Juneau, Alaska

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

Alaska by the Numbers – November 2019

November was a month of little change. In general, the markets turned slightly optimistic. That’s good news for Alaska in both the oil and investment side of things. Here’s a recap of where things stand.

The Stock Market Gained on Trade Deal Hopes

Equity traders saw a break in the onslaught of negative economic news last month. Fears of an imminent recession appear to by dying down a little bit on the trading floor. Some analysts are pointing to hopes that the end of the trade dispute with China is within sight to explain the change in tune.

Whatever the reason, the Dow jumped 3.7% in November. With 40% of the Permanent Fund invested in stocks, that means Alaska added about $1 billion to the public equities portion of the balance sheet.

The APFC financial report for October was released last week. It shows a fund balance of $64.8 billion as of Halloween day, and total earnings of $1.3 billion so far this fiscal year (plus whatever was added in November).

As things stand today, the fund appears to be back on track to hit its projected return of $4.1 billion, but is slightly behind its target return of 5% above inflation. Of course, a lot can change over the remaining seven months of the fiscal year.

The Oil Market Followed Suit, Posting a Slight Gain

Oil traders also reacted to positive economic developments. Fears of missing demand growth targets dissipated a bit as trade talks provided some relief. As the largest source of future demand, traders watch the Chinese economy closely.

It appears that some of those hopes helped oil prices over the last few weeks. Brent and WTI oil traded more than $3 higher than October. ANS posted a smaller gain of $2.14, as the increase in differential we saw last month closed again. Alaska crude is still selling at a $2 premium to Brent, which should continue as long a the sanctions on Iran are in place.

ANS averaged $64.97 in November and has now averaged $63.72 so far this fiscal year. Given where the futures markets are currently trading, it appears the FY20 average will land between $53.69 and $75.93 per barrel, with an average outcome of $64.93.

Fears of an Oil Supply Glut are Mounting

A lot of attention seemed to turn toward an upcoming oil supply increase recently. Several projects that were sanctioned before oil prices crashed in 2014 are just on the verge of entering sustained production. By some accounts, more than a million barrels per day of new supply is slated to hit the market within the next several months.

In addition, all three major oil forecasting agencies show significant gains in shale oil production from the US over the next year. With the markets already over-supplied, many analysts fear that piling on more unneeded sources will translate into a drop in prices over the next six months.

That risk is exacerbated by the fact that a few million barrels per day are already off the market due to sanctions on Iran and Venezuela. Should those sanctions be lifted, even more surplus oil would need to find a home.

OPEC Needs to Make a Decision Soon

Naturally, the world’s oil cartel can protect prices by making room for this new oil through production cuts. However, giving up market share to protect prices can only go so far. And, OPEC is already holding back a lot of production due to the growing US shale supply. When oil prices crashed in 2014, Suadi Arabia protecting market share was one of the primary causes.

Of course, they weren’t trying to sell part of their national oil company back then. Perhaps protecting prices is more important than protecting market share right now.

We won’t have to wait long to find out. OPEC is scheduled to meet in December to discuss its strategy. Early indications are that further cuts aren’t coming.

Low Investment Levels are Setting the Stage for the Next Rally

Regardless of how things play out this Winter and Spring, the next leg of the commodity cycle is already visible. It comes from the fact that oil reservoirs naturally decline as reservoir pressure is depleted.

With about 100 million barrels per day of global production, oil companies need to bring over 5 million barrels per day of new production online each year just to maintain current levels. In other words, they have to run as fast as they can, just to stay in place.

And so, when the market is over-supplied, it doesn’t require facilities to shut down. Balance is restored by simply putting down the checkbook for a few months. Since 2014, investors have put down their checkbooks. Reserve replacement is currently at a near-record low.

In addition, active rigs in Texas and Oklahoma have been falling for several months. The number of working rigs is down 25% since last year – as investors are hesitant to pump money back into these assets right now. Those rigs that are working are focusing a lot more on completing the backlog of unfractured wells (cutely called a “fracklog“). So, a decrease in production levels hasn’t been seen quite yet.

While there are plenty of resources to be brought online, investors aren’t likely to expand activity levels until prices rise. So, it’s starting to look like a timing issue could create a supply shortage a little over a year from now. That would mean a jump in oil prices followed by an increase in investment. And, any geopolitical tensions that disrupt supply could bring that window closer.

North Slope Production is Back to Winter Rate

North Slope oil production appears to have averaged around 518,000 barrels per day in November. At least according to throughput report from Alyeska. That compares to 538,130 barrels per day last November.

So far this fiscal year, 72.3 million barrels have been produced from the North Slope – which works out to an average of 473,014 per day. At this point last year, 74.4 million barrels had been produced (486,527 barrels per day).

Looking across the Slope, with the November data in hand, the average scenario now comes out to 505,319 barrels per day in FY20. Of course, that relies on some successful drilling that might not work out.

Mustang is Finally Pumping Oil

After a long and difficult few years, the first independent oil company attracted to Alaska by tax credits began pumping oil last month. This is also the first development made up of leases issued under the higher 16.67% royalty rate.

Congratulations to Bart Armfield and his team. And thank you for your hard work and tenacity. The Mustang project is expected to add over $400 million to the state treasury over its life, along with several jobs for Alaskans.

ANWR Lease Sale is Delayed – NPRA Sale is On Track

The Department of Interior wants to make sure they are doing everything by the book before they put the ANWR leases up for bid. So, out of an abundance of caution, the lease sale doesn’t look like it will happen in 2019.

The next step in the process is to issue a Record of Decision, which finalizes the National Environmental Policy Act process. From there, they will put out an expression of interest, allowing potential bidders to highlight what acreage they are interested in. Then, the agency will put out a 30 notice of sale.

So, it appears that we are still at least a few months away from the long-awaited opening of the ANWR Coastal Plain. But, it should still happen in FY20. Let’s just hope its worth the wait. There’s really no way to know how many bids the lease sale will generate. 

sn the other side of the North Slope, the NPRA is having a lease sale in December. As in the Department of Natural Resources for State-owned lands.

Alaska Jobs Are Up Again, and About to Climb Further

The Department of Labor released the October jobs numbers on November 15th. They show an increase of 1,800 jobs from last October, marking 13 consecutive months of job growth.

The construction (+400) and oil (+500) sectors are still showing the largest increases, with the hospitality, healthcare, and professional services sectors each posting gains of 300 jobs. Manufacturing (+200) and transportation (+100) are also up over last year.

State government jobs are down 500 from last year, largely due to budget cuts. Local government jobs are flat, and federal jobs are up slightly (+100), presumably due to US Census employment.

An increase in work happening on the North Slope this winter should result in a larger increase in oil jobs for the rest of the fiscal year (the increase should start showing up in January’s numbers). All indications still suggest the year will end with more jobs in FY20 than in FY19, despite the lost jobs associated with state budget cuts.

UGF Revenues Still Look Like They Will Come in Low

Given the oil prices and production levels observed so far this year – and given where the rest of the year appears to be headed – there is a 76% chance that the FY20 budget does not balance. There is also a 65% chance that additional funding will be required beyond the headroom allowed in the budget process.

Combined with early indications that a supplemental funding request is also likely, the FY21 budget process will be a challenge. The increase in FY20 spending along with the decrease in revenue will severely deplete the CBR.

With oil production projected to be relatively flat until 2023, additional revenues are not likely to manifest for a few years. Right now, it appears that balancing the FY21 and FY22 budgets will require finding over $3 billion – without any cash reserves other than the ERA to draw from. While this is not impossible, it will be a challenge. And it will almost certainly require the new legislative finance director to lead difficult conversations about the PFD and taxes.

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