State ‘Less Rich’ : Alaskan Oil: Still Gold at $15 a Barrel

Here’s an oil story you haven’t heard lately: Alaskan wells are pumping like crazy, the oil fields are gearing up for the biggest construction season ever and the Legislature just stuffed another $1 billion into the state’s savings account.

To be sure, tax revenues from oil--which account for practically the whole state budget and thus propel the unique economy here--are down by almost half. The only problem, however, is deciding which hoard of cash should be tapped to make up the difference.

Unemployment? It’s lower today than it was a year ago, when oil cost $30 a barrel. The sheer momentum of Alaska’s oil boom and the world-class production levels achieved from its relatively few wells have prevented any real economic retreat.

Correcting Excesses

Of course, experts now are predicting a recession next year or the year after. Housing values are declining, office vacancies are rising and wages are being driven down by newly hard-nosed management. Even the overgrown state budget is getting a light trim.

To some Alaskans, however, that is more a welcome correction of past excesses than an economic calamity.

“It’s been like a seven-year drunk up here,” says Gene Earnest, a native of Maine who hitchhiked here in 1956 and is now a college administrator in Fairbanks. “I’m frankly glad to see this.”

Indeed, unless it’s on the basis of the weather or the mosquitoes, don’t weep for Alaska yet. Crowed one elected official after he surveyed Alaska’s new, $15-a-barrel landscape: “We used to be filthy rich. Now we’re just rich.”

This is no Rust Belt or oil-patch story about unschooled, blue-collar workers in their 50s losing lifelong jobs as their hometown economies wither away. Alaskans are the nation’s youngest and best-educated people and they are a mobile, adventuresome bunch. Nearly a third of the state’s residents have arrived since 1980.

‘Easy Come, Easy Go’

“The human consequences are quite different from that of an Ohio steel town,” says Arlon R. Tussing, a Seattle-based energy economist with long experience in Alaska. “The Alaska economy is a revolving door. The wealth is so new that it’s sort of easy come, easy go.”

Nor is there an entrenched Alaskan oil community as there is in the Southwest. There aren’t many local oil firms to go out of business, because only the biggest of the multinationals--Exxon, Shell, Arco and Sohio--can afford to find, drill and lift oil in this part of the world.

The oil just shoots from the ground, through an 800-mile-long pipeline and into waiting tankers for shipment to the lower West Coast. Alaska accounts for about 1% of the nation’s oil and gas jobs while supplying 20% of its oil.

Except for a couple of office buildings in Anchorage, the pipeline itself and the lobbyists in Juneau, “The oil industry in the state is almost invisible,” said economist Scott Goldsmith of the University of Alaska’s think tank, the Institute for Social and Economic Research.

Out of sight, yes, but still very much on the minds of Alaskans, who grab about a third of the oil off the top in the form of taxes and royalties and have grown to like it.

There was a time when Alaskan oil meant the stuff that seeped naturally to the surface of the tundra. Eskimos would hack out chunks of oil-laden ice, melt it and burn the oil for fuel.

It was easier and cheaper than drilling, but it wouldn’t have done much to ease a national energy shortage. That effort took big money, fancy engineering, generous oil prices and broad public support over an 18-year period that changed Alaska forever.

Pumped to Ships

Today, the huge fields near this prefabricated town on the barren North Slope are yielding a fifth of all domestic oil, which is pumped south to waiting ships through a pipeline that is a $9-billion monument to the value the world attaches to petroleum.

That value was a meager $1.40 a barrel when the big Prudhoe Bay oil field was discovered in 1968. But as the world price of crude oil skyrocketed in 1979, to $30 a barrel and more, the tax man turned Alaska into a sort of small-time Abu Dhabi of the Western Hemisphere.

A state government whose annual budget was barely $100 million in 1968, when Atlantic Richfield and Exxon made their big oil strike, has raked in about $24 billion in oil revenues since the crude began flowing through the pipeline in late 1977. That comes out to $44,000 for each current state resident, and has led to annual state spending of $5,500 per capita--five times the national average.

The state has spent about $16 billion of its oil windfall on a feverish campaign to build up its “infrastructure,” an understandably overworked term among business and political leaders trying to establish some kind of economic normalcy in a region where more than 200 towns--including Juneau, the capital--are not connected by roads.

Services Improved

Thanks to oil-supported capital outlays that ran 12 times the national average, the Alaskan landscape now is dotted with new airports, highways, piers for the state-owned ferries, museums, schools, sports centers and convention centers. The University of Alaska has been vastly expanded, and water, sewer, electric and other basic services have been improved and extended to remote villages.

There is at least one handmade, $25,000 conference table in the Legislature, but no palaces of gold in evidence. The most outrageous proposals--one lawmaker wanted to bail out Chrysler Corp. and another wanted the state to build a domed ski resort at the foot of Mt. McKinley--did not get far.

Perhaps everyone just ran out of breath: Anchorage bank economist Scott Hawkins estimates that $500 million was appropriated but never spent, and remains in various state accounts.

Said Yes to Everybody

Jan Faiks, who raises llamas near Anchorage when she isn’t busy as a legislator, says sardonically: “We had a wonderful time. It was a wonderful, nouveau riche spending spree. For seven years, we were literally able to say ‘yes’ to everybody. Government,” she says sternly, “was not meant to have too much money.”

Now that world oil prices--after reaching heights that few had expected and creating wealth out of all proportion to the 500,000 people who live here--have plummeted unexpectedly, oil will bring Alaska’s government about $1 billion less than expected this year.

It’s the sort of thing that could be expected to cause an Alaska-sized hangover following what has been characterized for years as a drunken spending spree. And the oil industry itself ought to be beating a retreat from the frozen North, the costliest place to drill in the United States.

Dire Predictions

When the audience is right, that dire picture is sometimes drawn--by oil executives trying to head off an Alaska state tax increase, for instance, or by Gov. Bill Sheffield when he is urging the White House to permit sales of Alaskan oil to Japan.

Yet, for now, Alaska’s oil predicament appears considerably less dramatic than might be supposed.

While oil states such as Louisiana, Texas and Oklahoma are reeling from the price collapse and shutting down tens of thousands of wells that were losing money at today’s low prices, Alaska’s prolific oil reservoirs are considered almost immune to such retrenchment.

The difference: An Alaskan well produces an average of about 1,900 barrels a day, compared to a national average of 15 barrels daily per well. The industry is shutting down tired old “stripper” wells that are pumping only a few barrels a day, or not enough to cover fixed costs.

No Wells Closed

To date, not one of Alaska’s 977 producing wells has been closed because of last winter’s price collapse. Although more than half the drilling rigs in the United States have been idled since December, the number of rigs active in Alaska has held, according to Denver-based Petroleum Information Corp. Drilling cuts in some areas have been offset by new drilling elsewhere.

The problems could come in the out years: As it has elsewhere, the oil industry has largely put a hold on new exploration. Alaska, which in recent years has proved a disappointment to explorers, will suffer in time from Big Oil’s budget ax.

Meanwhile, the Prudhoe Bay field is expected to enter its natural period of decline in production sometime next year. The yield is expected to fall from 1.5 million barrels a day to about 365,000 barrels daily in the year 2000. Newer fields discovered so far aren’t large or productive enough to offset that decline, and some of them might not be worth developing at today’s low oil prices.

One new North Slope oil field that is considered marginal, Conoco’s Milne Point, began producing in December, just as prices went into collapse. Phase 2 of that project has been halted while three wells continue to pump on the site, the only one on the North Slope that is considered vulnerable.

Texaco Biding Its Time

Meanwhile, Texaco officials suggest that development of the only significant new oil source found in Alaska last year--the Colville Delta field--will be put off until the direction of oil prices becomes clear.

Alaska’s astute stashing away of money, if not its breakneck mission to spend at the same time, reflects a long recognition that its petroleum era will probably reach its peak in this decade. To some, the price collapse suggests that the peak has already passed before Alaska has had a chance to build a more stable economic future.

But nearly every long-term project that was already begun, including the two major new North Slope fields being developed by Arco and Standard Oil, has been given renewed approval amid company-wide cost cutting. Arco will spend a record $350 million on North Slope construction this summer, as its annual summer convoy brings in equipment on 26 barges to support its new, 3-billion-barrel Lisburne field, which is scheduled to start producing later this year.

As for the seriousness of the price collapse, today’s $15 a barrel is still higher than the $12 price that prevailed when the costly pipeline was finished. And, by some estimates, it costs less than $3 a barrel to bring to the surface oil from the Prudhoe Bay reservoir.

Still Making Money

“That oil was never worth $30,” snorts Walter J. Hickel, the former Alaska governor and U.S. Interior secretary, a Republican who just climbed into the gubernatorial race and is given a good chance of unseating Democrat Sheffield this year.

Harold Heinze, head of Atlantic Richfield’s big Alaska operations, laments a recent sharp drop in profits, but concedes that Arco is still making money in Alaska. He told an Anchorage audience recently: “I don’t think any of the companies are prepared to even contemplate shutting in the major fields on the North Slope.”

Says Mano Frey, head of the Alaska AFL-CIO, whose members face non-union competition and a sharp drop in usually high wages: “The timing of the price decline couldn’t have been better, in terms of winning support for the poor oil industry. At $11 a barrel, they’re still making a profit. Imagine how they were doing at $27.”

Alaska is seeing a leveling off of oil employment growth rather than massive layoffs. Although its development drilling has been cut in half, Arco employs 100 more people in Alaska today than it did a year ago. Standard Oil, the state’s biggest producer, said that it hasn’t trimmed its work force, either. The state’s unemployment rate, always high because so much work is seasonal, was 11.4% in March--a fraction lower than it was a year earlier.

There is general agreement that some Alaskan economic dislocations have been building gradually for about three years, as the long-running oil boom led to a glut of housing, office and retail space. Says Gov. Sheffield: “We’re overbuilt. We’ve got a 7-Eleven store on every corner.”

“Even when vacancy rates started to climb last fall, people continued to build,” says economist Tussing. “There’s a conviction here that there’s an inherent momentum to the boom.”

Resources Barely Tapped

Although uncertainties lie ahead, that’s a conclusion that is easy to reach. The North Slope alone has another 70 billion barrels of untapped, though hard-to-get, oil in the ground. That is seven times the potential of the entire Prudhoe Bay reservoir.

Two other fields are in production on the North Slope, and six more are under development or have been identified. One of them, Kuparuk, is the second largest in the nation. As for drawing any conclusions from the lack of major discoveries here in recent years, Arco’s Heinze says:

“In terms of sheer odds, that’s like having four wells in California and deciding whether California has potential or not. We’ve got a mere smattering of wells up here. In the North Sea, they didn’t find anything for the first 10 years.”

Meanwhile, the state’s public and private wage scales, historically generous to cover what used to be a 30% higher cost of living, remain high. As of 1983, the most recent comparison made, state employees were earning nearly 50% more than their counterparts in other states. Over the last five years, however, the difference in cost of living between Anchorage and the rest of the country has been narrowed to between 10% and 15%.

Wage Gap Shrinking

Labor leader Frey concedes: “We can’t justify, like we used to, the big wage gap.”

Since the expiration of master labor agreements on Jan. 1 and the oil industry’s flat refusal to renegotiate, oil jobs increasingly have gone to non-union contractors. This is driving down wages and forcing unions to relax work rules. Given new impetus by the oil-price collapse, by March, the non-union dominance of the oil fields work force was estimated at 72%. “The transition we are making in this state in a mere four months is remarkable,” says Arco’s Heinze. “No longer do the unions set the wages in North Slope construction. We had caterers with janitors making $85,000 a year. Since Jan. 1, it turns out, there are people willing to do that job on the North Slope for a mere $35,000.”

Bill Webb, whose Anchorage-based Arctic Hosts catering firm operates remote camps for oil-service firms, suddenly finds himself competing for contracts with three times the usual number of bidders. Many of the newcomers are from Texas, England and other places where the multinational oil corporations have longstanding relationships with such supply companies.

‘Absurd’ Labor Costs

“Arco and Sohio decided the cost of doing business on the Slope had gotten absurd,” Webb said. “We used to pay more in benefits than some people in the Lower 48 made in wages. We’ve been sheltered up here, and had our own thing going. We’re rapidly finding out we’re part of the world economy, whether we like it or not.”

As Alaska re-enters the atmosphere, it certainly seems to be headed for a soft landing.

The state’s dominant public economy continues to be pushed ahead by the massive, oil-fed projects begun in earlier years. Work is to start this summer on the biggest one yet: a $350-million hydroelectric project at Bradley Lake on the Kenai Peninsula.

After much hand-wringing over the projected $1-billion shortfall in oil tax revenues, the Legislature in May voted to make up nearly the entire difference by drawing on various reserve funds and a windfall that came from settlements of oil-pricing disputes. Thus, in the face of an expected 40% revenue decline, the Legislature cut spending by just 7.5%.

State Still Saving

During these theoretically dark days, the Legislature has also managed to scrape together another $1 billion for its sacred Permanent Fund, an oil-supported savings account now approaching $10 billion in principal. The fund cannot be raided without voter approval, and part of its earnings provide the much-publicized annual dividend payment to Alaskans--each of whom got $404 last year. The dividend is a sort of reverse income tax; the state’s personal income tax was repealed several years ago.

“They have money just lying around. It’s merely a question of gathering it up,” says Tony Arthur, who follows Alaska finances for Standard & Poor, the New York credit-rating firm that recently reaffirmed Alaska’s strong rating while downgrading that of Texas.

There are those who argue that the fiscal 1987 spending cut should have been steeper and the deposit into the Permanent Fund smaller, that a bigger cushion should have been left for 1988 and 1989. Citing the state government’s major role in Alaska’s economy, the elected leaders--facing reelection this year--have been reluctant to slash spending too steeply.

‘Act of Faith’

“It was either a cynical move in an election year or an act of faith that oil prices will recover,” says economist Hawkins, who is allied with Republican groups.

Gov. Sheffield, who has yet to sign off on the budget, asks: “What are we going to do, cut the whole $1 billion in one year? You’d put the economy into a tailspin.” Besides, the governor adds, the state expects still more lucrative court settlements of oil price disputes: “We’ve probably got $2 billion or $3 billion more coming.”

The price turnaround has inevitably renewed Alaska’s long debate with itself over the virtues of an oil-based economy and what will be left when it’s gone.

Economists generally agree that the state has failed miserably to diversify its economy, but they also say that the petroleum income has brought that goal closer by bringing with it cheaper power, better schools and roads, and the like. Polls show an overwhelming sentiment that oil has been good for the state, says Anchorage pollster David Wittman.

Explorer Cites Changes

Kathleen (Mike) Dalton, who traveled to Alaska’s northernmost reaches in 1950 to join the U.S. Navy oil expedition with her husband, Arctic pioneer Jim Dalton, recalls living in Quonset huts at Barrow and helping to build a “Rube Goldberg refinery” at Umiat--regions that since have been brought into the 20th Century with communications systems, schools and other modern fixtures made possible by oil money.

“It wasn’t that romantic. It was tough,” says Dalton, a former journalist who is now a legislative aide in Juneau. The Dalton Highway to the North Slope oil fields is named for her late husband.

“Those were good years, though, with close-knit communities. We lost some of that during the pipeline years, with the camp followers and so forth, but I believe the state is richer for some of the good people who have stayed.”

At the same time, Dalton and others deplore some of the behavior that has resulted from the easy money. Pollster Wittman talks of “a feeling that some economic contraction is good for us, that there will be a purging of wasteful habits.”

From that standpoint, a resurgence of oil prices would be bad news. That’s how Fairbanks resident Earnest views it. The director of purchasing at the University of Alaska’s Fairbanks campus and one of the minority who liked it better before the big oil strike, Earnest is uneasy about the recent rise to the $17-a-barrel price range.

“That’s as if someone just began to sober up after a long drunk and his friends showed up with a new bottle,” Earnest said.

In today’s Business section: Injuries to the oil exploration business may be permanent. On Monday: The American independent oil producer, a dying breed.