State revenues down, but Permanent Fund earnings and marijuana tax income are bright spots

To no one’s surprise, state revenues from traditional sources dropped last year and are expected to show declines this year and next mainly because of the economic disruptions of the COVID-19 pandemic, according to the Department of Revenue’s long-term forecast released Dec. 11.

Almost all categories of traditional revenues from oil and gas, fisheries, mining and the state corporate income tax, showed declines. One exception is state marijuana sales tax revenue, which is estimated at $7.2 million this year, up from $6.4 million last year. Next year it is estimated to be $8 million.

Forecasting during a pandemic is tough.

“This fall revenue forecast comes during a continued period of uncertainty regarding COVID-19. Given the unprecedented nature of the COVID-19 pandemic, it is impossible to make predictions on the stock market, oil prices, future tourist activity, or revenue with certainty,” state revenue commissioner Linda Mahoney said in a statement.

The bright spot for overall revenues, besides marijuana taxes, is in nontraditional income from investment earnings, mainly the Permanent Fund.

In fact, Permanent Fund earnings are expected to pay for about 71 percent of state unrestricted general fund, or UGF, expenditures this year and 72 percent next year. Conventional revenues, like oil and gas taxes, will pay for only 18 percent to 19 percent of UGF spending.

The transfer of earnings to help support the budget, authorized under s state law passed two years ago, is expected to be stable at $3.1 billion a year over the next two years. That is up from $2.9 billion transferred from Fund earnings last year.

This is the Percent-of-Market annual draw from the Fund’s earnings reserve account at a rate of 5.25 percent of the Fund’s total value averaged on the previous five years of earnings.

The outlook is not so bright for other state revenues, however. Petroleum revenues showed the greatest volatility, dropping from $1.08 billion last year to about $861 estimated this year and $808 forecast for next year.

Non-petroleum revenues, which include state fisheries, mining, fuel, insurance, and state corporate income taxes also dropped, from $462 million last year to an estimated $363 million this year. They are forecast to drop to $372.8 million next year. The corporate income tax showed the largest decline from $102 million last year to estimates of $30 million this year and $25 million next year.

Lower corporation profits caused by pandemic-related economic troubles mainly in the tourism sector likely caused this decline.

Fisheries taxes showed a drop from $33.9 million last year to an estimated $19.5 million this year, reflecting the unusual summer season this year. A small recovery to $20.8 million next year.

Minerals taxes and royalties appear more stable, dropping from $38.4 million last year to $32.5 million this year, and forecast to rise to $45.8 million next year.

Oil production, which affects the amount of royalties and taxes paid the state, are forecast to drop next year but then recover in the following year as new projects on the North Slope come online.

North Slope production is expected to average 477,294 barrels per day this year but is expected to drop to 439,587 barrels per day next year, according to a forecast by the state’s revenue department.

It is expected to recover to 446,963 barrels per day on FY 2023 and 263,335 in Fiscal 2024, the department said. The estimates are mid-case forecasts. The revenue department also developed high and low cases.

“Drilling and investment were sharply reduced this year, and are reflected in the lower near-term forecast, but we are hopeful that new developments will contribute to stabilizing production over the coming decade,” state revenue commissioner Mahoney said.

North Slope fields are expected to be back to an average of 481,843 barrels per day by Fiscal 2030 based on plans for new projects by producers, Mahoney said.

The state revenue department also included estimates for Cook Inlet, in southern Alaska, which is forecasted to produce 15,400 barrels per day on average in Fiscal 2021, down from an average of 17,900 barrels per day the previous year.

The decline in the current year North Slope production average is mainly due to cutbacks in production last summer when Alyeska Pipeline Service Co. ordered a 25 percent reduction of pipeline throughput because of slack market demand, and ConocoPhillips instituted a one-month 100,000 barrels per day reduction in producing fields on the slope that it controls.

The reductions were lifted by mid-summer and TAPS returned to its normal summer throughput. In November, slope producers averaged 499,233 barrels per day.

Drilling was also cut last spring in the three largest producing fields, Prudhoe Bay, Kuparuk River and Alpine, which will have a lagging negative effect on production over the next year from the loss of incremental output from new production wells drilled in the fields.

ConocoPhillips said in November it would put some rigs back to work next spring, but the benefits of that new oil will not be felt for some time.

One new project in construction that has remained on schedule despite the plunge in oil prices and concerns over COVID-19 is ConocoPhillips’ GMT-2, in the National Petroleum Reserve-Alaska west of the producing Alpine field.

GMT-2 is on track to be completed and in production in late 2021 with a peak rate of 35,000 barrels per day to 40,000 barrels per day. It is the main reason why state forecasters see an improvement in output by 2024. One other smaller project is ConocoPhillips’ Fiord West, in the Alpine field, where development will be resumed next year. Fiord West is expected to add 20,000 barrels per day in new production.

Two larger projects now in advanced planning includes ConocoPhillips’ Willow, also in the NPR-A and west of GMT-2, and Pikka, a project on state lands near the Alpine field.

Final engineering on both projects is expected to be underway in 2021 with Final Investment Decisions late in the year. Willow is expected to produce more than 100,000 barrels per day, ConocoPhillips has said, with a cost at full development of $6 billion. Pikka, being developed by Papua New Guinea-based Oil Search and its minority partner Repsol, is expected to produce 80,000 barrels per day in an initial phase and 120,000 barrels per day when built out, with an initial phase one cost of $3 billion and $6 billion when fully developed.

The expectation of these projects and several smaller ones underpin the state’s expectation of a return to 488,000 barrels per day by 2028.