Tuesday, December 20, 2011

Year in Review: Oil kept Alaska going

Tim Bradner
Alaska Journal of Commerce

It’s been a good 2011 for Alaska, all things considering. We could be like most other U.S. states, bogged down in recession. Thanks mainly to oil, we’re not.

Looking at the good things first, the number of people working in Alaska continues to gradually increase. State government is wallowing in oil revenues, with North Slope crude oil prices surpassing $100 per barrel.

The state is spending that money, too. Multi-billion-dollar state capital budgets in recent years are helping the state’s construction industry. Despite the pinch of a high state petroleum tax, spending by the industry – and employment – continues to be strong, although the bulk of that is on maintenance, not projects that will produce more oil.

Beyond this and possibly into next year, however, there could be trouble brewing for petroleum. The combination of a steady 6 percent annual decline in production and 10 percent or more increase in the state budget means that big cutbacks in state spending are on the horizon unless there are very large new discoveries of oil very soon on state-owned lands.

Still on the oil front, a positive note is a surge in new exploration drilling on the North Slope this winter, which is reassuring after several years of low activity. But a cautionary note is that most of the exploration is being done by one company, Repsol, and the state is also paying for a half or more of exploration expenses through an incentive program. Also, the exploring companies — including Repsol — believe any discoveries they make will be modest in size.

If Shell and other companies get the go-ahead to explore federally owned Arctic offshore waters the discoveries could be large enough to stop the decline of oil moving through the trans-Alaska oil pipeline, but they will not contribute to state revenues.

In Cook Inlet, explorers are finding new natural gas deposits, which geologists have predicted, somewhat allaying fears of a gas shortage in Southcentral Alaska. Two of the three new discoveries made in 2011 need to be fully tested, but even if modestly successful they will make a big contribution toward security of gas supplies.

Alaska’s other industries appear steady or growing.


Mining is a real bright spot, with metals prices at high levels. Mineral exploration has increased sharply and several major new mines are in advanced stages of development planning, among them the big Donlin Creek gold project near the Kuskokwim River and International Tower Hills’ gold project near Livengood, north of Fairbanks. These projects haven’t been given approval by their owners or government regulators, but things are looking good for them.

Work also continues on the big Pebble gold/copper project near Illiamna. It will still be several years before a development decision is made, but if Pebble, which is a very large deposit, becomes a mine it will be a major economic boost to the state and Southwest Alaska, an economically depressed region. People in some local communities have concerns over environmental effects of the mine, and state and federal regulatory agencies are certain to give the project applications a through review when they are made.

New mine development will have positive economic benefits to the regions in which the mines are located, and operating mines make substantial and solid contributions to local government revenues if the mines are located within municipalities. However, mines cannot afford to pay the kind of taxes to the state government that oil producers pay.


Tourism was better in 2011, back on the growth track after a sharp dip in 2009 caused by the national recession. Visitor numbers were up for cruise visitors, which is the engine that drives much of the Alaska tourism industry, and for independent travelers who typically fly to Alaska and make their own tour and hotel arrangements.

The visitor industry is highly seasonal and while it makes a nice contribution to local employment and municipal revenues, the industry is always subject to the uncertainties of the national and worldwide economy. There is also formidable competition from other tourist destinations including other states, which are easier to reach, and although Alaska has always had an allure pocketbook realities often have the final say. Costs for tour operators, particularly fuel, are also high in Alaska.

Fisheries and seafood

Fisheries, one of Alaska’s traditional industries, are growing. There was a good salmon harvest in 2011 and salmon prices are up significantly, which translates into more income for salmon harvesters and more shared fisheries tax revenue for coastal communities. The offshore ground fish industry appears stable. This industry, mostly involving the harvest of pollock and cod, works in federal waters off Alaska’s shores are relies on shore-based infrastructure and support services in coastal communities.

Fish harvests are subject to the uncertainties of nature, but Alaska fisheries regulators and their federal counterparts in the big offshore fisheries have good reputations for strict management to maintain the biological health of the fisheries. The numbers of fish caught will vary from year to year, sometimes in big swings, but there will always be fish.

The increasing demand for Alaska’s seafood is impressive. Domestic and international buyers seem to have really caught onto consumers’ interest in wild-caught fish, which are free of chemicals and contaminants found in many farmed fish, and this has helped push demand, and prices, upward. The surge in sales of fresh salmon from Alaska during the harvest season is a result of this trend.

Also, the economic growth in big emerging markets, particularly China, has led to a desire for more protein in diets, which has also pushed up demand for lower-value Alaska fish like pink salmon. Pink salmon prices are at high levels this year, and much of the harvest is being exported to China.

Federal spending

A major worry on the horizon for Alaska, however, is the real possibility of big cuts in federal spending. Money from the federal government, for military bases and a plethora of programs, constitutes about a third of the state’s economy (oil accounts for another third and everything else fills in the final third), according to University of Alaska studies.

As the national government deals with its deficits, cuts in spending are almost sure to be part of the agenda and Alaska will feel this more than elsewhere because the federal government presence in Alaska is bigger, on a proportional basis, than in most other states.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

Read more: http://www.alaskajournal.com/Alaska-Journal-of-Commerce/AJOC-December-18-2011/Year-in-Review-Oil-kept-Alaska-going/#ixzz1h42E4dIx