Oil sector leads construction spending rebound
The last couple years have been tough for Alaska contractors.
While it took about two years to really be felt as money on large multi-year and preplanned projects continued to be spent, the precipitous fall of oil prices in late 2014 led to construction spending declines of 18 percent in 2016 and 10 percent in 2017 year-over-year.
Not only did the price collapse hit contractors working in the state’s oil fields, but state capital spending has all-but disappeared since the oil revenues the State of Alaska relies on dried up as well.
Similarly, Alaska’s construction industry workforce has declined by 17 percent since peaking in 2014 with a year average of 17,800 jobs, according to the state Labor Department. Last year the industry averaged 14,900 workers. It’s worth noting that those figures do not reflect construction jobs classified within the oil and gas sector, which has seen its workforce shrink by 5,000 jobs, or more than 30 percent, over the same period.
However, there are signs of a turnaround.
The 2018 Alaska Construction Spending Forecast, compiled by the University of Alaska Anchorage Institute of Social and Economic Research estimates “on the street” spending will increase 4 percent to more than $6.5 billion this year.
Authors Scott Goldsmith and Linda Leask wrote in the report for the Association of General Contractors-Alaska that the modest increase will be driven by a rebound in spending by oil and gas companies that will more than offset continued declines in infrastructure investment by other sectors.
At more than $2.5 billion, oil and gas company spending will be up about 15 percent from 2017 on the back of improved and stabilized, if not robust, oil prices in the $65 per barrel range, as well as continued work on a burst of potentially large oil discoveries in recent years and more favorable federal policies.
For reference, Alaska oil and gas capital spending peaked in 2014 at $3.9 billion, according to ISER.
“Perhaps the most significant recent federal policy change affecting Alaska is the decision to open the 1002 (coastal plain) region of the Arctic National Wildlife Refuge to exploration,” Goldsmith and Leask wrote. “That decision — along with the opening of federal offshore lands to leasing — will not immediately lead to spending, but it does demonstrate a renewed federal interest in the petroleum industry in Alaska.”
ConocoPhillips has led greenfield activity on the Slope of late and is drilling five exploration and appraisal wells this winter, the company’s busiest exploration season in 15 years. Additionally, the company is finishing work on its roughly $1 billion Greater Mooses Tooth-1 development, which is scheduled to start producing oil late this year.
Industry leaders in Alaska have said spending has been cut to the point where company’s budgets are again stabilized and at least incremental investment is a possibility. Further, Gov. Bill Walker has a bill in the Legislature to pay off the state’s $800 million-plus oil and gas tax credit liability in one lump sum, which administration officials believe could spur additional oil and gas activity if it passes.
Walker has also proposed an $800 million capital projects plan to address the state’s deferred maintenance backlog, estimated at roughly $2 billion, and provide a small economic stimulus across the state. However, the funding source for the plan is a proposed temporary payroll tax that is politically unpopular and it’s unlikely the plan will pass this session.
The mining industry is also projected to be on the rebound with $239 million of capital projects, up 6 percent from 2017 after years of subdued activity worldwide, according to the forecast.
Teck, which operates the Red Dog mine north of Kotzebue, is exploring a large new zinc deposit and Trilogy Metals is continuing work on its prospects in the Ambler Mining District, also in Northwest Alaska.
The U.S. Army Corps of Engineers is also expected to release a final environmental impacts statement for Donlin Gold’s massive gold project along the Upper Kuskokwim River later this spring.
A favorable decision for Donlin will not mean more spending this year and company leaders have acknowledged the economic viability of the remote mine is very sensitive to gold prices, but if it goes forward Donlin likely represents $5 billion of work over several years of development.
Another positive will come from the federal government in the form of Defense spending, which with six large military installations in the state is a significant contributor to the construction industry. The feds are expected to spend $630 million on Defense projects in Alaska this year, an 11 percent increase from 2017, according to the forecast.
Missile defense work at Fort Greely will eventually add to the number of interceptor missiles at the Army base. The Air Force is in the midst of $325 million of work to install a long-range discrimination radar system at Clear Air Force Station near Nenana.
Further work is also ongoing at Eielson Air Force Base in Fairbanks to prepare for the 2020 arrival of the first squadron of F-35 fighters that will be stationed at the base.
The 2018 National Defense spending bill signed by President Donald Trump in December approved nearly $170 million in projects for the F-35 bed-down and $200 million for a new missile field at Fort Greely.
Surface transportation spending, particularly on roads and highways, should be up about 6 percent to $667 million, Goldsmith and Leask project. While most surface transportation funding comes from the federal government with a small state match and is generally pretty stable year-to-year, the increase this year is due in part to money from a $453 million state bond package approved in 2012 finally “hitting the street.”
“It can take considerable time for transportation appropriations to become cash on the street, so state funds from past capital budgets and bond sales are still contributing to current spending,” the forecast states. “Consequently, the level of spending this year will be a little higher than last.”
Much of that money will fund major projects on the Glenn, Seward and Sterling highways.
Capital spending in other sectors and industries is generally expected to fall by up to 20 percent year-over-year as bare-bones state capital budgets and the third year of Alaska’s ongoing recession continue to constrain investment.
Elwood Brehmer can be reached at email@example.com.