14 minute read
OIL & GAS
The Ups and Downs of Oil
Global markets continue to jostle Alaska’s oil prices
By Isaac Stone Simonelli
Oil price responsiveness to the fundamental economic principles of supply and demand remains on full display as the pandemic drags on with new variants and subsequent market scares.
“At the onset of the pandemic, when governments around the world started implementing shutdowns and stay-athome orders, the demand for petroleum products just bottomed out,” says Nick Szymoniak, venture development lead for Alaska Gasline Development Corporation and a former consultant for the McKinley Research Group.
People stopped driving. People stopped flying. There was an unprecedented plummet in demand for petroleum.
“The demand dropped off and we had way too much supply, and at one point we had negative oil prices,” explains Kara Moriarty, the president and CEO of the Alaska Oil & Gas Association.
On April 20, 2020, prices for the benchmark grade of West Texas Intermediate crude oil dropped $55.90 to -$37.63 a barrel on the New York Mercantile Exchange. It was the first and only time a contract closed at a negative value, according to Dow Jones Market Data.
Even before the pandemic hit, there was already downward pressure on oil prices, with Saudi Arabia and Russia both stating that the countries would increase production, Szymoniak explains.
The changes in prices are mostly due to speculation and the balance of near-present supply and demand—even beyond the pandemic.
There is very little significant storage of oil—outside of the federal Strategic Petroleum Reserve—which results in product being pumped out of the ground and put in short-term storage before being sent directly to refineries and into the market.
Szymoniak says, “Without being able to warehouse product, like you might see in other markets, other commodities, the result was the price just absolutely fell out.”
And it doesn’t take wild swings in the amount of supply or demand to affect prices.
“If demand exceeds oil production even by marginal amounts, that'll have pretty significant upward pressure on price,” Szymoniak says. “[Production] is almost all fixed cost. So once you have a well that's producing, the incremental cost to continue production is pretty low.”
Echo of Recession
The pandemic wasn’t the first time the bottom has dropped out on oil prices, but the way it did so was unprecedented. Oil prices in Alaska peaked in 2014 at more than $100 per barrel before crashing to near-record lows, triggering a statewide economic recession. That crisis was waning when the COVID-19 pandemic arrived.
“Late 2019/2020, things started to get a little active again,” says Neal Fried, an economist with the State of Alaska. “We all expected 2020 to be a good year.”
Instead, prices went “places that they had never been before” and activity dropped off, leading to significant layoffs in the oil and gas sector, Fried explains.
A couple of small fields were shut-in— though they’re back online now—both on the North Slope and Cook Inlet. “We had a period of time where there were absolutely no rigs running for the first time,” Moriarty says.
Production dropping off forced companies to be more efficient, she explains.
“Even though prices are up, the jobs haven't followed yet,” Moriarty says, “because we've learned how to be more efficient.” Industry-wide belt tightening has continued as long as capital markets are wary of financing oil projects, she adds.
Shocks to the petroleum sector ripple out to the government sector. For FY2021, state and local governments are estimated to collect more than $2 billion in revenue, royalties, and taxes based on the average price of $54 a barrel, Moriarty explains—significantly lower than the projection of $3 billion for FY2022.
“When prices crash, the state has less money,” Moriarty says. “In the height of COVID, we paid zero corporate income tax, which means we weren’t making money, but we still paid royalty production tax and property tax.”
Those alternative levies amount to a hedge for public sector treasuries. “The state and local governments still received about $2 billion in FY2020. Even in a year that the industry makes nothing,” she says.
Lagging Recovery
were fairly strong throughout 2021. “The price recovery came from demand recovery,” Szymoniak says. “People started flying again, and other aspects of the economy also took off.”
Nonetheless, the oil and gas sector in Alaska has been slow to respond compared to the rest of the country, Fried explains. “The rest of the country has seen more drilling activity and just more oil industry activity than we have for the higher oil prices,” Fried says. “But that's pretty typical because we're very, very project based here.”
Unlike the Permian Basin in Texas or the Bakken Formation in North Dakota, Alaska projects take a lot more lead time and investment due to both their scale and remoteness.
“It takes planning. We don't just go out and drive some big trucks and drill holes in the ground,” Fried says. “We are beginning to see some uptick and activity now, but very little.”
In addition to the usual lag that Alaska experiences in the oil and gas industry, uncertainty around the federal leasing program and the court decision for the Willow Project have both caused delays in the recovery, Moriarty says.
Senator Lisa Murkowski, Senator Dan Sullivan, and Congressman Don Young all spoke out against the scrapping of essential permitting for the Willow Project, a multi-billion dollar expansion of ConocoPhillips’s oil and gas operations in the National Petroleum Reserve-Alaska (NPR-A).
“This District Court Order vacating key approvals and permits for Willow is just plain wrong,” Senator Murkowski said in an August news release. “In partnership with communities on the North Slope, ConocoPhillips Alaska has been responsibly producing oil from the NPR-A region for decades under the highest environmental standards and this proposed project will be no different. Although this is a setback for Willow, it is not the end. Even the Biden administration has come to understand what Alaskans have always known—that the Willow Project must move forward.”
Gasline Hopes Undimmed
Unlike oil prices in Alaska, which are strongly dependent on the global market, natural gas prices in the Last Frontier exist in their own bubble—at least for now. This is primarily because most of the gas comes from Cook Inlet for domestic utilities in a relatively static market.
“That's a captured resource, and that's not exported,” Fried says. “Most of that is being used for local consumption. And it's very heavily regulated because it's used for utilities.”
The stable prices in the Last Frontier— mostly fluctuating with seasonal demand—remain despite Henry Hub natural gas prices swinging from more than $4 per million BTU in 2018 down to $1.63 in June of 2020 back up to more than $5.50 in October 2021.
“For the last almost ten years there's been no connection between the Cook Inlet natural gas market and the world natural gas market,” Szymoniak says.
The Alaska Gasline Development Corporation (AGDC) is working hard change that. Formed by the legislature in 2010 and acting since 2013 as an independent public corporation, AGDC has focused on an in-state pipeline to help unlock the vast gas resources on the North Slope and bring them to a global market.
Szymoniak explains that, because of the amount of infrastructure
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Kara Moriarty President and CEO Alaska Oil & Gas Association needed to move natural gas off the North Slope, there needs to be a strong LNG export market established for the gas. Nonetheless, the project would also provide lower prices for natural gas to Alaska communities, including to city centers, such as Fairbanks and Anchorage.
Alaska has been eyeing a natural gas pipeline for decades, working especially hard to develop markets for the resources in Asia, but the economics have never quite penciled out.
Szymoniak says that’s changing. “It very much pencils now,” Szymoniak says, based on recent global gas prices. “It's a highly economic project.”
Paying the Price
While delays in developments in Alaska affect future prospects of jobs and revenue in the state, they play less of a direct role in current oil and gas prices.
“The big question is what's the supply gonna look like? What's OPEC going to do?” Fried says.
The role OPEC, Russia, and the Permian Basin have in setting oil prices is not an entirely new story, as they can all react quickly to changing markets and produce enough to move those markets.
“Today, as demand has picked up and supply hasn't been able to catch up, prices have gone up,” Moriarty says. “As there was a little scare of the new variants and what that was going to mean to demand, people got a little shaky and prices went down.”
In December, the US Energy Information Administration (EIA) pointed toward the uncertainty tied to COVIDvariants. The Omicron variant has introduced additional unpredictability into oil markets, and this uncertainty is reflected in the recent increase in oil price volatility.
“It is not yet clear how Omicron will affect oil markets and the broader economy. One of the most likely markets to be affected is jet fuel, and some flights have already been canceled because of the variant,” EIA stated on its website in December.
Nonetheless, EIA expects global oil demand to rise by 3.5 billion barrels per day in 2022.
In a move to combat the rising costs of gasoline as oil production lags behind demand, the Biden administration in November authorized the release of 50 million barrels of oil from the Strategic Petroleum Reserve “to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.”
Gasoline prices averaged $3.39 per gallon in November, $1.29 higher than in November 2020—and the highest since September 2014.
The Biden administration’s move was met by sharp criticism from Congressman Young. “The release of this oil is a clear acknowledgment of the need to increase domestic supply. So what I don’t understand is why this President thinks it is a better strategy to raid our coffers rather than put forth a real energy solution,” Young wrote in a news release.
“I am frustrated by the lack of common sense among this nation’s leadership,” he added. “The Chukchi and Beaufort Seas hold 27 billion barrels of oil, the 10-02 area of Arctic National Wildlife Refuge holds roughly 10.6 billion barrels, and the National Petroleum Reserve-Alaska has 2.7 billion barrels and already has infrastructure in place to bring the oil to market!”
While high oil prices are a boon to the industry, its workers, and government treasuries, they also have a near-immediate negative impact for consumers.
“There's also a flip side for Alaskans,” Moriarty says, “when the commodity price is higher, the products that we buy—whether that's your home heating oil, your fuel, your lights, your gasoline, your snowmachine, your fish, your boats, your airplanes—the price of that commodity goes up too.”
Higher energy costs have a disproportionate impact on some rural communities in Alaska.
“I think it's always important to remember that Alaska has a lot of communities that don't have very much income and pay very high energy costs,” Szymoniak says. “So when oil prices go up, we need to kind of temper our celebration of the extra revenue, and make sure that those who have real hard problems paying for energy, when it gets cold like this, are considered.”
Elite-VB, LLC
Back in Alaska with new carrier options
With a corporate office in Kailua, Hawaii and new satellite location in Anchorage, Pamela Whitfield is no stranger to Alaska. Whitfield, the owner of Elite-VB, is a twenty-five-year voluntary benefits veteran who spent eight years establishing accounts with her team at a Midtown office. Previous clients include Native corporations, oil and gas companies, nonprofits, and government entities. Under her agency’s leadership, more than 25,000 new policies were written between 2013 and 2020 in more than 150 new Alaska accounts (for disability, accident, critical illness, life, and other employee-paid options). “Enrollments were always designed for high participation, utilizing custom websites, videos, and more, taking the burden off of HR,” Whitfield says. “Best of all, as a broker, our services are at no cost to your organization.”
Offering the Best Carriers
Elite-VB’s Anchorage office is armed with cutting-edge technology and new carrier options that make the old ones look obsolete. “It’s clear that representing one carrier isn’t putting the client’s best interests first,” Whitfield says. “Elite-VB believes in bringing the BEST carriers to the market based on your company’s specific needs and demographics. It just makes sense, and with premiums decreasing, wouldn’t your employees love better benefits at a lower cost?”
Besides, three in four employees consider voluntary benefits as a deciding factor for whether they work for and stay with an employer in 2022, according to Corestream’s “2021 State of Voluntary Benefits” report. Recruiting and retention are the most serious issue facing Alaska (and Hawaii) businesses. “No business is immune to this ‘great tsunami’ of workers leaving the workplace,” Whitfield says.
While Elite-VB has access to outstanding benefits counselors, virtual solutions make voluntary benefits more accessible and feasible to implement. Whitfield feels virtual solutions that are effective—compelling, dynamic, and custom-designed—are the best way to communicate and enroll voluntary clients in 2022 and beyond. Elite-VB can evaluate an organization’s current program and ensure the benefits are relevant to employees’ needs, easy to process, and affordable. “I’ll make sure your employees get the best bang for their buck,” she says.
Making a Difference
Whitfield is committed to making a difference in the lives of employees and the community. She previously served as president of the Alaska Association of Health Underwriters and garnered the 2016 BBB Torch Award for Ethics. During the pandemic, her proclivity for helping further intensified. In 2020, Elite-VB produced masks for the Alaska Native Hospital and the Pioneer Home and facilitated COVID-related training for human resources professionals.
Now Whitfield is helping Hawaii business owners, brokers, and unions implement COVID-compliant, virtual voluntary benefit programs as she did in Alaska in 2013. With new variants emerging, it’s even more critical for employers everywhere to take a fresh look at voluntary benefits. Whitfield admonishes: “COVID-19 changed everything. Do not go into 2022 with a voluntary benefits program that was designed in 2016. New carriers provide mental health and telemedicine, and it does not take more than an hour to see if your current program meets your employees’ needs—and contributes to your hiring and retention goals.”
For more information, contact: Elite-VB, LLC
Pamela A. Whitfield, Owner 926 W. 11th Ave., #12
Anchorage, Alaska 99501 Cell: (425) 443-1669 Hawaii Office: (808) 762-8746 pamela@elite-vb.com elite-vb.com elite-vb-alaska.com
ARCHITECTURE & ENGINEERING Architecture & Engineering: ‘Reimagining the Possible’
At Alaska Business Publishing Co., we like architects and engineers. On a certain level it’s selfish: whenever we reach out to architecture and engineering firms and specialists in Alaska to be sources for our articles, there are always a handful who respond in a timely and organized way. Once we get them into an interview, they are happy to provide details about projects, explain terms and concepts, and share their expertise—and their super cool concept art.
And on another level… it’s also selfish, as they design the world around us, from the computers we work on to the office buildings and homes we live in and the bridges we drive over to get back and forth between the two. Sometimes the projects we report on seem far away—and certainly, 800 miles is nothing to sneeze at—but even those far-off pipelines and ice pads directly affect our lives through the economy they support.
So it is with a smile (and a highly engineered keyboard) that we are again using our February issue to celebrate architecture and engineering, both in this special section and in tangential content throughout.
Within the special section itself, we’re once again pleased to present short bios on the Engineer of the Year and the Engineering Excellence project of the year award nominees for Anchorage; the winners will be announced at the 2022 EWeek Banquet on Saturday, February 26.
We also have an incredible piece by guest author Peter Briggs, founder and owner of Corvus Design, a full-spectrum landscape architecture, planning, and industrial design firm that has the mission to “craft meaningful people-based places.”
The rest of the special section is rounded out with a look at HVAC needs for marijuana-based businesses, engineering for 100-year events (and unexpected trucks), planning for indoor green spaces, a look at the differences between architecture and engineering, and our cover story, which dives deep into the redesign of 601 W. Fifth Avenue, formerly the KeyBank Plaza.
Whether you’re reading this on a phone or holding a print magazine in your hand, take a second to appreciate the decades of architecture and engineering that have “reimagined the possible,” allowing us to live in a safer, more beautiful, and highly functional world.
