more jobs and more supplies, services, and equipment will be needed.

Alaska companies are already feeling the effects.

Scherieble added another salesman and then boosted the workforce at Kenworth’s two retail stores, one in Anchorage and one in Fairbanks. Sales increased 12.9 percent and he added an entire second shift to the Fairbanks store to meet demand.

“Our Prudhoe customers are telling us all equipment available is already rented or working,” Scherieble says. “They’ve got these big projects like Point Thomson and CD-5, and it’s stretching out the available equipment until we can get more up there next winter. We’re getting stuff in the body shop now to be shipped up to Alpine and Kuparuk.”

SB21 isn’t without its detractors, with some legislators calling SB21 a giveaway to the oil companies. They have succeeded in getting a ballot measure on the August primary, “Vote No on Proposition 1,” that would repeal the measure.

Repealing SB21 would be disastrous for Alaska, says Harry McDonald, managing director of Saltchuk, which owns Northern Air Cargo, Delta Western Petroleum/Inlet Petroleum, Totem Ocean Trailer Express, Foss Maritime, and Carlile Transportation Systems.

“Whether to vote ‘No’ on Proposition 1 or to go back to the old ACES tax law is really a citizen of Alaska issue, not an oil company issue,” McDonald writes in an email. “Oil companies can invest in many markets, but this is our home and we have the most to win or lose. I believe that people on both sides of the issue have the same ultimate goal, which is to maximize the return on our resource.”

McDonald says he believes a return to ACES would be short-sighted. While Alaska could get more money in the short term if oil prices rise, the long-term effects will be negative. As it is, oil prices have been declining.

“There is new enthusiasm on the Slope directly related to the new and more equitable tax system put into place as a result of the passage of SB21 last session,” McDonald says. “Most of the impact of the new law is yet to come: Projects take planning and time to implement. Rigs are not built in a day.”

Saltchuk employs more than 6,500 people, most in Alaska and the Northwest, he says. “Our long-term viability in this market depends on intelligent tax support to support long-term stability.”

 

More at Stake

While Alaska’s Department of Revenue forecasts are still showing a long-term decline in oil production, there is more at stake than oil. A healthy oil industry is necessary for a natural gas project because both use the same infrastructure, Jansen says.

“We’re just not going to have a gas line if we don’t have competitive tax rates,” he says.

“This oil tax reform battle is an Alaska issue,” says Jansen, co-chair of the Keep Alaska Competitive Coalition, Vote No on #1. “Oil companies can invest anywhere in the world, where they can get the best returns, and they do. Where do Alaskans go if we lose the industry that provides our jobs, pays 90 percent of our taxes, contributes to the Permanent Fund, and supports our charities?

“Alaskans have a much bigger stake in this vote than the oil industry does.”

For now, oil companies are looking to the future in Alaska.

In April, BP Alaska announced plans to sell interests in four of its oilfields to privately owned Hilcorp so it can focus on its Prudhoe Bay holdings and make progress on an Alaska LNG project.

The sale includes all of BPs interests in the Endicott and Northstar oilfields and 50 percent interest in the Liberty and Milne Point fields.

“There are some big benefits from this transaction,” Weiss states in a news release. “BP will be able to focus on maximizing production from Prudhoe Bay and advancing the Alaska LNG opportunity. Hilcorp takes ownership of two mature oil fields ready for new investment and activity, and it will operate a third field that is primed for accelerated production. And, the state gets another accomplished operator working the North Slope. Thanks to tax reform, Alaska is now on course for increased investment and production and even the possibility of LNG.”

Weiss credits the passage of SB21 for putting Alaska back on track for a long-awaited LNG project. Parnell came to an agreement with BP, ConocoPhillips, ExxonMobil, and TransCanada to tie a North Slope gas project to a Southcentral Alaska LNG project. The state of Alaska would have a 25 percent stake in the project, which would provide lower-cost natural gas for Alaskans, as well as exports.

The gas line would cost between $45 billion and $65 billion and could go online in the mid-2020s.

It will be years before any new development on the North Slope results in a significant production uptick, but Scherieble is hopeful that what he’s seeing now is just the tip of the iceberg.

“Transportation businesses are the first people that see things happening,” he says. “We’re probably at the very front of that because we’re ordering things that are going to be shipped at the beginning of the year. All of the things that we have on order now will be hitting Alaska in summer and fall for winter delivery.”

Julie Stricker is a journalist living near Fairbanks.

This first appeared in the June 2014 print edition of Alaska Business Monthly magazine.

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