Alaska by the Numbers – October 2019

Here is your free monthly update on what’s going on in Alaska’s economy.

The Labor Market Keeps Improving

According to the Department of Labor numbers released last week, Alaska extended its winning streak to 12 consecutive months of job growth. The jobs count in September 2019 was a total of 2,000 jobs higher than in September 2018.

In addition, revised data from the department show that growth last month was better than first reported. August numbers now show an unreported increase from +400 to +2,200 jobs. Alaska is firmly out of the recession.

Alaska’s job growth is being anchored by an expanding oil and gas sector and increased construction work. The professional services sector continues to add jobs, a trend that began in April. The tourism industry continues to rise, along with the mining, fishing, and transportation sectors. And, despite cuts to Medicaid, the healthcare sector is still swelling so far.

All of these growing sectors more than offset the 500 lost jobs in the public sector stemming from $463 million of budget cuts this year. If only someone could have seen that coming…

Permanent Fund Earnings Are Behind Target

The Alaska Permanent Fund Corporation’s financial reports for August 2019 show a fund balance of $64.1 billion. That number already subtracts the $1 billion transfer for the PFD last month and another $1.4 billion of expected general fund transfers over the next 8 months.

Of that money, the legislature has immediate access to $14.1 billion (plus another $8.3 billion when the underlying assets are eventually sold). However, they have already committed to making $4.6 billion of that money off-limits by transferring it to the Principal account at the end of the fiscal year.

Therefore, when the next budget is debated, the legislature will have $9.5 billion (plus whatever the Fund earns over the next 8 months) to play with. The ERA will also show an additional $1.7 billion of unrealized gains assigned to the account.

Earnings so far this year have totaled $657 million. October was a flat month for the stock market. So, I don’t expect to see much earnings from equities in the next report. At this pace, the Fund is on track to earn about $2.5 billion in FY20. But, markets move quickly and are never predictable. The Corporation was projecting $4.1 billion of earnings this year.

ConocoPhillips Quarterly Report Shows Good News For Alaska

ConocoPhillips released its third-quarter earnings report this week. It shows that the company posted earnings of $312 million during the quarter. So far this calendar year ConocoPhillips has made $1.077 billion from its Alaska segment.

However, the report also shows that the company has reinvested all of those earnings in Alaska. So far in 2019, it has pumped $1.207 billion of capital investments into our state, with another quarter to go. That’s up $200 million from this point last year. All that extra investment means more jobs for Alaskans, more purchases from Alaska businesses, and more future oil production.

That’s all good news for Alaska!

A word of caution: Capital investments are not included in the net income figure because they are depreciated over several years. It would not be correct to say ConocoPhillips made $1 billion in “profits” by only looking at the earnings number. Nor would it be correct to say they “lost” money so far this year by subtracting capital from earnings. It would be even more incorrect to compare earnings between segments on a “per barrel of oil equivalent” basis. Financial statements are complicated and easily misunderstood. Simple statements based on them are often misinterpretations of reality.

Optimism on the North Slope Continues to Grow

Oil Search officially increased its projection of peak production from the Pikka play to 150,000 barrels per day once the field is fully developed. It has also accelerated the timing of production by sending pre-operation oil through the Kuparuk processing facility. The company is now projecting oil production to begin in 2022 at a rate of up to 50,000 barrels per day.

We are also likely to hear more good news soon. Oil Search is planning to appraise two additional areas in the “Pikka East Block” this winter. ConocoPhillips has seven exploration wells planned of its own. And several other players are on the cusp of sharing their excitement with the public. Stay tuned!

One company (Qilak Energy) was finally able to make its announcement last month. It has a potential way to move natural gas off of Point Thomson (which has the side benefit of increasing oil production by nearly 30,000 barrels per day). You can read about that here.

A Slight Upward Revision in ANS Oil Price

Alaska North Slope oil traded in a narrow window in October, with a high of $65.58 and a low of $59.95. The month averaged out at $62.83, down from $63.83 last month.

But, the $1 drop in ANS was mild compared to the $3 reduction in WTI and Brent crudes. This widening differential sheltered Alaska a little bit, although it is not immediately clear why that occurred.

Through the first four months of fiscal year 2020, the daily assessed value has averaged $63.42 per barrel of ANS oil. Depending on how things shake out over the next eight months, it looks like the final FY20 average price will land between $53.20 and $71.62.

The average outcome in simulated future prices works out to $62.43 per barrel. That is a slight upward revision from $61 last month – primarily from that widening differential.

As of right now, there is a 68% chance that the fiscal year will end with a number below the $66 per barrel forecast provided by the Department of Revenue in the Spring of 2019. So, it is prudent to set your expectations lower.

But, it’s too early to panic. Mounting evidence suggests that global oil supply is reacting to the fear of decreasing demand projections. Therefore, it is beginning to look like we are exiting the bottom of a commodity cycle.

I recommend waiting for a few more months before asserting that prices are heading lower, or that price pessimism is permanent. The balance point in the market remains around $65-$70 per barrel and deviations from that range should be temporary.

North Slope Production is Below Projections

According to AOGCC data, 14.3 million barrels of oil (475,610 barrels per day) were produced on the Alaska North Slope during September 2019. Alyeska Pipeline reports suggest production increased to around 501,000 barrels per day in October (official data comes in on a one month lag).

Through the first three months of the fiscal year, 41.3 million barrels of oil (448,679 barrels per day) were produced on the North Slope. That’s down from 42.1 million barrels (457,819 barrels per day) at this point last year (-2%). And, the preliminary October data suggests production stayed below last year (in part due to a power outage at Prudhoe Bay).

The biggest reduction comes from the largest field. Prudhoe Bay is down 27,765 barrels per day (-11.5%) on the year so far. The reduction is partly coming from the western side of the unit – with Polaris, Aurora, Borealis, and Orion all posting steep drops in August and September while facilities were down for maintenance.

A few fields are making up for the Prudhoe Bay shortfall. Colville River had a smaller seasonal maintenance cycle than last year, so its numbers are up. Point Thomson was shut down for the first part of last year, so even the disappointing 5,038 barrels per day last month was an improvement. Milne Point is benefiting from Moose Pad and advanced viscous oil recovery methods, posting gains from a year ago.

GMT1 wasn’t producing until October of last year. So, every barrel from that unit is an increase over last year. But, it is also about 10,000 barrels per day lower than where I expected it to be right now. After drilling four producers, the new oil pool has not added a well for several months. Two of those wells are very disappointing. As a result, production from the unit has averaged just 9,533 barrels per day so far this fiscal year.

With a full year in the book since sustained production began, the unit should be over 20,000 barrels per day right now. I have not been able to track down exactly why it’s not – but I’m waiting for a call.

Adjusting to changing circumstances is the hallmark of understanding where things stand and where they are heading. Here is what the updated numbers suggest:

With the first quarter disruptions, we now appear to be on track for 506,080 barrels of oil per day in FY20. That is near even with the 506,075 barrels per day in FY19. However, it’s 23,400 barrels per day below the last forecast published by the State.

We are Probably Going to Miss the Revenue Forecast

With oil prices and production levels both coming in below the state forecast upon which the budget was built, there is a growing concern that the deficit is getting bigger.

Without a doubt, we are on track to miss the $2.2 billion revenue projection. Right now, we are on track to come in about $200 million light. But, there are still eight months left in the year and a lot of remaining uncertainty.

With the data we have in hand, there is a 74% chance UGF revenues will come in low (an 82% chance if we assign no chance of an ANWR lease sale). And, there is a 54% chance we will need to approve another draw from the CBR (66% without the lease sale).

A New Service is on the Way

I love being able to provide this data-driven, non-partisan, analytical view of what’s going on in Alaska. So, I’m considering committing more time to do deeper analysis for you. But, time is money. And I can’t move in that direction without monetizing the effort.

If you enjoy my work, please let me know what you think. Is there something missing in the information landscape? Are there certain things you would like to receive more attention? What information would you be willing to pay for?

Shoot me an email, give me a call, or drop a comment. I would love to hear your ideas.