Alaska's construction spending forecast for 2014: annual report for the construction industry progress fund and the Associated General Contractors of Alaska.

• Author: Goldsmith, Scott
• Position: SPECIAL SECTION: Building Alaska - Statistical data

OVERVIEW

The total value of construction spending "on the street" in Alaska in 2014 will be $9.2 billion, up 18% from 2013. (1,2,3)

Wage and salary employment in the construction industry, which was stable last year at about 16,300, should continue at that level through the next year. (4)

The oil and gas sector will account for most of the growth this year. It will total $4.3 billion, up from $3.2 billion last year.

Other spending will be $4.9 billion, up from $4.6 billion last year.

Private spending, excluding oil and gas, will be about $2.0 billion, up from $1.9 billion last year--and public spending will increase from $2.7 to $2.9 billion.

The robust projection of construction spending in Alaska in 2014 is due to four factors. The largest and most obvious is the petroleum industry's expanded investment plans.

Federal government spending will be higher than anticipated, because of both a larger Department of Defense budget and the one-time re-allocation of previously unspent federal highway funds.

State government spending will also be strong, notwithstanding the reductions in state appropriations for capital projects the last two years. In FY2013 the state appropriated a record high $2.8 billion (including transportation bonds) for capital spending for projects (excluding federal grants). That fell by $1.7 billion in FY2014, to $1.1 billion. For FY2015 the governor has proposed project spending of $0.6 billion.

State-funded construction spending has been largely insulated from that drop, for several reasons. First, the record-breaking appropriation in FY2013 pumped more money into the construction "pipeline" than it could handle, so many projects funded then are only now under construction. Second, many projects now receive only partial funding in a single year--so many projects from the large budget years are still seeking additional funding to start or continue to completion. Third, the FY2013 bond appropriation has yet to be fully utilized. Also, many of the projects approved in the record capital budget were not construction-related.

Finally, the economy has continued to grow, adding jobs and population. This fact, together with the renewal of cautious optimism in the oil patch, has led to higher private spending in the residential and commercial construction sectors.

Most of the uncertainty in the forecast this year is in the oil and gas sector. We assume that the oil and gas companies will be largely successful in carrying out the plans they have announced for the year. (5) But plans can and do change, because of many factors associated with weather, logistics, availability of supplies, evaluation of work completed, regulatory and environmental challenges, prices of oil and gas, and other operational and strategic concerns. The continued uncertainty about the future direction of state petroleum tax policy, possible new energy policy initiatives put forward by the second Obama administration, and the prospects for construction of a gas pipeline to commercialize North Slope gas add a cautionary note not only to industry planning, but to the entire economy.

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 2014 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 as the state capital budget grows it becomes more time-consuming to follow all the flows of state money into the economy.

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

PRIVATELY FINANCED CONSTRUCTION

Oil and Gas: $4,255 Million The biggest sector, and the one projected to increase the most this year, is oil and gas. We expect that if actual spending matches the announced plans and past experience in the industry, spending will be up 33% from $3.2 billion last year.

The growth is being driven by the continuing high price of oil, the increase in the cost of inputs to all phases of oil and gas operations, the growing need to maintain the aging infrastructure and facilities on the North Slope and in Cook Inlet, and perhaps most importantly, by the climate of optimism created by passage of the new production tax on oil and gas that went into effect at the start of 2014.

On the North Slope, Conoco Phillips will be conducting exploratory drilling at Kuparuk and in the NPRA (National Petroleum Reserve Alaska) west of the Colville River, where the company hopes to develop the Greater Moose's Tooth Prospect. Conoco's largest project will be developing the CD-5 satellite, also west of the Colville River and the Alpine field. Work this year will include a bridge, module installation, and pipeline fabrication. British Petroleum has announced an expanded capital budget this year, with concentration on more well work-overs and well stimulations at Prudhoe Bay. The company has also begun to re-evaluate its Liberty prospect, and expects to increase capital spending by several billion over the next five years. Exxon Mobil is continuing work on development of its Point Thomson field.

Shell Oil is hoping to come back and complete the well it started to drill in 2012, on the OCS (Outer Continental Shelf) in the Beaufort Sea. Meanwhile, Statoil has not announced any plans to explore its prospects in the Beaufort Sea.

Also on the North Slope, ENI is continuing to drill wells in the Nikaitchuq field, and Savant is re-working wells at Badami. Pioneer has plans to expand its facilities at the Oooguruk field, with an additional onshore production pad and expanded island. (6)

Brooks Range Petroleum is working to develop the Mustang...