The Alaska Contractor - Spring 2011 - Keep Trees

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Back to the future Oil and Alaska: a proven, powerful partnership BY RA C H A E L FI S H E R One year ago, AGC of Alaska Executive Director John MacKinnon wrote a column, “It’s taxes stupid,” to bring attention to legislation that would attempt to undo some of the negative impact of Alaska’s Clear and Equitable Share. Another year with ACES has passed and the construction industry, particularly those who work on the North Slope, continues to suffer the unintended consequences of the tax’s stifl ing effect on oil exploration. ACES gave the state’s economy a boost and allowed Alaskans to enjoy a healthy capital budget while much of the country felt the full effect of the national recession. But the industry that helped build Alaska seems to be growing weary of the progressive tax’s take—ACES taxes oil twice as much as any other market with the state taking more than 80 percent of current oil revenue. “Although high oil taxes help the state’s treasury, oil must be produced in order for it to be taxed,” MacKinnon wrote. In addition to implementing progressively higher taxes, ACES also took away incentive for new development by curtailing deductions and credits. The lack of incentive for investment in oil exploration in Alaska coupled with capping the profi ts to be had here at far less than other markets is threatening the livelihood of Alaska’s biggest industry. You’d be hard pressed to fi nd a contractor who doesn’t agree that working in Alaska is logistically challenging with limited infrastructure, and some of the most remote locations and extreme climate conditions in the world. Add a hefty dose of environmental regulation to that. Then add an excessive tax structure to the mix and it isn’t diffi cult to see how The Last Frontier is quickly becoming an unattractive place for oil companies to do business. “I think not only is ACES not conducive to business, I don’t think that it is fair to expect that they are going to come up here and invest hundreds of millions of dollars in new projects when their best case scenario is a 15 percent take,” said Carlile Transportation Systems CEO Harry McDonald. “I don’t think we should give it away but I think it has to be fair.” It is costly to do business here with many of the expenses being beyond control but oil taxes can be controlled by the state. Oil companies, like any other business, will seek the most profitable opportunities. And in the face of anticipated declines in federal spending as the country wrestles with a huge national debt, private industry growth is more important than ever to Alaska’s construction economy. In Alaska, private industry growth is dominated by oil. Now Alaska is facing both declining production and a sudden, steep decline in exploration. This year— for the second consecutive year— ConocoPhillips, a long-time investor in AIC’S 2010 EQUIPMENT the state’s oil industry, will not drill any exploration wells. The oil giant is one of Alaska’s most active explorers and 2010 was the fi rst time in more than 40 years that the company did not drill a single exploration well. And it’s not alone— only one exploration well will be drilled in Alaska this year. Meanwhile the trans-Alaska pipeline is only operating at one-third capacity and production is expected to decline further. “I think that the state needs to make itself competitive for the oil companies otherwise they are going to take the profi ts they make from the state and go spend them somewhere else just like any other business would,” Steve Percy, president of Alaska Interstate Construction, said. Percy would like to see a combination of adjustment to the progressivity of ACES and a method to reward oil companies who engage in additional development and get more oil into the pipeline. Without exploration activity the Alaska companies that specialize in oil fi eld services are among the fi rst UTILIZATION AV E RAG E EQ U I P M E N T TY P E SERV I C E TR U C K S SNO W B I R D S SNO W B L O W E R S 16G MO T O R GR A D E R TRI M M E R S/DI T C H W I T C H B-70 HE AV Y HA U L UN I T S KEN W O R T H TR A C T O R T-500 KEN W O R T H TR A C T O R T-800 966 FR O N T EN D LOA D E R 988 FR O N T EN D LOA D E R D-9 DO Z E R HITAC H I 450 EX C AVAT O R TOTAL NU M B E R O N SL O P E 74 The Alaska conTrAcTor Spring 2011 9 14 4 3 5 6 15 13 8 2 3 4 86 EQ U I P M E N T VA L U E $914,745.00 $1,598,723.32 $411,249.00 $569,839.47 $640,351.75 $1,125,332.53 $1,957,144.44 $1,333,548.57 $2,728,944.24 $910,882.89 $1,026,409.47 $1,467,921.79 $14,685,092.47 HO U R S P E R UN I T 1373.67 300.86 327.50 535.67 121.20 51.67 753.20 481.08 748.13 324.50 121.00 90.75 526.98 • A typical work week for in service equipment is 70 hours/week or 3,640 hours/year • Decent utilization is 1,000 hours/year minimum TO TA L IN T E R N A L RE N T $210,171.00 $219,024.00 $65,500.00 $110,883.00 $33,330.00 $18,910.00 $282,450.00 $118,826.00 $329,17 5.00 $71,390.00 $35,937.00 $29,040.00 $1,524,636.00 GRAPHIC: COURTESY OF AIC
to feel the trickle-down effect of ACES. Companies are faced with such undesirable options as losing revenue, laying off employees or relocating operations to active oil exploration sites. Alaska businesses such as AIC, Carlile, Cruz Construction and Little Red Services have experienced signifi cant drops in the volume of business related to oil exploration. This year AIC will have an equipment fl eet valued at $20 million on the North Slope, specialized for Arctic work, sitting underutilized and depreciating without exploration activity. “If we can’t put that depreciation cost against a project then it comes out of our margins. We have to keep the equipment ready for when and if it’s needed, and if we can’t make money on that equipment then it is just a huge cost center,” Percy said. Carlile is trying not to buy new tractors this year (in a normal year it would purchase 20 to 30). The company experienced a 30 percent drop in volume in ’09. Typically at this time of year there would be as many as 70 Carlile trucks running north but only half are working now. And usually the company would have added 15 employees on at this time of the year but added none in 2011. “Quite honestly I was adding this piece of equipment under the assumption that we would revise our tax and get back into the market,” LRS President and CEO Doug Smith said. “A key element is the exodus of equipment to the Lower 48. It is diffi cult and timely to get equipment back should we start a more active drilling program.” The near halt of oil and gas development in the state is also forcing skilled Alaskan workers to look Outside for employment that offers a future with long-term, good-paying jobs. The number of AIC employees working in the oil and gas division is projected to plummet more than 68 percent in 2011, leaving the company with only 125 of the Spring 2011 The Alaska conTrAcTor 75
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Associated General Contractors of A
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KODIAK FLOORING REPLACE $774,482 Pr
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PRESIDENT’S MESSAGE Long-term oil
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Forecast predicts Alaska constructi
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Spring 2011 The Alaska conTrAcTor 1
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up-to-date information about laws a
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Page 42 and 43: MEMBER PROFILE R&M CONSULTANTS INC.
Page 44 and 45: photo: © Ken Graham photoGr aphy.C
Page 46 and 47: FINANCIAL SERVICES & CONTRACTORS Co
Page 48 and 49: Energy effi ciency programs keep co
Page 50 and 51: photo: Jo dy ellis-Knapp Sean Skali
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Page 61 and 62: Fairbanks 14th Annual 2011 BoWL THo
Page 63 and 64: Curtis McQueen, CEO of Eklutna Inc.
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Page 67 and 68: HUMAN RESOURCES UPDATE Employees do
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Page 88 and 89: AGC members’ projects 2010 Winner
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Page 98 and 99: Member NEWS In Memoriam Herring, Jo
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Page 102: New AGC Members continued TRIODETIC
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