2018 Alaska Construction Spending Forecast.

• Author: Bell, Larry
• Position: Building Alaska

Dear Alaskans,

The Construction Industry Progress Fund (CIPF) and the Associated General Contractors of Alaska (AGO proudly offer the Alaska Construction Spending Forecast as a guideline to construction activity and its effect on the 49th State in the year ahead.

Under a special arrangement with the Institute of Social and Economic Research (ISER) at the University of Alaska Anchorage, Scott Goldsmith and Linda Leask have again compiled and written the forecast. The Alaska Construction Spending Forecast reviews construction activity, projects, and spending by both the public and private sectors for 2018.

CIPF and AGC are proud to make this publication available annually and are confident it provides useful information for many of you.

We recognize in these times of economic uncertainty there is a likelihood of reduced construction activity, and some of this information contained herein may change.

The construction trade is Alaska's third largest industry, paying the third highest wages, employing more than 15,000 workers and contributes $6.6 billion to Alaska's economy. The construction industry reflects the pulse of the economy, and when it is vigorous so is the state's economy. Therefore, it is imperative to keep building and repairing necessary infrastructure laying the groundwork for the future.

AGC is a nonprofit, full service construction association for commercial and industrial contractors, subcontractors, and associates. CIPF is organized to advance the interests of the construction industry throughout the State of Alaska through a management and labor partnership.

After falling by half in the last two years, spending by the petroleum industry will start to recover because of the rise in the price of oil and more support for the industry from the federal and state governments.

Civilian federal spending in Alaska, most of which funnels through state and local government, fluctuates little from year to year and thus tends to stabilize the size of the construction budget. Military-related spending is more variable, and in recent years has been growing, largely due to the Missile Defense program and most recently the assignment of two F-35 fighter plane squadrons to Eielson Air Force Base outside Fairbanks.

Local and state government spending--particularly state--will continue to contract. But since the state capital budget now consists almost entirely of the match required for the state to get federal transportation funds, it is close to bottoming out. The unexpended funds from prior year capital appropriations are almost entirely gone. By contrast, local government spending remains relatively stable.

The non-petroleum basic sectors of mining, tourism, seafood, and air cargo are expanding, thanks to the strength of the national economy, and that growth will be reflected in modest increases in construction spending in these sectors.

Construction in the rest of the private economy will suffer another year of contraction because of the continued poor performance of the state economy. Alaska's population declined in 2017, and the current recession is expected to continue into 2018.

As in past years, some firms are reluctant to reveal their investment plans, because they don't want to alert competitors; also, some have not completed their 2018 planning, Large projects often span two or more years so estimating "cash on the street" in any year is always difficult--because the construction pipeline never flows in a completely predictable fashion. Tracing the path of federal spending coming into Alaska without double counting is also a challenge, and because of the complexity of the state capital budget, it is always difficult to follow all the flows of state money into the economy.

We are confident in the overall pattern of the forecast--but as always, some surprises can be expected as the year progresses.

Privately Financed Construction

Petroleum: $2.56 Billion

The outlook for petroleum-related construction spending in 2018 is brighter than in the last two years. There will be an upturn toward the end of 2018, during the winter season, due to a number of factors. Those include favorable federal and state policy, recent discoveries, a large inventory of projects, price recovery, and cost-cutting.

Perhaps the most significant recent federal policy change affecting Alaska is the decision to open the 1002 region of the Arctic National Wildlife Refuge to exploration. That decision--along with the opening of federal offshore lands (OCS) to leasing--will not immediately lead to spending, but it does demonstrate a renewed federal interest in the petroleum industry in Alaska. Of more immediate effect is the possibility that the area within the National Petroleum Reserve-Alaska (NPR-A) open to exploration will increase. Production has already begun there, and a new report from the US Geological Survey concludes there may be much more recoverable oil in NPR-A than previously thought.

Exploratory work is proceeding at three North Slope sites where potentially huge discoveries in the Nanushuk formation have recently been announced. If these prospects prove economic, they will result in billions of new capital investments in the coming years. The largest, but most challenging because of its remote location, is a discovery by Caelus at Smith Bay. Repsol, in partnership with Armstrong (and Oil Search), is investigating a large discovery at its Pikka unit. And ConocoPhillips will be studying a 2017 discovery called Willow, west of its existing projects in NPR-A.

When the price of oil collapsed in 2014, a number of North Slope projects under development were postponed as producers waited for improved market conditions. Now that the oil price has increased and costs in the oil patch have fallen--estimates for the North Slope range up to 40 percent for oil production--producers will be moving forward with some of these projects. (For example, Eni recently received a federal permit to drill offshore in the federal OCS at Nikaitchuq North, and Brooks Range Petroleum is moving forward to develop the Mustang field.)

In addition, in the last few years a number of firms, particularly those active in Cook Inlet, came to depend on receiving cash from the state government's tax credits. But the...