a bright future …but are we prepared? - southeast conference 23 2018...2016. 2017. 2018. state...

ALASKA’S ECONOMY

A bright future …but are we prepared?

Mike Navarre, CommissionerDepartment of Commerce, Community, and Economic Development

Pat Pitney, DirectorOffice of Management and Budget

DCCED’s mission is to promote a healthy economy, support strong communities, and protect consumers in Alaska

Commerce, Community & Economic Development

What’s happening in our economy?

Does Alaska need a fiscal plan?

3

The Alaska Economy

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP

(Mill

ions

)

Nominal GDP of Oil and Gas industry in Alaska, 1997-2015

Oil and Gas GDP has grown, but is volatile

5Source - US. Bureau of Economic Analysis

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP

(Mill

ions

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Nominal GDP of All Other (non-petroleum) Private Industries, 1997-2015

Other private sector industries growing steadily

Source - US. Bureau of Economic Analysis

Mining (except oil and gas) Education, health care,

social assistance Other services Arts, entertainment,

recreation, accommodation, food Professional and business

services Finance, insurance, real

estate, rental and leasing Information Transportation and

warehousing Retail trade Wholesale trade Manufacturing Construction Utilities Agriculture, forestry, and

fishing

GDP - OIL AND GAS

UNRESTRICTED PETROLEUM REVENUE

UNRESTRICTED GENERAL FUND REVENUE

GDP - ALL OTHER PRIVATE INDUSTRIES

050

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1975 1985 1995 2005 2015

GDP/

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The Disconnect

Our economy is diversifying –

but our revenues are

not

The Disconnect

7Source - US. Bureau of Economic Analysis, Legislative Finance

We don’t need a fiscal plan because….

“The status quo is okay, oil and gas will save us”

“Cutting government will save us”

Let’s review these statements

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Misconceptions

Can’t we just wait on oil and gas development?

orOil price increases?

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Good news in oil and gas

Modest increases in productionNorth Slope oil production forecast in 2018 at 533,000 barrels/day — up for the third year in a row

NPR-A beating expectationsConoco beat its flow projections at CD5 within NPR-A

New prospects on the horizonConoco’s Greater Mooses Tooth start-up late 2018. ConocoPhillips at Willow, Caelus Energy at Smith Bay, Armstrong, Repsol, Oil Search at Pikka & Nanushu

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Maybe even better than good

ANWR PotentialFirst ANWR lease sale could occur by 2021-2022

North Slope future looks brightWith more leasing in NPR-A, plus ANWR, plus new discoveries west of Prudhoe Bay, the North Slope has decades of production potential

LNG ProjectThe long-awaited North Slope gas line project could add to Alaska’s success stories in the 2020s

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Maybe even better than good

4. ANWR PotentialFirst ANWR lease sale could occur by 2021-2022

5. North Slope future looks brightWith more leasing in NPR-A, plus ANWR, plus new discoveries west of Prudhoe Bay, the North Slope has decades of production potential

6. LNG ProjectThe long-awaited North Slope gas line project could add to Alaska’s success stories in the 2020s

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Alaska’s Competition

Active oil and gas wells February 2017

Source: Washington Post, February 2017 BBOE estimates- ConocoPhillips

PERMIAN BASIN50-115 BBOE

BAKKEN20-40 BBOE

EAGLE FORD35 – 60 BBOE

MARCELLUS>400 TCFG

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Oil Production by Geologic RegionMillions of barrels of oil production per day, 2007-2017

Source: Washington Post, February 2017

15Source: U.S. Energy Information Administration

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2000

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10000

12000

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May

-08

Oct

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Mar

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Jan-

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Jun-

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Nov

-10

Apr-

11

Sep-

11

Feb-

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Jul-1

2

Dec-

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May

-13

Oct

-13

Mar

-14

Aug-

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Jan-

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Jun-

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Nov

-15

Apr-

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Jul-1

7

Dec-

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U.S. Crude Oil ProductionThousand barrels of oil per day, 2007-2017

Alaska Crude Oil U.S. Crude Oil Excluding Alaska


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Are we competitive?

Sources: Alaska Department of Revenue Fall 2016 Revenue Source Book, Rystad Energy UCube

Production costs per barrel

Can we rely solely on oil and gas?

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Production Forecast: ANS History and Forecast by Pool

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How does Alaska stack up?

From an investors perspective

Uncertainty is the enemy of investment

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– Mouchine Guettabi, PhD, ISER (February 2018) What do we know to date about the Alaska recession and the fiscal crunch?

Private Construction spending in 2017 is supposed to be around 4 billion dollars. Using the 5 to 15%

estimated by Jens (2013), we would conclude that the direct effects of policy uncertainty is costing

the state somewhere between 200 and 600 million in private capital spending. The decline in spending due to policy uncertainty would indicate

that waiting is not a costless option.

“”

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There are many opportunities to invest our communities

GDP - OIL AND GAS




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1975 1985 1995 2005 2015

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The Disconnect



not

The Disconnect


“We don’t need a fiscal plan because….”1. “The status quo is ok, oil and gas will save us”

We have to compete with larger more accessible plays throughout the country and world. Our fiscal situation is a real and significant disincentive to investment, both within the oil and gas industry and across Alaska as a whole.

2. “Economic development will save us”..our economy is developing and diversifying.. our revenues are not.. and the state needs to be able to cover the costs associated with development

3. “Cutting government will save us” ..cuts have impacts.. While cuts are an important element.. Our problem is too big to cut ourselves out of 22


We have to compete with larger more accessible plays throughout the country and world. Our fiscal situation is a real and significant disincentive to investment, both within the oil and gas industry and across Alaska as a whole.

2. “Cutting government will save us”

3. “Cutting government will save

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Can’t we just cut expenses more?

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Unrestricted petroleum revenue

Non-petroleum unrestricted revenue (e.g. fishing, mining, motor fuel, alcohol, tobacco and

marijuana taxes, corporate income taxes)

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FY18 State Revenues

$1.801 billion

$536 million

Source – AK Department of Revenue

Cuts have real impacts on services

26Source – AK OMB

FY 19 UGF Spending

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K12 + University, $1,649

Health and Social Services, $1,141

Natural Resource Agencies, $142

Public Safety Agencies, $609Transportation, $180

Other Agencies, $217

Statewide items, $638

Capital, $189

PFD, $1,023

Unrestricted General Fund Spending: $5.8billion in FY2019

State spending – job cuts

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-2%-5%

-4% -1%

0

5,000

10,000

15,000

20,000

25,000

30,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

State government employment Statewide, July job counts, 2001-2018

Source: Alaska Department of Labor and Workforce Development, Research and Analysis Section 8/21/18

- There are 3,000 fewer state jobs (including University) in July of 2018 compared to July of 2014- State government employment has been reduced to 2001 levels

State Spending – capital budget

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$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2011 2012 2013 2014 2015 2016 2017 2018 2019

Capital Spending – FY11 to FY19Dollars in millions, UGF

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$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

FY2011 – FY2018 State Revenues and Expenditures (Excluding PFD payments)

UGF budget - excluding PFD Total UGF Revenue (with POMV in FY19)

Revenues

with FY19

POMV

Expenditures

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Draining Savings

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State funds matter locally

Municipalities and schools depend on state helpLocal Governments Fiscal Year 2017

Kenai Peninsula Borough $103 million

Fairbanks North Star Borough $155 million

Mat Su Borough $223 million

City and Borough of Juneau $59 million

Municipality of Anchorage $443 million

Total $ 983 million


We have to compete with larger more accessible plays throughout the country and world. Our fiscal situation is a real disincentive to investment.

2. “Cutting government will save us” Cuts have real impacts that must be weighed. Cutting government means cutting services, cutting local funding, and real economic impacts.

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The perfect solution?

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Legislature passed SB 26 Alaska Permanent Fund Protection Act

SB 26 reduces this year’s deficit from $2.4 billion to $700 million

S&P upgraded Alaska’s debt outlook from Negative to Stable on June 13

S&P stated that the upgrade reflects recent fiscal reforms utilizing the Permanent Fund Earnings Reserve

We have made progress

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Consumer confidence is looking up

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But the disconnect still exists

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– S&P Release 18-077 Global Alaska Credit Outlook

While the state has reformed its finances, we recognize the uniqueness of the state’s revenue

profile that makes it subject to economic volatility more than its peers, either from the price of oil or

investment returns of its Permanent Fund. . . . . . . The reliance on such economically

sensitive revenue will likely make it more prone to future fiscal pressure.

“”

GDP - OIL AND GAS




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1975 1985 1995 2005 2015

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The Disconnect



not

The Disconnect



Consumer confidence is up

There is still a gap remaining…

We need to start investing in Alaska…• Communities Schools• Transportation Public Safety

What does it all mean?

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Our future is bright…

…if we fix our flawed economic foundation.43

Alaska Department of Commerce, Community and Economic DevelopmentCommissioner Mike Navarre

[email protected](907) 465-2500

Office of Management and BudgetDirector Pat Pitney

[email protected]

45

For more information …

mailto:[email protected]

mailto:[email protected]

a bright future …but are we prepared? - southeast conference 23 2018...2016. 2017. 2018. state...

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