Looking forward: 2011 economy in limbo

Posted: Tuesday, December 28, 2010

Expectation and apprehension: two words that say it all for 2011.

For Alaskans watching the state's economy as a whole, with all of its diversified industries, there are expectations of better times.

Those focused on the petroleum industry, which pays the bills for state government, are apprehensive.

The divergence is striking.

Tourism, fisheries, mining, air cargo, are all looking fairly good in the coming year. Alaskans working in oil and gas, for the producing companies or firms that do support work, are worried, however.

Their concern is over declining oil production, the downturn in drilling and exploration, and the political impasse in Juneau about easing the state's high tax rates on oil, which the industry argues is impeding new investment. All of that casts a gloomy spell.

Oil is important, accounting directly or indirectly for about a third of the state's economy, according to University of Alaska studies, but other industries employ a lot of Alaskans and here the news is better.

Fisheries are always cyclical, but 2011 looks to be on the upper end of the cycle. It looks like another good year for salmon harvests and markets, and prices, for salmon are continuing to hold firm.

See 2011, page A-3

For this Alaskans can thank Mother Nature and the wisdom of state fisheries managers for creating a sustainable resource, the bad luck of Chilean salmon farmers for a virus infection that impeded their production, and the weak U.S. dollar, which make Alaska fish inexpensive in export markets.

They can also thank the continuing efforts of the industry-supported Alaska Seafood Marketing Institute and the new efforts by regional marketing organizations, some just getting off the ground.

Efforts at quality control on the fishing grounds seem to be paying off, too. Fishermen get a better prices when their salmon are delivered in better shape.

The big groundfish industry, the pollock and cod fleet working offshore, can look forward to a better 2011. Harvest quotas will be up due to strict conservation measures by fisheries managers, and markets look good.

Crab fishermen will enjoy increased harvests of snow crab, but the high dollar Bristol Bay red king crab stock is in a declining trend and could see further cuts in allowable catch. Halibut fishermen will be hit hard by quota cuts as great as 47 percent in Southeast with stocks taking longer to mature to legal size.

Mining expectations

Mining is on a real roll. With gold prices at high levels times are good for the state's producing gold mines, large and small. The large producing gold mines include the Fort Knox mine near Fairbanks, the Pogo mine near Delta, and Kensington north of Juneau.

The Greens Creek mine near Juneau produces some gold and silver in its multi-metal ore, but zinc is also an important product for the mine, and zinc prices are better than they were.

Zinc is also produced at the big Red Dog mine north of Kotzebue, along with lead. Both metals are in concentrates being stored now at the Red Dog port, on the Chukchi Sea coast, to await shipment when the ice opens enough to allow navigation in 2011.

High metals prices have prompted a surge of exploration in the state, however, and Alaska is fortunate to have substantial amounts of land open to exploration and development, not only state-owned lands, but also private lands owned by Alaska Native corporations.

Minerals explorers face many challenges including high costs and uncertainties in federal environmental regulatory policies, but access to land is not a concern.

Several major mines are also in advanced stages of exploration and development. The large Donlin Creek project, which could become one the world's major gold mines if developed, is at an advanced stage of planning by its developers. Energy costs are a problem yet to be solved, but the companies hope to file for permits to develop the mine in late 2011.

North of Fairbanks, near Livengood, a major new gold deposit is being explored. If a mine is developed it could be similar in size to the producing Fort Knox mine.

The granddaddy of mines-in-development is the large Pebble project, southwest of Anchorage near Illiamna. If developed, Pebble would be one of the world's largest copper and gold mines.

A large amount of mineralization has been found at Pebble, but the project faces many hurdles including the high cost of building a mine and providing power.

There are political obstacles, too. The mine would be developed in the headwaters of important salmon streams, and a strong opposition has developed in communities in the region. There is support for the mine, too, because if developed it would be an importance source of jobs in an economically depressed region.

Tourism is on the comeback in 2011 after a dip in 2009 and 2010 that caused a real scare among Alaska businesses that provide support for the visitor industry. The economic recession caused a sharp downturn in visitors in 2009 and this, combined with a targeted state tax on cruise tourisms, caused cruise ship companies to cut back on voyages. This had a ripple effect in 2010.

However, a rebound in independent travelers in 2010 stopped the decline in visitors and restored confidence in the Alaskan visitor industry. Gov. Sean Parnell and the Legislature supported a reduction in the cruise passenger tax, and cruise companies recast their ship deployment schedules in response.

The renewed cruise ship traffic won't really be felt until 2012, but in 2011 the entry of a couple of new cruise ship companies, combined with expected strong numbers of independent visitors, partly a result of stronger advertising and promotion by the state and the Alaska tour industry association, should make for a decent summer season.

Pipeline pessimism

All of the upbeat vibrations in the state's economy are offset, however, by the downbeat feelings in the state's oil patch.

More than anything the mood is set by the uncertainty, and now pessimism, about a large natural gas pipeline project. The expectation was that TransCanada Corp. would make announcements at the end of December that it had signed agreements with gas shippers for capacity in its planned 48-inch pipeline from the North Slope. The pipeline company had hoped to have agreements but it now acknowledges this won't happen, at least by New Year's Day.

Alaskans now expect the same from the Denali pipeline group, TransCanada's competitor, that had hoped to have agreements signed by early March. Both groups held open seasons in 2010 to solicit commitments for pipeline capacity after making substantial investments in engineering and cost estimates, and both groups reported receiving several proposals for significant volumes of gas.

The proposals were conditioned on issues that apparently are still being negotiated. Whenever and if contracts are signed they will still be conditioned on a long-term fiscal agreements between gas producers and the state of Alaska, but the governor and Legislature will await the signing of the initial contracts before tackling this thorny issue.

Larry Persily, the federal gas pipeline coordinator, said he isn't surprised that the gas capacity negotiations are taking longer than expected due to the immense scope of the project, which could cost more than $40 billion.

However, Alaskans are worried about the growth of shale gas production in the Lower 48, which could compete with Alaska gas, and the current very low prices for gas. Given the current market environment they worry that the delay in getting signed contracts could signal that the giant project will go on the shelf once again.

TAPS worries

The continued decline in oil production and lack of new exploration drilling is another concern. In its latest forecast the state Department of Revenue reported that oil production from the North Slope declined 7 percent last year, although the decline is expected to soften to 4 percent this year.

About 650,000 barrels per day is now moving through the Trans-Alaska Pipeline System, on average and the revenue department expects this will drop to an average of about 611,000 barrels per day next year.

The producing companies say the amount of oil moving through the pipeline could drop to 500,000 barrels per day in three to four years, a point at which Alyeska Pipeline Service Co., the pipeline operator, acknowledges that there will be operational challenges for TAPS.

One hope for getting new oil into the pipeline, and one bright light for the industry, is for Shell Oil to make a discovery in the eastern Beaufort Sea, where the company holds federal offshore leases. Shell has been attempting to drill exploration wells since 2007, but has been stymied by lawsuits and regulatory delays.

The company is now guardedly optimistic that it may finally get permission to drill a test well next summer.

The area where Shell plans to drill, in Camden Bay east of Prudhoe Bay, is highly prospective. Oil discoveries have been made there in earlier drilling by Unocal Corp. and Arco Alaska Inc., but the discoveries were not large enough to develop with the technology available at the time.

Shell hopes to confirm there is enough oil there to develop, and will be able to take advantage of new technology and the industry's experience in building offshore buried pipelines in the Arctic. BP's buried pipeline to its Northstar field six miles offshore has operated successfully for almost 10 years.

Another advantage Shell has that Unocal and Arco didn't have before is established pipeline built 30 miles east from Prudhoe Bay to Badami, and that will be extended in 2014 to ExxonMobil's new gas condensate project at Point Thomson. Being able to use this pipeline greatly enhances Shell's position.

If Shell is given approval to drill and the well is successful, Beaufort Sea oil could be flowing into TAPS soon enough to avert problems the pipeline might experience from very low flows of oil.

It will take longer, but if Shell, ConocoPhillips and others are allowed to explore in the Chukchi Sea, more discoveries are likely. Bringing this oil to TAPS will require a pipeline across the National Petroleum Reserve-Alaska and the development of that infrastructure will make small oil deposits found in the NPR-A economical to develop. This will take years, however.

The current oil field operators, BP and ConocoPhillips, have hopes for further development of large deposits of viscous oil, like the West Sak deposit, and eventually heavy oil that are within the existing oil fields. This could amount of a substantial amount of new production, enough to stem the decline in oil moving through TAPS, BP Alaska President John Minge said at the Resource Development Council's annual conference in November. This could buy time until offshore oil can be brought into production.

ConocoPhillips agrees on the potential for viscous oil but its Alaska president, Trond-Erik Johansen, cautioned that modifications in Alaska's high taxes on oil are needed to make this development possible.

Gov. Sean Parnell is engaged in a review of the state production tax, known as Alaska's Clear and Equitable Share law, or ACES, but an effort to make substantial changes in the tax will meet opposition in the Legislature by lawmakers who crafted the current tax law in 2007.

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