Alaska Economic Outlook 2017

‘Bright, if…’

From the Editor

Happy New Year! We asked leaders across Alaska for their comments on the economic outlook for 2017, and the common theme is an optimistic outlook as long as there is proper legislative action taken and diversification of the economy. Alaska Business Monthly believes “Alaska Can Do It,” and we’re confident the business community will prosper. We begin the magazine with the 2017 Economic Outlook, which starts with an insider’s expertise, continues with comments from a couple dozen other Alaskan leaders, and ends with a view from Outside by an economist who is very familiar with Alaska.

Dave Harbour, longtime state leader, is someone who knows Alaska and the workings of government, industry, and the economy inside and out. Harbour is a former chairman of the Regulatory Commission of Alaska and director of external affairs for ARCO, the Arctic Gas project, and AGDC. He is former Chairman of the Anchorage Chamber of Commerce, Alaska Council on Economic Education, and Common Sense for Alaska. A former Army infantry officer, he was also president of the American Bald Eagle Foundation and the Alaska Press Club. Harbour is NARUC Commissioner Emeritus and Chairman Emeritus of the Alaska Oil & Gas Congress. He served on the Energy Transition Team for Governor Sean Parnell and on the Energy Task Force for Mayor Dan Sullivan. Harbour is publisher of northerngaspipelines.com and a former publisher of Alaska Business Monthly. He starts off with a little history lesson.

We hope readers will find all the comments insightful, interesting, and helpful. Enjoy reading the 2017 Economic Outlook as well as the rest of the January issue of Alaska Business Monthly.

—Susan Harrington, Managing Editor
Alaska Business Monthly

2017 Economic Outlook: ‘Bright, if….’

Back in spring, 2012, my Alaska Business Monthly column warned against that generation stealing from the next. I opined that, “Alaska has evolved into a state so blinded by its own greed and constrained by entitlement constituencies that rational, political decision-making is nearly impossible.”

Way back, on December 13, 1980, Alaska’s business and government leaders assembled to warn against overspending and excessive reliance on volatile oil tax revenue (i.e. “The Challenge of Plenty”).

In the early 1990s, Dr. Scott Goldsmith reported on how Alaska could create an economic “safe landing.” Year by year, the Institute of Social and Economic Research has shown lawmakers how to create a sustainable budget.

Most politicians have ignored these warnings.

Result: the burden of irresponsible deficit spending and debt—both in Alaska and nationally—unfairly passes to the backs of our children.

Alaskan private sector employees by the thousands have been laid off in the past year as government workers received pay increases. North Slope production is no longer increasing as it was. Some politicians continue demanding more taxes while demonizing major taxpayers. Few significant government operating costs are getting chopped.

Is Statehood Jeopardized?

We believe Alaska’s economic outlook for the 2017-18 fiscal year is very bright 1) if OPEC efforts to increase oil prices are effective; 2) if the Legislature and governor act decisively to cut the cost of government; 3) if officials don’t seek to keep government whole at the expense of the private sector; and 4) if politicians can begin appreciating and not demonizing the state’s largest investors while adopting a new credo, “In Alaska, a deal is a deal.”

If such corrective action doesn’t happen in the next two fiscal years, we will bequeath to our children an impossible debt burden and a dysfunctional state. The blame game will become intense and solve nothing. All will suffer, especially rural Alaska.

Alaskan pioneers created a state to escape territorial status in 1959. Alaska’s imprudent financial managers increasingly jeopardize statehood and expose citizens to a new era of reliance on federal government funding and oversight.

—Dave Harbour, Publisher
Northern Gas Pipelines

Alaska’s future is bright with opportunity; however, we must address our fiscal challenges in order to reap those benefits. With a $3.4 billion budget deficit and rapidly diminishing savings, it is critical that lawmakers work together this session to pass a complete fiscal plan and bring economic stability back to our state. This will require us to implement a combination of cuts, new revenue, and a restructuring of our financial assets to close the hole in our budget. My administration is committed to working with the Legislature to fix Alaska’s fiscal crisis so we can move on to building Alaska in the years to come.

—Governor Bill Walker

Juneau’s economic outlook for 2017 is positive/stable. Industries that bring outside money into Juneau’s economy are strong. Tourism is expected to grow by about 4 percent next year, as the number of cruise passengers visiting Juneau continues to grow. Juneau’s mines continue to have a steady workforce and strong production. We anticipate the same level of fish harvesting activity as 2016 and the potential for more products to be processed in and around Juneau. Juneau continues to see a vibrant arts and culture economy supporting jobs. Construction sector seems poised for a steady year in 2017 with continued opportunities for road spending and municipal infrastructure investments. Juneau will be susceptible to potential government induced economic crisis if state government is subjected to further substantial cuts and deteriorated business confidence if no long-term fiscal plan emerges. The forecast for 2017, therefore, is mostly sunny with a threat of severe rain.

—Brian Holst
Juneau Economic Development Council

Positive developments at the federal level should continue to be a bright spot for Alaska’s economy in 2017. A predictable transportation program and military construction, especially in the Interior, will create new jobs and deliver a much needed economic boost. Furthermore, preparation for the F-35s and other assets should be encouraging for the housing and consumer sectors. New leadership at key federal agencies and growing prospects for regulatory reform are also positive signs for Alaska’s business community and resource development sector, particularly our efforts to refill the trans-Alaska Pipeline System. I also remain optimistic about the opportunities for economic development in the Arctic, which will benefit the communities in the region, as well as our state as a whole.

—Senator Lisa Murkowski

The state’s current fiscal dilemma stems in large part to an over reliance on one industry—really, one single commodity—on which to fund our government and its operations. Considering the cyclical, and occasionally volatile, nature of commodity prices, this really isn’t a prudent model for stability and sustainability. When it’s good, it’s really good, and when it’s bad, it’s really bad! What’s needed is greater diversification of our economy, in terms of business activity, and also diversification of our revenue base, in terms of additional tax payers beyond a handful of oil producers. Exports, and other international business, can play a role in fostering such diversification. Already a $5 billion annual contributor to the Alaska economy, there is room for considerable more growth leading to a more balanced economy.

—Greg Wolf, Executive Director
World Trade Center Anchorage

We believe in Alaska. Our economy is one of ups and downs, based on a foundation that hasn’t changed even though circumstances worldwide have changed dramatically. Alaska’s competitive advantages, the principal one being our state’s abundance of certain natural resources, will continue to drive our state economy. While the past year has seen reduced investments in oil and gas exploration and development, bright spots in our state’s economy include substantial levels of national defense spending, a strong tourism season, and a growing healthcare sector. Alaskans are no strangers to adverse economic events. With a balanced, sustainable state budget that changes past patterns of government spending and savings, we believe Alaskans will continue to learn from past economic challenges to achieve success.

—Betsy Lawer, Chair and President
First National Bank Alaska

Settling budgets will inspire confidence. Having the election behind us will hopefully remove a lot of uncertainty that we believe has been affecting both personal and business finances. While the new administration transitions, we hope that more certainty will help spur business expansion and lend to improved consumer confidence. Closer to home, it’s imperative that we secure a long-term solution to the state budget deficit in order for Alaskans to feel truly confident and more comfortable regarding personal spending and overall consumer confidence.

—Lori McCaffrey, KeyBank
Alaska Market President

The performance of the Alaska economy in 2017 will be impacted by a number of key variables. There will be a short-term drag on the economy if the Legislature is able to create a sustainable budget by making difficult decisions on reduced spending levels, increased taxes, and changes to the Permanent Fund. However, a budget solution will have long-run positive impacts through a return of business confidence and a stabilized climate for private capital investment. The change in federal administration in 2017 has the potential to positively impact the government regulation of natural resource development in Alaska. The energy sector is starting to stabilize as the worst of falling oil prices and related cuts to employment and spending are likely behind us. Strong growth in tourism and healthcare are also providing opportunities in the Alaska economy.

—Mark Edwards, Northrim Bank
SVP, Senior Credit Officer & Bank Economist

Striving in the New Year. The coming year offers more questions than opportunities. State budgetary issues, federal spending, taxes, and regulations all are vexing issues facing Alaskans. Rising unemployment and flat oil prices will hinder economic growth. The financial industry will continue to struggle with stifling regulations that threaten not only our operations but our ability to serve members, customers, and communities. However, in the financial industry we are also optimists for—and drivers of—future growth. Alaskans do not sit pat, and we look forward to working with Alaskans to build a state we’re all proud to call home.

—Bob Teachworth
Denali Federal Credit Union

After seeing growth in both our loans and deposits through late 2016, we are beginning to see a softening in loan demand due to the decline in oil prices and the state budget situation. That being said, there are some bright spots in Alaska’s economy. Among those are the state’s tourism and healthcare industries that continue to see steady employment and economic growth. The incoming GOP leadership at the federal level also appears to bode well for resource development opportunities and small businesses in Alaska. Wells Fargo remains firmly committed to helping fuel Alaska’s economy as we help our customers navigate potential economic headwinds.

—Joe Everhart, Wells Fargo
Business Banking Division Manager for Alaska, Oregon and Washington

In today’s economic reality of lower oil prices for longer our state is at a crossroads, given the budget deficit. Coming together and establishing principles built on the desired future for Alaska is essential, as well as keeping an open dialogue to understand the ramifications of choices. Alaska can have a thriving and competitive oil and gas industry. That thriving industry will be the heart of the economic engine of the state, and just like an engine we can kill it and be stuck or maintain it and it will take us places. I hope that the future of Alaska includes a thriving oil and gas industry, where Alaska achieves more oil flowing down TAPS through new developments, more development, and years of life in our backbone fields, including Prudhoe Bay.

—Janet Weiss, President
BP Alaska

ConocoPhillips Alaska (COPA) expects an active year on the North Slope in 2017. The company is beginning construction this winter on Greater Mooses Tooth 1 (GMT1) in NPRA. The cost to develop is about $900 million gross, and estimated peak gross production is about 30,000 BOPD. The project will support six hundred to seven hundred jobs during this upcoming winter construction season. Permitting is also underway for GMT2, which represents more than $1 billion in gross investment.

COPA has restarted the viscous oil expansion project in Kuparuk called 1H NEWS and expects first oil in 2018. The company also has an active exploration program, with two wells drilled in 2014, seismic acquired in 2015, three wells in 2016 in NPRA, and one planned for 2017. Most recently, COPA announced a contract with Doyon Drilling for an extended reach drilling rig. Expected delivery is 2020, and the rig will initially target development of Fjord West, a field northwest of the main Alpine pad.

With the current tax structure, Alaska remains competitive within the global COP portfolio, and the company still has opportunities in Alaska for new investment and growth.

—Scott Jepsen, VP of External Affairs and Transportation
ConocoPhillips Alaska

Continued investment in responsible resource development is essential to a strong Alaska economy. With an unsustainable state budget, focusing on growing the private sector is a vital component to help solve our fiscal crisis. In 2017, Alaska will continue to depend on the oil and gas industry for revenue, will see a bright star in the tourism industry, will anticipate increased investment in mining, will maintain a healthy and robust fishing industry, and must push for fair management of the forestry industry. Growing these industries will depend on fiscal and permitting stability, as well as investment from around the world. Imagine what we can accomplish if we send the right message to investors in 2017: Alaska is open for business in all resource development sectors.

—Marleanna Hall, Executive Director
Resource Development Council for Alaska, Inc.

While Alaska is currently facing tough economic times, we will get through it. However, we must diversify our state’s economy and prepare ourselves to weather challenges down the road. We must focus on opportunities for success such as new oil and gas developments, tourism, fisheries, healthcare, transportation, and federal infrastructure spending. I believe a key component for long-term economic growth and success is making strong investments in our university system. We must look forward and come together if we want to build a strong economy to last.

—Mark Begich
Former US Senator
President and CEO, Northern Compass Group

Continued uncertainty. The economic outlook for 2017 looks similar to the one we experienced in 2016. By the year’s end, employment losses could be about 2 percent of the Alaska economy. The three most affected sectors were state government, natural resources, and professional and business services. The consequences of lower oil prices and government cuts have also spread to other private industry sectors but to a lesser extent. In 2017, we anticipate weakness to remain in the oil and gas industry as well as construction and professional business services. Additionally, we expect vulnerability in local government jobs due to their dependence on the state’s budget. The continued growth of the healthcare sector coupled with the strength of the national economy, which affects tourism, should offset some of the losses described above but will not be enough to result in positive economic growth.

—Mouhcine Guettabi, Assistant Professor of Economics
ISER Institute of Social and Economic Research

No excuses. Alaska’s oil industry has weathered the worst. Housing prices have remained solid. More North Slope exploration and development activity may follow Caelus’ recent oil discovery. Lower 48 consumer spending has been growing, tourism numbers should remain strong. And Alaska Native Corporations continue to play a vital diversifying role in Alaska’s economy by returning their Outside profits to Alaska. Alaska Native Corporations are the unsung economic heroes, holding twenty-one spots on the Alaska Business Monthly’s Top 49er list, making up 69 percent of the Alaska jobs generated, 86 percent of the total jobs created, and 75 percent of the income produced by Alaska’s top companies. Now, if only Alaska’s Legislature could get its act together.

—Bob Poe, Term Assistant Professor
UAA College of Business and Public Policy

NANA is preparing for 2017 to be another year of low oil prices, along with the ramifications the industry downturn will continue to have on Alaska’s economy. Federal contracting will continue to be a bright spot, along with the Red Dog Mine due to rebounding base metal prices and plans for solid mine production. As an Alaska-based company we look forward to participating in discussions at the State level of how to create a stable and sustainable fiscal environment that continues to attract the investment dollars that are so critical to Alaska’s ongoing prosperity.

—Wayne Westlake
President and CEO, NANA

Ahtna is growing and expects expanded Alaska revenues in 2017. We do not expect any significant impacts on our overall business performance in 2017 from the State of Alaska’s budget shortfall. In, fact we are planning on expanding our revenues in Alaska. Ahtna’s Alaska business grew 40 percent in 2015 compared to 2014 and we expect our Alaska revenues in 2016 and 2017 to be even higher. We will be looking for strategic partners in 2017 to help build Alaska and create opportunities for Alaskans. We see great opportunities in our focus areas for 2017, which include carbon credits, resource development, oil and gas, tourism, government contracting, and construction.

—Ahtna, Incorporated

Reduced spending by state and local government will continue to keep the building sector down. The inability to achieve a long-term fiscal plan and other government related factors has resulted in uncertainty and a lack of confidence, keeping private investment sitting on the sidelines, further impacting the building sector. Notwithstanding the cancellation of state legacy projects, horizontal construction will remain fairly stable but very competitive due to federal highway spending. More stability in construction markets will result from significant federal investment in Defense spending on Interior Alaska projects.

—John MacKinnon, Executive Director
Associated General Contractors of Alaska

or the Alaska mining industry, 2016 was a year of transition from the bottom of a five-year industry low to the first steps in what appears to be an industry-wide upswing. For 2017 this transition spells better margins for producers and more robust economics for development projects looking to move up the value chain. The coming year also looks to hold more promise for explorers with several mining-related leading economic indicators showing uptrends that usually translate into more aggressive mineral exploration in Alaska.

—Curtis J. Freeman
Avalon Development Corporation

2017: Challenges always create opportunities. In a state that typically equates its economy with the energy sector, it’s important to remember we have varied factors that drive our economy. Healthcare has expanded, tourism seasons are strong, federal investment in the military continues, Alaska Native corporations are more diversified—all bringing different revenue streams to our state. While we face uncertainties with low oil prices and state fiscal policy, therein also lies opportunities for businesses to find efficiencies and new operating models through technology. Additionally, long underserved regions in our state are getting new broadband access. With our focus on broadband and managed IT services, we see continued opportunities to bring customers value and fuel Alaska Communications’ growth.

—Anand Vadapalli, President and CEO
Alaska Communications

The clean energy sector continues to grow quickly worldwide. Wind and solar are already competitive with coal and natural gas in many markets. In Alaska, building owners continue to retrofit inefficient building stock, investments that can have very short payback periods. Rural utilities are exploring options to finance renewable infrastructure without state grants. The current effort in Alaska’s Railbelt to consolidate grid operations and establish a uniform transmission tariff will impact the private sector’s ability to invest in renewable infrastructure and compete against natural gas. The Railbelt market is also influenced by the mid- and long-term uncertainty associated with natural gas prices in Cook Inlet and whether the state will continue to subsidize gas production.

—Chris Rose, Executive Director
Renewable Energy Alaska Project

Trucking has felt the impact of low oil prices and the resulting slowdown in the oil patch. The consumer goods side is slowing down, and most of our members are expecting 2017 to be slower in both sectors than 2016 and are hopeful that solutions can be found to restore confidence in Alaska’s future business climate. We are cautiously optimistic that the governor and the Legislature can come together to resolve our budget crisis.

—Aves Thompson, Executive Director
Alaska Trucking Association

Alaska failed to catch the economic growth wave that brought the United States economy up to full employment. The news for 2017 could be very good or very bad or even a mixture of very good for some sectors, very bad for others. The Trump administration might open up mining and drilling and pipeline construction, but don’t expect it to happen right away. On the downside, trade wars could wallop Alaska’s fishing and transportation sectors. The future is more likely to change than continue the state’s flat economy, but the change could go in either direction.

—Dr. Bill Conerly
Economist & Business Consultant
Conerly Consulting LLC