Now that the holidays are over, it’s time to turn our attention back to Alaska’s financial problems. Here are some of the highlights of what happened in December 2019.
The Governor Released His FY21 Budget Proposal
The governor rolled out his proposed FY21 budget on December 11th. To the surprise of many observers, Governor Dunleavy did not offer any additional cuts in this budget. According to the OMB fiscal summary, the budget calls for $4,532,100,000 of UGF expenditures compared to the $4,533,800,000 that is approved for FY20.
Some speculate that flat funding signals a retreat brought on by the recall effort. Others assume the proposal is a gambit, shifting the unenviable task of budget cuts over to the legislature. Either way, it will make for an interesting session – seeing as there is not enough unrestricted revenue to cover the proposed unrestricted expenditures.
With the Constitutional Budget Reserve critically low, it seems unlikely that the legislature will draw it down much further (implying a much smaller PFD than the governor proposed).
One possible outcome is a prolonged battle over the right mix of tax variations, PFD changes, budget cuts, and savings draws. At the other extreme, it is possible to simply pass the governor’s proposed budget, use whatever revenues are left to pay the PFD (or break the POMV limit), and get out of Juneau in 90 days (and on to the campaign trail).
The more likely scenario is something in the middle with some changes to the budget getting a lot of attention. Although the budget total is flat, there are pieces within it that moved around. Most notable is $50 million of increased required payments on debts plus the following increments:
- $52 million increase to Corrections
- $12 million increase to Public Safety
- $10 million increase to Education
- $6 million increase to Veterans’ Affairs
Those $130 million of additions are mostly offset by a $25 million cut to the university and a $100 million reduction to the Department of Natural Resources versus this year (almost exclusively to fire suppression activity that will come back as a supplemental if we have another terrible fire season).
All in all, it is shaping up to be another 121-day session with debates about taxes, spending limits, and the PFD sucking all the air out of the room.
Oil Prices Continued Climbing
The price of Alaska North Slope (ANS) crude increased again in December, marking the third month in a row of upward trending prices. ANS averaged $66.96 last month (+$1.77), bringing the fiscal year to date average up to $64.17 through the first half of the fiscal year.
Optimism about the US/China trade dispute winding down held on through the holidays, providing analysts with some hope of higher demand growth in 2020. So long as the economy remains stable, it should support prices around $65-$70 from the demand side. However, there is little reason to believe demand will outpace expectations. Meanwhile, a slowdown in the global economy still poses a threat to the downside. Therefore, the risk-weighted demand-side outlook is still pessimistic in the near-term.
Oil Supply
On the supply side, OPEC+ agreed to another 400,000 barrels per day of production cuts during its December meeting. By making room for the anticipated additions, commodity traders became less concerned about a looming glut of oil on the horizon. Consequently, some supply-side pessimism was alleviated in December, allowing prices to inch upward.
The remaining question comes from the US midcontinent. Rig counts in the shale patch continued to fall in December, although the month did post one week of gains. The slowdown of activity in 2019 has been attributed to investors becoming impatient with continuous reinvestment rather than increasing free cash flow. That slowdown is already creating consequences in the Texas labor market (which may have a positive impact on Alaska’s) but is yet to result in reduced production levels.
As a result, the major oil production forecasting agencies have not reduced their outlooks quite yet. But traders appear to be unphased by the implications that such production increases would create. So far, futures markets do not seem to be pricing a significant oversupply into contracts over the next six months.
What’s Ahead
While some analysts see the shale slowdown as evidence of weakening resource potential, most believe it is a result of disappointed investors. From where things stand today, 2020 should be a year of consolidation in the shale plays. The first half of the year should have limited opportunities to break-out to the high-side, with ample choked supply and limited demand growth putting a ceiling on prices. The floor is lower, with uncertainty about the strength of the economy lingering and as threats of oversupply persist.
With an improved December number in the books, the price outlook for FY20 has increased this month. Model outputs now show the year averaging $66.38 +/- $7.
North Slope Oil Production is Below Expectations
Preliminary data suggest that 15.85 million barrels of oil moved down TAPS in December – an average of 511,411 barrels per day. That rate is about equal to the November numbers and down 2.2% from last December. The month saw the highest production day on December 2nd (522,996 barrels) and the lowest day on December 15th (498,544 barrels).
Turning to AOGCC data (which is reported on a month lag) pinpoints the sources of changes from last year. Looking at November 2019 vs. November 2018, production is down 12,392 barrels per day on the North Slope (-2.4%).
The Bad News
Prudhoe Bay is responsible for most of that, posting a year-over-year decline of 4.7%. Including the deeper maintenance cycle in the summer of 2019 than the one in 2018, the field is down 8.5% on the year so far. That number should get smaller as the year progresses, but PBU is likely to post a more significant decline in FY20 than expected.
Point Thomson is the other primary culprit of reduced throughput. After making substantial repairs in October 2018, Exxon was finally able to get production rates up to its 10,000 barrel per day target. The fix seems to have worked until May. From June to October of 2019, the operator could not keep rate above half its mark. The November data is even worse, showing just 1,263 barrels per day without any downtime.
The Kuparuk Unit posted a decline of 4.3% from last November but is supported by West Sak increases earlier in the year. Overall this fiscal year, the decline rate has only been 1,927 barrels per day (1.8%). Northstar and Oooguruk have also posted similar declines of 1,829 and 1,715, respectively. However, the numbers are starker in percentage terms (-17% each).
Other than Kuparuk, all of these numbers are lower than anticipated, which results in missing our production forecast to the low side and leading to further downward revisions. Our model is now showing an FY20 average production rate of 490,215 barrels per day (-3.1% from FY19).
Also contributing to that outcome is the poor performance at GMT1. While ConocoPhillips was expecting to produce over 25,000 barrels per day from the nearly $1 billion investment, it hasn’t achieved nearly that level of success. Now over a year since commercial production began, the field only produced 8,060 barrels per day in November – primarily from just one well. Production peaked at 12,526 in February 2019 – half what was expected. It is unclear exactly what went wrong, but this highlights the risk investors take and the importance of including uncertainty in statements about the future.
The Good News
Fortunately, there is some good news that is offsetting some of those disappointments. The Colville River Unit is currently up 4.8% over this point last year. Nikiatchuq has posted an increase of 4,285 barrels per day (+28.4%) in the first five months of the fiscal year – primarily due to the unexpected disruption last year that didn’t happen again in 2019. And Mustang has made its first production report to AOGCC (although the first production month averaged just 367 barrels per day).
More exciting is the increase at Milne Point. The addition of Moose Pad has pushed the Unit production up by 4,706 barrels per day so far this fiscal year. That number should grow as drilling continues. And this is hopefully just the beginning. Hilcorp plans to add another drill pad or two to the unit, as well as expand its successful polymer flooding project and heavy oil pilot. We are optimistic about what the success at Milne Point could mean to the future of Prudhoe Bay once the transfer from BP is complete.
Investment Revenues Are Back on Track
The Alaska Permanent Fund Corporation (APFC) November 2019 financial report shows a net increase of $900 million to the Permanent Fund last month – which puts the corporation firmly back on pace to hit its projection of $4.1 billion. Barring a significant market correction, it appears that the Permanent Fund will earn more than enough to cover the withdraws in FY20.
Through five months of the fiscal year, the APFC has earned $2.3 billion of the $2.9 billion scheduled to be withdrawn during FY20. Anything over $600 million of additional earnings over the next seven months will grow the fund (in addition to the royalty deposits).
The Alaska Permanent Fund Corporation (APFC) reported a total asset value of $67.5 billion as of November 30th, 2019. Subtracting accounts payable of $1.7 billion, the fund is currently investing $65.7 billion for Alaskans. Of that money:
- $41.7 billion is locked away in the Principle Account
- $4.6 billion is scheduled to move from the Earnings Reserve Accou
nt to the Principle Account in June. - $9.2 billion is appreciation on assets that would need to be sold before it can be spent
- $3.1 billion is set aside for use in the FY21 budget
- $7.1 billion remains available for appropriation (if the legislature decides to break the POMV limit)
Alaska’s Economy Continued to Grow
According to data released by the Department of Labor, Alaska posted another
The oil and gas sector continues to be the primary driver of job growth. But, those additions have roughly offset reductions in state government. Gains in construction, hospitality, healthcare, construction, and other sectors continue to pull Alaska through its recovery.
From a regional perspective, Anchorage and the North Slope Borough were the primary beneficiaries of the job growth in 2019. Juneau has not seen enough growth to offset the negative impact of the recent budget cuts.