2010 not a bad year in Alaska

Posted: Sunday, December 19, 2010

If escaping the ravages of the national recession in 2010 and bulking up our state treasury reserves with billions in oil dollars are performance measures, it's been a pretty good year for Alaska.

There are plenty of challenges out there in the future -- declining oil production, uncertainties about a gas pipeline, the ever-rising state budget, but let's rejoice about the good things we have for now.

Few disagree that the state's economy is relatively stable. There's concern for things a few years out, but no hiccups appear on the near horizon.

Alaska's unemployment rate is the envy of most others states, except maybe North Dakota, which also benefits from oil.

Consumer spending appears stable, although retail sales are difficult to track in communities like Anchorage and Fairbanks, which have no local sales taxes.

Commercial banks report that business lending is down and commercial real estate is slow, but these are mainly a result of caution among business managers over the future of the state's economy, and that of the nation. There's no shortage of cash available for borrowing, bankers say.

Alaska Industrial Development and Export Authority, the state's finance and development corporation, reports that its business participation lending in partnership with commercial banks is on track with previous years, and that delinquencies on loans are at almost an all-time low.

North Slope oil field activity is down from previous years, as indicated by employment data, but robust maintenance programs on pipelines and field production facilities helped take the sting out of reduced drilling and other oil field development work. The oil producers say the state's high marginal tax rate on new oil projects acts as a disincentive for them.

However, three ongoing projects, development of the small offshore Nikaitchuq field by Eni Oil and Gas, BP's work in preparing to drill its offshore Liberty field, and ExxonMobil's development of a liquid condensate production project at Point Thomson, east of Prudhoe Bay, staunched the reduction in work for oil support contractors through 2010.

However, the high state oil taxes the producers complain about brought a flood of cash to the state. Pat Galvin, in his last revenue forecast briefing before ending his tenure as state revenue commissioner, said the state of Alaska is in the strongest financial position it has ever seen, with about $11 billion in liquid assets in two state reserve funds.

Of that, about $10 billion is in the state's Constitutional Budget Reserve and another $1 billion is in a separate account, the Statutory Budget Reserve. These funds are available for appropriation if oil prices suddenly drop and state revenues plunge.

These reserves, and an outlook for steady oil revenues over the next two years or so, led credit rating agencies to upgrade the state of Alaska's bond ratings to AAA, the highest level. That helps reinforce credit ratings for independent state corporations and for municipalities in Alaska. Even though the state is not legally obligated to their debt, the financial community feels that the state would not allow one of its corporations or municipalities to go insolvent.

The permanent fund, which is restricted in its uses but is still considered a source of financial security for the state, is back to nearly $40 billion in market value after having lost a third of its value in the recent economic meltdown. As it does every year the fund paid out several hundred million dollars in permanent fund dividends, stimulating the retail sector just before the holidays.

Alaska's military bases, another economic bulwark, seem secure, and with tensions heating up again on the Korean Peninsula and with China, the strategic importance of the Army and Air Force installations in Anchorage and Fairbanks is underscored.

In its other industries, Alaska had a banner salmon fishing year with harvest and prices both up, a happy convergence. Harvests and prices for pollock and cod in the big federally managed offshore fisheries are headed up again, more good news.

Tourism is rebounding faster than expected, and there will be more cruise ships headed back to Alaska in the next two years.

Mining is a real economic bright spot for Alaska. Even though mines don't contribute as much to the state treasury as does oil production, producing mines are major taxpayers in the municipalities where they operate and they are a source of good-paying local jobs.

Because of strong gold prices, the state's gold mines, led by the Fort Knox Mine near Fairbanks and the Pogo Mine near Delta, had good years. The Kensington gold mine near Juneau also began production in 2010 after a long development process, which included substantial litigation.

The Greens Creek Mine near Juneau and the Red Dog Mine north of Kotzebue had good years. Both are mainly zinc mines, although Greens Creek produces other metals, including silver, and Red Dog is a major lead producer as well as zinc. Red Dog received permission to develop a new ore body adjacent to its original mining pit, which secures its future until about 2031.

Usibelli Mine Inc., the state's only coal mine, had a banner year with record exports of coal as well as supplying power plants in Interior Alaska, the core customers for the mine.

Coal prices on Pacific markets are strong and the low sulfur content of Usibelli coal makes it attractive for customers because using it allows power plant operators to meet certain air emissions standards easier.

The prosperity of the state's mining industry is only setting the stage for substantial new growth in this sector. The large Donlin Creek gold mine on the Kuskokwim River is in advanced stages of development planning and may file for its long-awaited permits late next year.

Donlin Creek is on land owned by two Alaska Native corporations, Calista Corp. and The Kuskokwim Corp., and its development could result in substantial royalty income to Native corporations, as well as be a major source of jobs in a region that is now one of the state's most economically depressed.

International Tower Hills is exploring a large low-grade gold deposit north of Fairbanks that looks promising. If developed, it would be a large surface mine similar to the Fort Knox. It would become another major employer in the Fairbanks area.

A few years out, the large Pebble copper/gold deposit southwest of Anchorage could be developed into a major mine. Pebble faces environmental and political challenges due to its size and location in a sensitive area, but if a mine is developed it, would be a major employer in a region that, like the Kuskokwim region near Donlin Creek, badly needs jobs.

The election of Gov. Sean Parnell to his first full term as governor -- as opposed to being a fill-in after Sarah Palin resigned -- has created some optimism.

Parnell served out the remainder of what would have been Palin's first term as governor. Now Parnell gets his own term, and he has a crack at another four years at the helm of state after he completes this term.

Parnell has already served about two years, so there is a possibility of 10 years with one governor and one administration. Regardless of how one feels about Parnell, a decade gives Parnell time to tackle some of the state's long-term structural problems, like oil decline and fiscal policy.

It creates a lot of stability for Alaska, a plus after the tumult of Palin's brief tenure.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

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