Is the Sun Shining a Little Brighter in Alaska’s Oil Patch?
From Alaskanomics: Friday, May 18, 2018
Credit: Wikimedia Commons
There is a little spring warmth, it seems, after a long winter. Several winters, in fact, of low oil prices and workforce cuts.
The job numbers have not yet ticked up and in fact they’re still slipping, though modestly now, after big cuts made in 2016 and 2017 as producing companies adjusted to the world of lower prices.
But prices are ticking up again. Even during the slump a number of new projects were being worked on and the brighter price outlook should cause some companies to push the green button on their projects.
It’s possible there could be enough new oil that the Trans-Alaska Pipeline System, now running at one quarter of its design capacity, could see an increase in oil throughput. But given that some projects could be delayed, not happen at all or meet expectations, it’s a safe bet there will be enough to maintain the current production for a decade or more.
This is significant because it wasn’t long ago that forecasters were predicting continued declines, to the point that the pipeline might be no longer economic in 10 years.
There’s other reasons for cautious optimism. One not widely recognized is that for the first time in years the Alaska Legislature wasn’t convulsed in acrimony over oil taxes. Some lawmakers did raise the tax issue, mainly to look at things not done in a big tax overhaul last year.
Despite that there was little appetite in most of the Democrat-led state House to revisit this issue, at least this year. The Republican-led Senate opposed this from the beginning.
But what’s also important is the Legislature’s action to use some Permanent Fund earnings to help finance the budget, and not turn to the oil companies once again, is a big shift.
This is a signal to new resource industry investors, whether in oil, minerals or fisheries, that if they’re lucky enough to develop profitable businesses after investing they won’t be heavily taxed the next time the state needs money.
Another underappreciated accomplishment of the Legislature this spring was in developing a solution, finally, to the festering sore of a billion dollars in unpaid oil tax credits to oil explorers, mostly small independents, who had been promised payment by the state.
One can argue whether the state’s oil tax credit investment program was a good idea. It involved state funds used to help fund exploration, but it did achieve its objectives in bringing new companies to Alaska and getting more wells drilled, and new discoveries made.
However, it was hugely expensive. In the end we just couldn’t afford it. But welching on commitments, even in our dire financial circumstances, became a black stain on Alaska’s reputation.
This spring the Legislature dealt with it with a plan proposed by Gov. Bill Walker to pay off the tax credit liabilities with bonds. Companies participating would accept a 10 percent discount in what they are paid, which is enough to cover the state’s costs of borrowing. State revenue commissioner Sheldon Fisher said this is a good deal for the companies because they get money right away rather than having to wait 10 years or so.
A feature of this is companies can get a lower discount, down to 5 percent, if they put the money to work in their Alaska projects within 24 months. Sheldon Fisher estimates this could result in over $700 million in new capital being deployed to restart projects stalled when the tax credits couldn’t be paid.
The companies can also get the lower discount by agreeing to a higher royalty on their state oil and gas leases, but state officials believe most will opt to put their money back to work in Alaska. If this plan works – there is a court challenge from an individual that must be dealt with – the stain on our financial reputation will be removed.
Added up, this paints a nice picture. We’re getting our financial house in order, and oil prices are up.
But things are still fragile. What’s causing the oil price rise is the agreement between OPEC and Russia to restrain production as well as continued Middle East tension. This could change quickly. Also, those prolific U.S shale oil producers will respond to higher prices, putting new oil on the market.
We haven’t closed the state fiscal gap, the difference between revenues and spending, although it is narrower. Even with this year’s financial restructuring a $700 million deficit remains for the next fiscal year, which begins July 1.
There are also upward pressures on the state budget that seem uncontrollable. Rising health costs, a problem almost intractable, along with rising costs in prisons and higher pension expenses combine to push the budget up. If the oil price rise sticks and oil production remains stable we could have more revenue, which would help this. But one should never try to predict oil prices.
The plan to use part of the Permanent Fund earnings has risks, too. A few bad years in financial markets could bring the wolf back to the door. The Legislature may be tempted to draw more than is prudent from Permanent Fund earnings.
We can’t even count on all those new oil projects. Most of these haven’t been sanctioned, or formally approved, by their developers. Some of the discoveries that seem very promising need more wells drilled to confirm the oil is really there, and some of these might not pan out. Even if companies move to develop new discoveries there could be unexpected technical problems in reservoirs that could impede production. It’s happened before on the North Slope and in Cook Inlet, more than once in fact.
Summing up, things are still fragile and there are reasons to be cautious. Still, there’s also lot of progress and a lot to be pleased with.
A little sunshine feels nice.