Juneau, Alaska

(907) 699-6788 ed.king@kingecon.com

Alaska by the Numbers – FY19 Closing Edition

Now that my work with the new administration is done, I’m back to providing you with some light reading. Here’s your monthly breakdown of the things that I’ve been watching in Alaska’s Economy. Although, seeing as today is the first day of the new fiscal year, this edition provides insight into how fiscal year 2019 wrapped up. Enjoy.

North Slope Production Declined 2.6%

Production numbers from the North Slope were a little disappointing this year. Well, at least if you were counting on the production forecast the state released in December. They had predicted FY19 production to come in at 526,800 BOPD. But, if you read my forecast, you would have seen this decline coming.

Total production on the North Slope appears to have totaled 184.8 million barrels of oil (506,405 barrels of oil per day). That figure is preliminary, based on AOGCC data through May and preliminary reports of TAPS throughput for June. Compare that to FY18’s posted production numbers of 189.8 million barrels of oil (520,153 BOPD) and you get a 2.6% decline.

By historic standards, a 2.6% decline is a good thing. The average natural decline rate of the North Slope has exceeded 5% per year and this year’s production level is about 85,000 barrels per day higher than we thought we would be back in 2012.

You will probably see other information outlets say production was more like 181.6 million barrels (497,565 barrels per day). That’s a pipeline throughput number, not a production number.

The throughput number is lower because Kuparuk restarted the injection of Prudhoe Bay NGLs this year. As a result, not all production entered the pipeline. So, the throughput decline rate is more like 4.4%. This reporting inconsistency is why I advocated for using AOGCC numbers before.

Just to do a little self-promotion, it turns out my forecast from November of 510,297 barrels per day was 99.2% accurate. That means I beat the state’s equivalent “official” forecast by 16,503 barrels per day (or more, if they intended to forecast throughput).

I’ll dig a little deeper into where the decline occurred in a future article, once all the official data is in.

Good News on the North Slope

Despite the small decline, there was some good news coming from the North Slope in FY19. ConocoPhillips was able to bring GMT1 online and is already producing 12,000 barrels per day (which should double over the next few months). They also sanctioned GMT2, advanced the Willow prospect, conducted some exciting exploration activity, and purchased the Nuna prospect from Caelus.

Hilcorp built the Moose Pad up at Milne Point, which is already producing 2,200 barrels of oil per day and slated to increase to 10 times that rate once fully drilled. They are also considering an expansion of their new polymer flooding project, which could provide another boost to the unit’s production rate.

Oil Search received its federal permit, and is inching closer to making an investment decision on the Pikka Unit (the buyout of Armstrong’s interests is a strong indication they will progress). The Liberty owners also received their Record of Decision and its owners should be just a few weeks away from sanctioning that project, allowing construction to start this winter. And, the Alaska LNG project received a draft EIS just last week.

Plus, a few new players have made the news. Pantheon Resources picked up a couple prospects. 88 Energy is planning some drilling. Jade is targeting the Point Thomson conventional oil. Glacier Oil had success in a new Badami well, which could be the start of something bigger. The Mustang project could be just days away from finally pumping oil. And much more.

Oil Prices Jumped All Over

ANS oil traded at an average of $69.46 in FY19, with a daily low of $54.19 and a high of $85.36 during the year.

The year started strong, mostly due to the expected impact of sanctions on Iranian supply. OPEC increased production to compensate for that lost production, but then the President issued waivers for several countries to continue their purchase of Iranian crude oil. The combination of extra OPEC oil, some supply increases in the shale patch, and the lack of expected Iranian disruption created an oversupplied market in October. Prices responded with one of the biggest and fastest corrections in history.

By January, oil prices began to recover as OPEC cut back on production and outages in Venezuela balanced the market. Oil prices continued to rise through April as the sanctions waivers for Iranian oil expired and the escalation of the Libyan civil war began to concern traders.

By May, a new fear took control of the oil traders – a slowing global economy. With US trade wars unresolved, and new fronts emerging, traders became concerned about the ability to hit demand growth targets. As economic data began to show the negative consequences of the tariff battle, fears were fueled and traders abandoned their long positions.

The combination of a productive meeting between the US and China over the weekend, and the extension of OPEC cuts being discussed today, are allowing traders to refocus their attention on Iran. ANS is currently trading as just under $70 a barrel again.

These competing tensions appear likely to continue through next year and is creating anxiety with commodity traders. A war in the middle east could send prices into the triple digits. Faltering demand and escalating trade wars could drive prices back toward $50 (or lower if China begins importing Iranian crude).

In other words, don’t trust any point estimate price forecasts right now. Nobody knows what will happen next.

Total Revenues Beat Expectations

When the FY19 budget was passed, the Legislature planned on spending $663 million out of the Constitutional Budget Reserve (CBR). That estimate was based on a FY19 oil price of $63 and production of 192 million barrels of oil.

The Department of Revenue ended up missing both forecasts by substantial margins. But, by missing them in opposite directions, they mostly cancelled out. The actual price came in $6 higher than forecast, while production fell 7 million barrels short.

As a result, the state received something north of $100 million in oil revenues beyond what it planned for. That money should be returned to the CBR soon. While I don’t know the exact number, my best guess is that the Constitutional Budget Reserve holds an accessible balance for FY20 of a little over $2 billion (with no planned draw right now).

Of course, that number may be over $1 billion higher if a reverse sweep is not passed during special session (by constitutional law, the balance of the of the general fund and its subaccounts get swept into the budget reserve fund at the end of the year, unless the fund is fully repaid or 75% of the legislature agrees to “reverse” the sweep back into the subaccounts).

Investment Earnings Were Scary, but Came in on Target

Equity markets were a roller coaster in FY19, and you can see the ride in the Alaska Permanent Fund earnings.

While we won’t have the official numbers from the APFC for another month (and those won’t be audited until September), we do have a pretty good idea of how things turned out.

By my count, the Corporation ending up earning about $3.8 billion (5.8% effective annual return) during FY19. After a great first quarter, things went really bad in the second quarter of the fiscal year. For a while, it wasn’t clear they would get back to even. But, a strong rebound in January put things back on track. Another scare in May put a question mark on the return, but a solid June return put things firmly in the black for the year.

By the way, the realized returns for the year imply a PFD calculation of just over $3,000 per person in October 2019. Although, that statute has not been followed for the last three years and is still a question mark this year. The legislature will be working on where to set the PFD during a special session beginning next week.

Our Economy is in Recovery

Fiscal Year 2019 ended with an uptick in economic activity. GDP and wage data each show a 4% gain year-over-year. Jobs numbers have beaten the previous year numbers in each of the last 8 months, the unemployment count continued its downward trend, and the unemployment rate is at its lowest point since December of 2007.

The unemployment rate now stands at 6.4%, well below the state’s historic average of 7.9%. If you’re curious why our unemployment rate is higher than the rest of the country, I wrote about that here.

As I predicted, Alaska’s jobs numbers have been recovering for several months now. We are firmly in an economic recovery period (although there is likely to be a dip in the next few months as the budget cuts take effect).

I expect this recovery to continue through next year as oil developments, military construction, healthcare and tourism growth more than offset the reduction to state spending.

Thanks for reading! See you next week.

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