Construction spending expected to fall 10 percent this year


DECLINE WILL BE LESS THAN LAST YEAR, AIDED BY INCREASED FEDERAL DEFENSE, HIGHWAY PROJECTS

AGC Spring Construction Spending Expected to Fall

The economic decline has resulted from the precipitous drop in the price of oil that began in the second half of 2014 after it had reached a high of $110 per barrel. By early 2015 it had fallen below $50, and after moving higher for a few months it plunged again to nearly $25 in spring 2016. However, the price has again moved up and was fluctuating around $50 as this year began.

The outlook remains unclear as the world oil market struggles to balance slowly growing demand with uncertainty about future supply. Because of the importance of petroleum to the Alaska economy, this uncertainty surrounding world oil and gas markets is a source of concern about the underlying strength of the economy in the future.

The drop in oil prices was first reflected in a decline in employment in the oil patch, and then last year as the decline in the oil patch accelerated, construction and state government employment also started to fall. This year employment is expected to be lower in almost all sectors and regions of the state. But the decline in construction activity will be somewhat less than it was last year for several reasons.

  • First, federal spending will be higher because of increased spending for national defense. It is not sensitive to the price of oil and tends to be stable from year to year.
  • Second, although state government spending will be lower, particularly for education, there will still be state money on the street. The drop in oil prices has resulted in huge state general fund deficits since fiscal year 2014, and the capital budget — excluding federal grants — has fallen to less than $200 million in the last three years, down from more than $2 billion in 2013. But because it takes time for appropriated funds to become cash on the street, there is still money in the pipeline, although less than last year.
  • Third, private spending (excluding oil and gas) will be marginally higher, mostly due to construction related to health care. Strength in that sector will offset declines in residential and commercial construction, both of which will be lower because of the weakness in the overall economy and uncertainty about the state gov-ernment’s ability to deal with the deficit.
  • Fourth, the decline in activity in the oil patch will be less than last year. Reductions in spending last year brought the level close to a “bare minimum” to maintain production from existing fields. A large share of activity for developing new reserves in existing and new fields was postponed. But now, as the oil price is showing signs of recovery, some of those postponed projects could be resumed.
PRIVATELY FINANCED CONSTRUCTION
Oil & Gas: $2.43 million

Construction spending related to oil and gas will be lower for the second year in a row, but the decline will be less than last year.

Oil and gas is always a difficult sector to forecast because plans change and because of factors associated with weather, logistics, availability of contractors and supplies, evaluation of work completed, regulatory and environmental challenges, tax policy and other operational and strategic concerns.

This year is a particular challenge because of the uncertainty surrounding the price of oil. Consequently, many companies have announced a “wait-and-see” attitude about moving forward with development projects.

The decline last year resulted from completion of a number of massive one-time projects on the North Slope as well as from the low price of oil.

The large projects completed included Exxon’s development of the technically challenging Point Thomson field east of Prudhoe Bay, ConocoPhillips’ development of the CD-5 satellite west of the Colville River and termination of Shell’s exploration program offshore in the Chukchi Sea in northwestern Alaska.

The low oil price has affected the producers’ cash flow as well as the explorers’ ability to attract funds for capital expenditures. The prospect of the lower price continuing had a negative effect on the economics of investments to enhance production.

The state government’s exploration-credit program was an important but only partial offset to the reduced ability of companies to continue their capital expenditure programs.

As the new year began the price of oil had rebounded from its low level of last year, and forecasts for the coming years are moving higher. At the same time, the low price of the last two years has driven costs down in the oil patch. As a result, activity is beginning to stabilize, and companies will begin to consider expanding their exploration and development programs as the year progresses.

On the North Slope, in spite of cutbacks last year and continued operating losses, the major leaseholders — ConocoPhillips, British Petroleum and Exxon — will continue to invest in the largest fields at Prudhoe Bay and Kuparuk to slow their rates of decline. Some developments have been put on hold, and efforts will concentrate on reducing costs.

Among the major petroleum companies, only ConocoPhillips has announced that its 2017 capital budget will be about the same as last year. ConocoPhillips operates both Kuparuk and Alpine, including the new CD-5 satellite within the boundary of the National Petroleum Reserve Alaska (NPRA) west of the Colville River. In addition, it is developing the Greater Mooses Tooth (GMT-1) prospect in NPRA and expanding viscous oil production at Kuparuk with the North East West Sak (NEWS) project. A second Greater Mooses Tooth prospect (GMT-2) is in the permitting stage.

The Italian firm ENI (Ente Nazionale Idrocarburi) had postponed its two-year program of well drilling to bring the Nikaitchuq field into full production but recently announced it will be resuming work there.

Hilcorp will concentrate activity at Northstar, Milne Point and Endicott.

Brooks Range Petroleum is moving forward to develop the Mustang field, west of Kuparuk, with financial assistance from the Alaska Industrial Development and Export Authority.

Caelus Energy has slowed work on the Oooguruk and Nuka fields. It has two more years of drilling for total build-out of Oooguruk and is considering expansion of the offshore island from which the field is accessed.

Three recent announcements of potentially significant new discoveries could bode well for an upswing in capital spending on the North Slope in the coming years, although it is too soon to know. All will require additional work to determine whether they are economically viable. If development were to proceed, any one of them could add 100,000 barrels per day to production.

Caelus Energy is exploring a prospect at Smith Bay, far to the west of the existing infrastructure on the North Slope. Armstrong (Repsol) is investigating a prospect in the Pikka Unit (Nanushuk), adjacent to the Colville River Unit. It faces challeng-ing geology. Most recently, Conoco-Phillips announced the discovery of a potentially significant field (Willow) in the Greater Mooses Tooth Unit.

Mining: $187 million

Spending by the mining industry — on exploration and development (excluding exploration and development costs associated with environmental studies, community outreach and engineering) as well as maintaining and upgrading existing mines — will be about the same as last year, thanks partially to a slight uptick in mineral prices.

Spending by the six major mines currently in operation will be a bit higher than last year as producers make new investments to increase efficiency and to develop new prospects for future production to extend the life of the mines.

Spending for drilling and other site work will be low again this year at the three world-scale mine projects currently under various stages of review for potential future development (Donlin Creek, Pebble and Livengood).

Utilities: $498 million

Utility spending will be about the same as last year. Large cutbacks by the telecom industry will be offset by some growth in renewable electrical energy projects.

A number of large-scale conventional electric generation plants were completed in recent years, and no new plants are under construction or planned. Most electric utility spending will be for facilities maintenance.

Permitting was obtained last year for development of the Sweetwater hydroelectric project outside Juneau. When complete it will also include a district-heating project to provide space heating for that community.

Phase 2 of the Fire Island wind project, offshore from Anchorage, will be underway as well.

Telecommunications spending will be lower this year due to uncertainties about the economy and resolution of the state’s fiscal problems. Telecommunications spending in Alaska benefits from funds generated by the Universal Service Funds, which channel revenues collected from services provided in other locations to help pay for needs in Alaska.

Hospitals & Health Care: $336 million

The demand for health care continues to grow as the Alaska population ages, and with that comes growth in hospitals and other facilities. Spending this year will be considerably higher than last year, primarily due to federally funded facilities to provide services to the Alaska Native community.

The largest project is the new Yukon-Kuskokwim Health Corp. hospital and outpatient clinic in Bethel. Southcentral Foundation also has a large expansion underway, including a children’s clinic in Anchorage and renovation of other facilities in Southcentral Alaska. The other regional Native hospitals will also continue to invest in facility upgrades. The Alaska Native Medical Center hospital campus in Anchorage will also likely see a couple of new buildings this year.

Residential: $277 million

The residential market softened considerably last year with new construction falling off throughout the state except in the Matanuska-Susitna Borough, where both employment and population continued to grow.

That statewide trend toward softening will continue because of the continued economic decline and net outmigration of population, with the exception of the Mat-Su Borough.

Projects with public funding will be less sensitive to these economic trends.

The age of the housing stock, and the aging of the population, are also boosting residential spending. Because a large share of the stock was put in place 30 years ago, the demand for renovations is growing. And the senior and millennial populations are growing, increasing the demand for smaller housing units.

PUBLICLY FINANCED CONSTRUCTION
National Defense: $635 million

Defense spending will be up significantly for the second year in a row as large projects get underway at Eielson, Fort Greely and Clear, buoyed by the largest military construction budget in any state.

The Corps of Engineers budget for MILCON (military spending for facilities on bases) at Eielson Air Force Base outside Fairbanks will be driven by large projects to get the base ready for the two F-35 squadrons that will be stationed there in 2020. These include a central heat and power plant and a dormitory.

The first phase of a $1 billion expansion for missile defense at Fort Greely outside Fairbanks and Clear Air Force Station near Nenana will also be underway this year. This program will add 14 interceptor missiles to the defense system at Fort Greely over the next several years and also add Long Range Discrimination Radar at Clear.

New aircraft hangars will be added at Joint Base Elmendorf-Richardson in Anchorage.

Transportation—Highways and Roads: $629 million

Spending on highways and roads tends to be stable and predictable, and 2017 is no exception, with spending expected to be only slightly lower than last year.

A majority of funding for highways, including the Marine Highway System, comes as grants from the federal government under a program known as the Fixing America’s Surface Transportation Act (FAST Act), which became law in 2015. This program requires a state match for receipt of the federal funds. Some federal funds also go directly to Alaska Native tribal organizations for transportation projects.

In addition, the state augments federal funds for highway and road construction with an annual capital appropriation to the Department of Transportation and Public Facilities.

Also, in some years the state Department of Commerce, Community and Economic Development disburses grants to local governments for road construction, but little has been appropriated for grants through DCCED since 2013.

Finally, the state also periodically sells general obligation bonds to support road construction and other infrastructure projects.

State-funded capital appropriations for transportation have been falling as the state budget has contracted. However, it takes 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 governor has recently proposed postponing several projects funded by past state appropriations and bonds, but these cutbacks will not significantly reduce the total amount spent this year.

Transportation—Airports, Ports & Harbors: $370 million

Spending on airports also tends to be stable and predictable because federal funds, mainly from the Federal Aviation Administration’s Airport Improvement Program, provide the bulk of funding for airport improvements at the large international airports in Anchorage and Fairbanks and the many smaller state-owned airports across Alaska. That funding is augmented by revenue bonds and other local sources. Spending on airport projects throughout the state in 2017 will be almost the same as last year.

Spending related to ports and harbors will be slightly lower this year. Work on the redevelopment of the Port of Anchorage has not gotten underway, and there will be no money to continue development of the Point MacKenzie rail extension for the port across from Anchorage.

Education: $212 million

Because education capital spending comes mostly from state government, it will be much lower this year than in the past.

Direct state funding of rural schools will be less this year as the new schools mandated by the Kasayulie case head toward completion. A school at Nightmute is under construction, and one at Kwethluk will be finished this year. Only the Kivalina school is still waiting to move forward. Funding for new projects has not been included in the state capital budget.

In 2015 the Legislature imposed a five-year moratorium on the decades-old practice of reimbursing municipalities for a share of the debt they incurred to build and repair schools. That change has more than doubled the price of new schools for urban school districts. This year the local school districts are using only the last of the funds from debt incurred before the moratorium, augmented by local funding to do renovation and repair work.

The school that recently burned in Bethel may be replaced using funds from the insurance policy.

The only new large University of Alaska construction project will be the power/heating plant on the Fairbanks campus, and construction has already begun.

Other Federal: $255 million

Although the largest categories of federal construction spending in Alaska are for transportation and national defense projects, there are several other sources of federal spending that contribute to construction spending. The largest of these are a series of grants that support housing and safe-water programs in the state, and because these grants have been stable over the years, other federal spending has tended to be constant from year to year. It will be marginally lower this year.

Most of the funding for the state-administered Village Safe Water program for rural sanitation comes from federal sources, including the Environmental Protection Agency and the Indian Health Service. With the state contribution, that spending is expected to be constant this year.

The federal government also provides construction grants to Alaska tribes, nonprofit organizations and local governments across the state. Alaska Native nonprofit corporations, housing authorities and health care providers receive most of this money. The largest of these programs in Alaska is the Native American Housing Assistance and Self-Determination Act, which provides assistance for housing construction in Alaska Native communities.

Other State & Local: $322 million

State and local government capital spending — excluding transportation (roads, ferries, airports and ports), education, health and energy — will be down considerably this year because of less state money. When state capital budgets were large, many projects were funded through grants from the Department of Commerce, Community and Economic Development to local governments and nonprofits throughout the state. But there have been no new appropriations to fund these grants in several years.

CONSTRUCTION IN THE OVERALL ECONOMY

Construction spending is one of the important contributors to overall economic activity in Alaska. Annual wage and salary employment in the construction industry in 2016 was about 16,200 workers with average annual pay of $82,000, second only to mining (including petroleum). But that figure doesn’t include the “hidden” construction workers employed in other industries such as oil and gas, mining, utilities and government (force-account workers). In addition, it does not account for the large number of self-employed construction workers, estimated to be about 9,000 in 2011.

Construction spending generates activity in many other industries that supply inputs to the construction process. These “backward linkages” include, for example, sand and gravel purchases (mining), equipment purchases and leasing (wholesale trade), design and administration (business services) and construction finance and management (finance).

The payrolls and profits from this construction activity support businesses in every community in the state. As this income is spent and circulates through local economies, it generates jobs in businesses as diverse as restaurants, dentist’s offices and furniture stores.