HomeMy WebLinkAboutLower Cook Inlet Sale, SEEA Economics Factors 1981
LOWER COOK INLET LEASE SALE, SEEA:
ECONOMIC FACTORS January 1981
By: Gordon S. Harrison, Lee Huskey, and Thomas A. Morehouse
Institute of Social and Economic Research University of Alaska
for State of Alaska, Division of Policy Development and Planning
January 28, 1981
AC g6165% i
INSTITUTE OF SOCIAL AND ECONOMIC RESEARC _ UNIVERSITY OF ALASKA -
Hymne meme eS S| Lower Cook Inlet Lease Sale
SEEA:
ECONOMIC FACTORS
January 1981
by
Gordon S. Harrison
Lee Huskey
Thomas A. Morehouse
Institute of Social and Economic Research
University of Alaska :
for
Division of Policy Development and Planning
State of Alaska
January 28, 1981 m AC 7421655
Wena eal al — — — A 7m mH eS = = ECONOMIC FACTORS
Introduction
Long-term regional impacts of oil and gas leasing aba a function of
the size and location of discoveries that may result. The size and loca-
tion of reserves determine the type, magnitude, and site of production
facilities, which, via their direct employment, are the source of local
socioeconomic impacts. Size and location of petroleum reserves, however,
can only be known through exploratory drilling. To forecast socioeconomic
impacts of petroleum development in advance of actual discoveries requires
speculation about petroleum resources and their probable pattern x
development. As a planning exercise, this process is very tentative and
preliminary, but useful to the extent it identifies potentially signifi-
cant community impacts that can be influenced by measures taken in the
pre-lease period.
In the lease sale at. hand, the state Department of Natural Resources
(DNR) estimates that acreage to be offered may reasonably be expected to
yield discoveries of 100 million barrels of oil (recoverable) and a half
trillion cubic feet of natural gas. A hieheeoite estimate for the
acreage is 300 million barrels of oil and 1 trillion cubic feet of gas.
The most promising acreage is offshore, so it is assumed that exploration
and development would occur there.
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New oil discoveries of 100-300 mmbbls in the area of this sale would
be comparatively modest .2 Production from fields in Upper: Cook Inlet has
been declining for years, and as a result there is surplus capacity in
existing onshore facilities. Oil produced from fields found in this sale
could utilize the Drift River terminal and Nikiski refineries. It is not
clear when or how new gas reserves of 0.5 to 1.0 Tcf would be marketed.
We believe, however, that by itself, this new gas would not be directly
responsible for construction of either hike 1 or 2 of the proposed Pacific
Alaska LNG project.” Consequently, construction of new onshore pipelines,
processing plants, or crude terminals should not be required as a result
of commercial discoveries made from this sale. Field development would be
limited to the installation of production platforms and submarine pipelines.
A corollary of the foregoing assumption is that exploratory drilling
on state leases in Upper Cook Inlet and on federal leases in Lower Cook
Inlet will be unsuccessful, or if successful, the new production would
not absorb existing surplus capacity of shore facilities.° Large commer-
cial discoveries of oil in other lease sale areas, in addition to commercial
AL ecowerable reserves of about 1 billion barrels of oil have been discovered to date in Upper Cook Inlet.
con assumption is that there are sufficient existing reserves avail- able to meet the threshold requirements (200 mmcf/d) of -phase 1, and that construction will occur before acreage in this sale is fully explored and developed. A large (1.0 Tcf) would certainly improve the prospects for phase 2, but, again, it would not alone provide the threshold requirements (400 mmcf/d).
In fact, both the state and federal government have predicted dis-— coveries ir their impact assessments of lease sales in these areas. We have, however, chosen to evaluate the potential effects of this lease sale by imposing a plausible development scenario on the existing situation in
2 ACE 7421657
mH mE EH SE BE SE eee BS S&S S&F 8 Et EE discoveries in this lease sale area, could exceed the surplus capacity
of existing onshore facilities (shore bases, treatment plants, crude
terminals, refineries). In the event that petroleum discoveries result-
ing from this sale could not be produced through existing shore facilities,
some onshore construction would be required, such as expansion of the
Drift River terminal and Nikiski LNG capacity. Thus, manpower require-
ments during the field development period and employment opportunities
for Alaska residents would be greater than in the case of only offshore
development activity. Manpower requirements for the production (operation)
period, however, should not be substantially affected.
The economic analysis that follows hinges on the key assumptions
that exploration and development activities occur offshore and that con-
struction of shore facilities is not necessary. Quantitative estimates
of employment, population, and income effects are derived from a mid-
range development scenario that includes one offshore 100 mmbbl oil
field and one offshore 0.5 Tcf gas field. A detailed description of the
field development scenario and assumptions and methods used to estimate
the economic and population effects appears in Appendix A.
the Cook Inlet area. While we are mindful of the significance of dis-
coveries in other sale areas to the development (and, therefore, impacts) of discoveries in this sale, we believe that building upon hypothetical
development scenarios from other lease sales compounds the imaginary
element of this analytical exercise to an unacceptable degree. Further-
more, our concern is primarily with long-term socioeconomic impacts,
which in this case will be associated with the operation of new offshore
production platforms, even if significant discoveries occur elsewhere.
That is, the marginal effect of production from discoveries in this
lease sale on the manpower requirements for operating shore processing
facilities should be insignificant, whether or not expansion of those
facilities is necessary because of other discoveries.
3 ACE 7421658
Employment
Estimates of total employment generated by the mid-range development
scenario are presented in Table 1. Estimates of the share of this employ-
Ment going to current Alaska residents are shown in Table 2. Note that
these numbers estimate peak number of people employed. During the period
of exploration and field development (years 1 through 5), work will not
be year-round. During the period of operation (year 6 and after), the
numbers represent full-time annual employment.
Employment required for a high-range development scenario would be
between 1.7 and 2.0 times the numbers in Tables 1 and ae
At a given level of petroleum development (that is, at a given level
of demand for labor such as we have hypothesized in the mid-range develop-
ment scenario), several factors influence the number of jobs that will be
obtained by Alaska residents. For exploration and field development
activities, these include the following:
e the match between skill requirements and trained, available
Alaska residents; ‘
e the general demand for labor regionally and statewide at the
time exploration and development activities occur};
4g all of the reserves of the high-range resource estimate were
found in one oil and one gas field and produced from 5 platforms (as
shown in Table A-2), then the workforce would increase 66 percent over
the mid-range scenario. If 6 platforms were required, as might be the
case if two sets of oil and gas fields were discovered with 150 mmbls
and 0.5 Tcf each, then the labor force would be approximately double
that required by the mid-range scenario.
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aay (im = a rs TABLE 1. ESTIMATED TOTAL EMPLOYMENT
MID-RANGE DEVELOPMENT SCENARIO
(peak number of people)
Direct Indirect a
Year Employment Employment Total
1 362 42 404
2 543 64 607
3 543 64 607
4 975 113 1,088
5 1,007 119 1,126
6 184 129 313
(operation begins)
4From Table A-10.
SOURCE: ISER
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TABLE 2.
Year
MID-RANGE DEVELOPMENT SCENARIO
(peak number of people)
Direct Employment* Indirect Employment? Tot
ESTIMATED EMPLOYMENT OF CURRENT ALASKA RESIDENTS
al Employment
Alaska Residents Alaska Residents Alaska Residents
Offshore Onshore Number % of Total
1 16 31 36 83 21 2 24 46 54 124 20 3 24 46 54 124 20
4 44 82 96 222 20 5 45, 88, 101 234 21 - 6 96 22 110 228 73 (operation
begins)
*Prom Table A-7. Wicca Table A-9.
“Total employment from Table 1.
Snoring operational phase, all employees will live in Alaska.
These numbers are estimates of current Alaska residents who obtain
employment from among the estimated 184 new direct jobs.
SOURCE: ISER
ACE 7421661
| e the number of exploration and development contracts obtained
by Alaska-based firms;
| e prevailing wage rates in the exploration and development jobs.
During the operational period, the ptimary factor that affects the number
| of Alaska residents hired is the match between skill requirements and
trained, available residents.
Different assumptions about those factors produce different estimates
of resident employment. Our estimates of Alaskan employment during the
exploration/field development period reflect the following assumptions
about each factor.
e offshore drilling and construction activity requires a rela-
tively high component of skilled labor; few Alaska residents
possess these skills; and the demand for people with these
skills will be high elsewhere in Alaska (many can be employed
onshore as well as offshore, as for example in exploration and
production drilling and in the installation of production equip-
ment at the Prudhoe Bay and Kuparuk fields; also, offshore
exploration will occur concurrently elsewhere in Alaska on state
and federal leases) ;
e@ the general level of demand for labor, particularly oil field
and construction labor, will be high statewide because of con-
tinuing field development and exploration on the North Slope and
construction of the gasline and Alpetco projects;
e major contracts for drilling and construction will go to outside
firms, and comparatively small, peripheral contracts will go to
Alaska contractors;
@ a consequence of the foregoing is that offshore wage rates will
be substantially below Alaska wages for comparable work.
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: Reasoning along these lines, we foresee as few offshore jobs (5 percent)
going to Alaska residents in years 1 through 5 of the development scenario.
We assume, however, that most of the onshore direct jobs (85 percent) and
indirect jobs (85 percent) will go to Alaska residents during this period
because the average skill level is not high and the work is intermittent
(see Tables A-7 and A-9).
Our estimates of employment of Alaska residents during the production
phase reflect different assumptions about the match of skill requirements
and available Alaska senidanta: Operating and maintaining offshore plat-
forms require a highly trained work force, but because production from
existing offshore fields is declining and employment on the Upper Cook
Inlet platforms is declining as a result, there should be experienced
local technicians available for a substantial portion (60 percent) of
the new offshore jovas* A large portion of new onshore direct jobs
(90 percent) and indirect jobs (85 percent) should go to Alaska residents
(see Tables A-7 and A-9) because these jobs require a much lower average
level of skill and because adequate local manpower should be available.
This assumption is clearly related to our assumption that acreage
elsewhere in Cook Inlet is unproductive. In case commercial discoveries
were made on state leases in Upper Cook Inlet, for example, a large
share of platform operation and maintenance jobs would probably go to
in-migrants, depending upon the effectiveness of vocational training
efforts in Alaska and related factors.
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: Population
An estimate of population increase generated by the mid-range
development scenario is presented in Table 3. The figures in Table 3
are based on our estimates of the total amount of employment created by
the development scenario and the likely distribution of onshore jobs
between residents and nonresidents. Incremental population is derived
from these employment estimates by an assumption about the number of
nonworking dependents that would accompany the average onshore in-migrant
worker. This relationship is expressed as a "dependency ratio" (also
referred to as the "labor force participation factor"), which is the
ratio of total population to total work force in the area.
We have assumed that the dependency ratio is smaller in years 1
through 5 than in years 6 and after because most employment will be tem-
porary then, and fewer dependents would be expected to accompany in-
migrant workers during this economically unsettled development period.
We assume that no offshore in-migrant workers would bring dependents to
Alaska during the exploration and development period because the airfare
is normally paid for these workers to their point of hire during rest
breaks. In the operation period, we assume the same dependency ratio
that currently exists in the Kenai Peninsula Borough and the Anchorage
area, which is approximately 2.0 (see Table A-11).
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Total
16
25
25
45
48
TABLE 3. ESTIMATED POPULATION INCREASE CREATED
BY MID-RANGE DEVELOPMENT SCENARIO?
Year Kenai Peninsula Anchorage
> 13 3 2 21 4 = 21 4
4 38 7 5 41 7 6 142 28 (operation begins)
*Prom Table A-11
SOURCE: ISER
10
170
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Economic Stability
The effect of oil development. on economic stability would have to
reflect its effects on five things: employment opportunities, seasonality
of employment, linkages with other industries, the pattern of employment,
and the scale of the economy.
Employment opportunities relate to the need to reduce unemployment.
Because of this, the number of jobs is not the sole consideration;
instead, the ability of Alaskans to fill these jobs must be considered.
This depends on the matching of skills required and skills possessed in
the population. The more technical the jobs, the 16s likely they an
to match the skills of Alaskan unemployed.
Seasonality defines the seasonal pattern of employment. Reducing
seasonality improves the economic stability. The pattern of employment
is similar to seasonality in its emphasis on steady employment. Resource
developments often have a boom-bust pattern with large employment demand
in the development phase and lower employment demand during operations.
To the extent Lower Cook development follows this pattern, it reduces
economic stability.
The final characteristics of stability concern linkages and scale
effects. Each of these measures the potential for future growth.
Resource developments have potential for both backward and forward
linkages; the potential reflects both the size of the development and
1
ACE 7421666
mew HRM Ee EES ‘ , cost conditions. * These linkages lead to further economic growth and
expansion of firms connected with the resource development sector.
Scale effects are the expansion of markets and the structural change
which results as markets expand.
The size of this development and the fact that it will most likely
occur when dindlpx and much larger developments are occurring in the
area limit the effect of this project on the economic stability of the
state or affected regions. Total employment impact will be less than
one percent of the Kenai and Anchorage current employment totals, while
long-run employment is less than one-tenth of that.
Real Income
Of the groups affected by offshore petroleum development, we are
most concerned with the effects on residents in Alaska prior to the
deveopment. While tian in the welfare of other groups is borne
voluntarily, the effects on these current residents are often involuntary.
One measure of the welfare effects of Lower Cook development is the
change in real per capita income which results from the development.
Real per capita income measures the average resident's claim on
goods .and .services. _ByAtselt this is not an unambiguous measure of
welfare since income is not shared evenly by the population. Because of
this distributional problem we present estimates of the economic welfare
effects on current Alaska residents and on total residents, including
those who migrate as a result of the project.
ACE 7421667
12
| bere | ial The size of the real per capita income effects depends on: y
° The number and type of jobs created. The type of job is
important because wage rates vary across jobs.
° Who gets the jobs affects the distribution of income. To the
extent non-Alaskans ‘secure petroleum jobs the real per capita
income effects are reduced.
e The share of Alaska firms securing work on the project. This
determines the effect on proprietors’ income.
e Changes in population determine the number of people over
which the income change is spread.
e Changes in the price level. If rapid expansion increase
prices, this will reduce the real income of all Alaskans, not
just those associated with the project.
Table 4 shows the projected income increases earned by current
Alaska residecte and residents attracted to the state by the development.
This projection depends on our assumption about the distribution of jobs
between current residents and in-migrants. During the production phase,
real per capita income of current residents is increased by $21; if
total Alaskans are considered, real per capita income is increased by
$25.
13
ACE 7421668
aos sy yw Vik ee | EGE Lrg Rae ahaa ‘Bia a Year
TABLE 4. LOWER COOK LEASE SALE®
REAL INCOME EFFECTS
Total Personal Income
(Millions of 1979 $)
Alaska Residents
1.05
1575
1.75
2015
3.34
9.88
aSee Tables A-12 and A-13.
SOURCE: ISER.
14
Current Residents
0.93
1.55
1.55
2.41
2.94
8.34
ACE 7421669
Introduction
APPENDIX A
METHODOLOGY FOR EMPLOYMENT, POPULATION, AND INCOME EFFECTS
This appendix discusses the process used to develop the estimates
of employment, population, and income presented in Tables 1 through 4.
The process begins with a plausible, but necessarily hypothetical, field
development scenario and then builds on a number of assumptions about
manpower requirements and the demographic characteristics of the work
force. The numerous elements in this elaborate methodological construct
can, of course, vary within a more or less wide range of reasonable
expectancy. Our assumption about each element reflects our best guess
(in the absence of pertinent data) about a value in that range. Thus,
we believe that the quantitative estimates of employment, population,
and income that result from the assumptions represent a point within a
realistic range of values for each of these factors. That is, the
quantitative estimates should be regarded as indicators of relative
magnitude rather than precise forecasts of socioeconomic impact.
Development Scenario
Elements of the development scenario for the mid-range resource
‘estimate are shown in Tables A-1 through A-3. Table A-2 also shows
basic elements of a development scenario for a high-range resource
estimate.
ACE 7421670
alll TABLE A-1
ASSUMPTIONS FOR FIELD DEVELOPMENT SCENARIO
MID-RANGE RESOURCE ESTIMATE
No new shore transportation or processing facilities are required
for either gas or oil; new construction limited to platform instal-
lation and submarine pipeline.
Crude oil is dehydrated offshore and shipped by submarine pipeline
to Drift River terminal. :
Associated gas reinjected.
Gas field discovery occurs relatively close to shore in the East
Foreland area and is shipped by submarine pipeline to Nikiski
industrial area. os
Phase I of the Pacific Alaska LNG project is built without new
reserves discovered in this sale; Phase II is not triggered by
discoveries in this sale of either the mid-range or high-range
scenario.
Assumed field size and production facilities are shown in Table 2.
Assumed field development schedule shown in Table 3.
SOURCE: ISER
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ZL9OTZ24L ADV HEE HH E
TABLE A~-2
SCENARIO ASSUMPTIONS: FIELD CHARACTERISTICS
Number of
Producing Wells/
Platform Recoverable
Reserves
Number of
Fields Number of,
Platforms Resource Estimate
Miles of
Pipeline
Mid-Range 100 0.5 ZL L
High-Range 300 TO ee igs
——
*conventional steel jacket platforms
SOURCE: ISER from resource estimates by DNR
10
10
7 =m HEHEHE SFE SE BE HH Ee Ee ES & & , TABLE A-3
SCENARIO ASSUMPTIONS: FIELD DEVELOPMENT SCHEDULE
Year from Start
of Exploration
1
6 and after
SOURCE: ISER
Activities
3 exploration and delineation wells (oil discovery)
5 exploration and delineation wells (gas discovery)
5 exploration and delineation wells
Install 2 steel jacket oil production platforms
(2 months each); begin development oil well
drilling (18 months total per platform);
3 exploration and delineation wells
Install 1 steel jacket gas production platform
(2 months); begin development gas well drilling;
continue oil development well drilling;
lay all submarine pipeline (6 months)
Begin oil and gas production
ACE 7421673
CCC lee The central assumptions upon which these scenarios are built have
been discussed in the ext ; namely, that recoverable reserves are between
100 and 300 mmbbls of oil and between 0.5 and 1.0 Tcf of gas; that explora-
tion and development occurs offshore; and that no major discoveries occur
in Upper Cook Inlet or on federal leases in Lower Cook Inlet. Within
these parameters, however, numerous factors influence the pattern of
development and, tierehers, manpower requirements. Factors that determine
the production facilities, such as the number of platforms, the com—
plexity of deck modules, Yength of subsea pipeline, and the nature of
shore facilities, include the following:
e number and distribution of fields
e water depth
e reservoir depth
e thickness and shape of reservoir
e gas/oil ratio and other characteristics of produced liquids
e proximity to existing support infrastructure and processing
facilities
e distance from shore
e@ well productivity
Among the factors that influence the schedule of field development
which, in turn, determine manpower loading and peak manpower demand are
the following:
e amount of delineation required after discovery
e complexity of producing structures
e well productivity
ACE 7421674
ee ee ee a ee cee e® amount of production equipment required and complexity of design
e® response time of vendors and fabricators of platform and pro-
duction modules
e length of construction season
Our assumptions, explicit and implicit, about these factors are
reflected in Tables A-1 through A-3. Different assumptions would pro-
duce different estimates of labor requirements and, therefore, different
estimates of population and income effects.
Direct Employment
Estimates of the manpower required for each major activity in the
development scenario are presented in Table A-4. These estimates are
applied to the scenario according to the development schedule in Table A-3.
This is shown in Table A-5, and the results are summarized in Table A-6.
The manpower estimates in Table A-4 represent employment values
developed by the ocs Socioeconomic Studies Program (Bureau of Land Manage-
ment, Anchorage), modified in a few instances to fit the case at hand.
They are expressed as manpower requirements’ for each "unit" of activity
that occurs in the mid-range development scenario. It must be noted,
however, that manpower demand is very sensitive to a number of factors,
including the following:
e type and complexity of primary processing and secondary recovery
equipment on the platforms
e distance of platforms from shore bases and from other platforms
e labor skill and productivity
ACE 7421675
ne oS Ts se anew TABLE A-4
EMPLOYMENT ASSUMPTIONS
(Number of People)
Employment*
Activity b
Offshore Onshore
Exploration and delineation 163/well 18/well
well drilling
Platform installation 250/platform 25/platform
Development drilling 151/platform 18/platform
(1 rig/platform)
Pipeline construction 200/spread 25/spread
Platform operation, oil 60/platform 8/platform
Platform operation, gas 40/platform 8/platform
*Includes employees off-duty. Offshore employment is typically about
twice the number present at the work site because crews take one day off
for each day worked on a schedule of 7 days on and 7 days off; 14 days on
and 14 days off; or 28 days on and 28 days off.
Preludes offshore support such as tug and supply boat services.
c ceed Includes onshore support activities such as helicopter operations,
as well as administration, secretarial service, bookkeeping, expediting,
etc.
SOURCE: ISER, derived from the OCS manpower model; see Alaska OCS Socio-—
economic Studies Program, Technical Report No. 63, North Aleutian
Petroleum Technology Assessment, pp. 5-2 to 5-5.
Some modification
of the OCS estimates has been made to account for the 100 mmbb1l
field size. See also Technical Report No. 55, Monitoring Oil
Exploration Activities in the Lower Cook Inlet, pp. 55-78.
AJ ACE 7421676
TABLE A-5
ESTIMATED DIRECT EMPLOYMENT
MID-RANGE RESOURCE DEVELOPMENT SCENARIO
b Employment
Activity Level of Activity® Length of Activity Man Months Peak No. of People
Offshore | Onshore | Offshore | Onshore
1 exploration/ 3 wells 4 months/well; 1,956 216 326 36 delineation 12 drilling
drilling (2 rigs) months total
> 2 exploration/ 5 wells 4 months/well; 3,260 360 489 54 oo delineation 20 drilling
drilling (3 rigs) months total
3 exploration/ 5 wells 4 months/well; 3,260 360 489 54 delineation 20 drilling
drilling months. total
4 oil platform 2 platforms 2 months/platform , 1,000 100 250 25 installation 4 months total
(1 derick
barge spread) a m development 2 rigs 14 drilling months 2,114 252 302 36 x drilling (1 rig/platform)
N
a exploration 3 wells 4 months/well; : 1,956 216 326 36 N drilling (2 rigs) 12 drilling
7 months total
(continued)
i
TABLE A-5 (continued)
Emp loyment?
Level of Activity® Length of Activity Man Months | Peak No. of People Year Activity
Offshore |Onshore oFtenore | Onshore
5 oil develdépment 2 rigs 22 months 3,322 396 302 36 drilling (1 rig/platform)
gas platform 1 platform 2 months 500 50 250 Zo installation
2 gas develdpment 1 rig 6 months 906 108 “151 18 drilling A
pipeline 1 spread 6 months 1,200 150 200 25 installation
6 oil production 2 platforms 12 months 1,440 192 120 16
begins
gas production 1 platform 12 months 480 96 40 8
>
oO
m
N“N
nv a a From Table A-3. o ~ @ on Table A-4.
SOURCE: ISER
TABLE A-6
SUMMARY: DIRECT EMPLOYMENT
| Man Months Peak Number of People
Year
| Offshore ae Total [ Offshore [ronsters Total
RE 1,956 216 2,172 326 36 362
a 3,260 360 3,620 489 54 543
3 3,260 360 3,620 489 54 543
4 5,070 568 5,638 878 97 975
2 5,928 704 6,632 903 104 1,007
6 1,920 288 - 2,208 160 24 184
(operation)
SOURCE: Table A-5, ou A-10
ACE 7421679 wi
BE 2 8 8 Sf SS SS SSS as”: sw e the schedule of component projects in the field development
process
e construction techniques
e size and type of drilling and construction equipment
(e.g., lay barges) :
e site-specific geologic conditions
e environmental stipulations
Therefore, our estimates could overstate or understate actual manpower
needs for the various tasks in a real situation.
Note that Tables A-5 and A-6 show employment in man-months and peak
number of people. This is because the employment in years 1 through 5
is not year-round. Table A-5 shows, for example, that in year 5 oil
development well drilling on each platform lasts eleven months; instal-
lation and commissioning of the gas platform, two months; gas develop-
ment well drilling, six months; and all pipeline building, six months.
We have assumed that all of these activities will overlap at some point
in the summer months during the "weather window" (construction season).
Therefore, the peak number of people employed in year 5 is 1,007.
However, only 6,632 man-months have been worked, which is the equivalent
of 553 men working for twelve months. Not until the operational period
is reached does work becomé year-round (2,208 man-months = 184 people x
12 months). Subsequent analysis deals with the peak number .of people
employed, except for the calculation of income effects, which is based
on man-months of labor.
A-11
ACE 7421680
ee ee eee es eee eed fm. Table A-7 allocates the direct employment between residents and
nonresidents and then allocates the residents between the Kenai and
Anchorage areas. Our assumption about the share of direct offshore jobs
held by residents is shown in column +4; of direct onshore enpitjeent, in
column 6. As explained in the text, we vary this distribution for the
exploration/development period (years 1 through 5) and the operation
period (year 6 and after).
Our assumption about the place of residence of the Alaskan employees
(columns 10 and 12) also varies between the exploration/development.. period
and the production period. A 50-50 split between the Kenai and Anchorage
area is our best guess about the period of intermittent employment during
exploration and field development; the split of 85 percent and 15 percent
during operation is the current residential distribution of Upper Cook
Inlet oil industry personnel.
Indirect Employment
Indirect employment is that support sector (nonbasic) employment
generated by the presence of new direct (basic) employment in the economy.
Its magnitude is estimated by employment multipliers that express the
historical, or expected, relationship between direct and indirect (basic
and nonbasic) employment tin an economic system. Analysis of the case at
hand is complicated by three factors:
Jyenai Peninsula Borough, OEDP Staff, A Profile of the Oil and Gas
Industry, Kenai Borough, July 1978, p. 17.
% fourth minor complicating factor is ignored for the purpose of
this analysis, namely that accelerated activity in the Kenai economy
has secondary effects on the Anchorage economy because of linkages
between the two.
wae ACE 7421681
BHF meHeReHEHEEBEHEHEEH ewe SE BF = = 41 eG
TABLE A-7
RESIDENCY PATTERNS, DIRECT EMPLOYMENT
(Peak Number of People)
Direct Employment® Alaska Residents gaa of Residents
Offshore Onshore Nonresidents lias = Anchorage
1 326 36 5 el6 85 3 47 315
&
2 489 54 5 24 85 46 70 473 50 35 50 35
3 489 54 ) 24 85 46 70 473 50 35 50 35
4 878 97 5 44 85 82. 126 849 50 63 50 63
> 5 903 104 5 45 85 88 133 874 50 67 50 67
m
~ 6 160 24 60 96 90 22 118 66 85 59 15 39
N (operation) ~ o
ao N
*From Table A-6.
e Multiplier effects will differ between the exploration/
development and the operation periods;
e multiplier effects for offshore, nonresident workers during
the exploration/development period will differ from the
multiplier for onshore workers during this period;
e multiplier effects will differ between the Kenai and
Anchorage areas,
Multiplier effects during exploration and development will be
smaller than those during the operation period because direct employment
will be short term and will fluctuate sarki the year. Therefore, many
apes in support sector industries will hesitate to hire new employees
in response to increased but irregular demand. Only when increased
demand becomes steady during the operation phase will the full secondary
response occur.
Offshore, nonresident workers will generate little per capita second-
ary economic impact during the early period because they will live off-
shore and spend money in the local economy only as they rotate to and
from the offshore drilling rigs, platforms, barges, and boats. In the
peak years of construction, however, this source of secondary employment
is not insignificant to the Kenai economy.
Multiplier effects will be greater in Anchorage than in the Kenai
area because in a larger and more complex economy, there is greater
opportunity for money to be re-spent within the system rather than to
"leak" outside it.
A-14
ACE 7421683
In view of the foregoing, we have used the following multipliers
in the analysis shown in Table A-8:
Exploration/Development Operation
Kenai 1.3 1.65
Offshore, nonresidents | 1.07 --
Anchorage 1.5 ~ 2.0
The figures 1.65 and 2.0 are based on historical patterns of basic and
nonbasic employment in these areas;> the figures 1.3, 1.07, and 1.5
represent our best guess of multiplier effects during the pre-production
period.
Table A-9 allocates the indirect employment between residents and
nonresidents on the basis of the assumption that the former will hold
85 percent of these jobs and the latter, 15 percent. This is assumed to
be the case for indirect jobs created in both the Anchorage and Kenai
areas.
Total Employment
Table A-10 summarizes total employment. from the estimate of direct
employment in Table A-6 and indirect employment in Table A-8.
See also Bradford Tuck, Economic Development Planning for Anchorage:.
A Theoretical and Empirical Analysis. Municipality of Anchorage, Depart—
ment of Planning, November 1980.
. ACE 7421684
A-15
cegtzyh 30V si-? TABLE A-8
INDIRECT EMPLOYMENT
(Peak Number of People)
Q Location of
Direct Employment
Year
Direct Employment?
Employment Multiplier
Indirect Employment
Offshore | Kenai anchorage | Offshore | Kenai | Anchorage four Anchorage | Total |
i 326 36 310 28 24 (1) .07 (1) 53 €21) °.5 30 12 42
2 489 54 465 43 35 (1) .07) (je .3% Ga). .5 46 18 64
3 489 54 465 43 35 (1))|.07) 7G) 3 (1) 5 Lo 18 64
4 878 97 834 78 63 (1)i' 07; ((1)..3...:. (1) .5 81 32 113
5 903 104 7 858 82 67 (1) 07! | (2) 3. 1) 5. 85 34 -L9
6 160 24 a 156° 28° --? (1) 65 (1)41.0 101 28 129
(operation)
a From Table A-6,.
Derived from information in Table A-7$ assumes nonresident, onshore employees live a i
in Kenai area.
Cassumes onshore employment multiplier effects of nonresident, offshore employees
occur in Kenai area.
During operations, total workforce lives in Kenai or Anchorage.
®rotal operations workforce of 184 divided between Kenai and Anchorage 85 percent and
15 percent, respectively.
LI-Vv 989T24l 39V Indirect Employment”
Kenai
1 30
2 46
3 46
4 81
5 85
6 101 |
(operation)
*From Table A-8.
Anchorage
12
18
18
32 |:
34
28
RESIDENCY PATTERNS, INDIRECT EMPLOYMENT
85
85
TABLE A-9
Residents
In-migrants
Anchorage
85
85
85
85
85
85
10
15
15
27
29
15
15
15
15
3
15
12
13
15
15 come
15 3
15 3
15 5
15 5
15) 4
TABLE A-10
SUMMARY: TOTAL EMPLOYMENT
(Peak Number of People)
a Indirect
Direct Employment Employment Total Employment
Year b
Offshore (Onshore) Offshore
ZL 326 36 42 326 78 404
2 489 54 64 489 118 607
3 489 54 64 489 118 607
4 878 97 113 878 210 1,088
Ss 903 104 119 903 223 35126
6 160 oe 129 160 313° 313
(operation)
*Prom Table A-6.
prom Table A-8.
“In operational phase, offshore workers live onshore, so total
employment may be considered onshore employment.
a ACE 7421687
Population Effects
Table A-11 calculates the population increase that results from the
share of new direct and indirect jobs held by in-migrants to Alaska.
This calculation is made by means of a “dependency ratio" of 1.4 for
the exploration/development period and 2.0 for the period of operation.
This ratio and the rationale for the use of two values is explained in
the text. The ratio of 1.4 for the first period is based on our best
guess of a reasonable and realistic value; the ratio of 2.0 for both
Kenai and Anchorage is based on the current approximate relationship of
total population to work force in these places.
An important assumption implicit in the derivation of these popula-
tion estimates is that in-migrants do not come to Alaska to take jobs
vacated by current employed Alaskans who move into the direct and indirect
jobs created by this petroleum development activity. Thus, we assume
that Alaska residents who enter the new jobs will be people previously
unemployed or people previously not in the labor force; or they will be
people previously employed whose vacancies will be filled by unemployed
or new entrants into the labor force.
‘see Kenai Peninsula Borough Planning Department, The Kenai Penin-
sula Borough: Situation and Prospects, January 1980; Anchorage Urban
Observatory, 1978 Population Profile, Municipality of Anchorage, Anchor-
age, Alaska, 1978.
A-19
ACE 7421688
oc7-V 6sgtz7lL 3 TABLE A-11
POPULATION EFFECTS OF DIRECT AND INDIRECT EMPLOYMENT
(Number of People)
In-migrant Employment*
Labor Force
Kehai Area Anchorage Area Participation Population
b = b a Factor
Tr — se:
5 4 9 2 2 1 0 1.6 13 3 16
2 8 7 15 0 3 3 1.4 21 4 25
3 8 7 15 0 3 3 1.4 21 4 25
4 15 12 27 0 5 5 1.4 38 7 45
5 16 13 29 0 5 5 1.4 =m) 7 48
6 564 15 71 104 4 4 2,50. 0<. fag 28 170
(operation)
®Excludes nonresident, offshore labor force during exploration and field
development activity.
bP om Table A-7,
“From Table A-9.
da ssumes 85 percent of the 66 nonresidents shown in Table A-7 locate in Kenai,
‘and 15 percent in Anchorage.
Real Per Capita Income Effects
A common feature of any resource development in Alaska is that the
welfare consequences of any development are dispersed among several groups:
the owners of the resource, consumers of the resource, migrants attracted
to the region by the economic opportunities associated with development ,
and the origina residents of the region at the time of development.
This analysis concentrates on the probable welfare consequences ‘to the
last group, Alaska residents at the time of development. The reason for
this is that any changes in the welfare of the first four of these groups
are borne voluntarily, while the effects on original residents are atten
involuntary.
Our measure of the welfare effects of the development of the state's
Lower Cook leases is the change in real per capita income which results
from this development. Real per capita income measures the claim of the
average consumer on goods and services; an tan in real per capita
income allows the average consumer to purchase more goods and services.
The effect of Lower Cook development on the claims on goods and services
is one important measure of the welfare effects of development.
By itself, change in real per capita income is not an icine beiiin
measure of welfare. The primary reason is that increases in real income
are not shared evenly by the population. Income changes resulting from
petroleum development accrue primarily to individuals directly involved
in the development. These distributional consequences reduce our ability
to determine the welfare changes which result from petroleum development.
Avot ACE 7421690
By definition, changes in real per capita income are determined by
changes in three economic variables: income, prices, and population. All
components of income--wages and salaries, proprietors’ income, and capital
gains--may be affected by petroleum development - Capital gains result from
increased pressure of resources, which in the short run are in relatively
short supply, such as housing. Because this dereteedenk has a relatively
small effect on population, we will assume the capital gains from this
development are negligible. Wages and salary created by this development
are a function of the number and type of jobs created. The number of
jobs created depends, as we have shown, on the size of d«velopment, tha
need for facility construction, and the size of peconnees afrecta- The
type of jobs created is important because wage rates vary across jobs.
The real per capita income effect will be lower if the majority of the
employment is created in the lower-paying service sector than if the
majority of jobs is created in the petroleum sector. Z
A second consideration when discussing real per capita income
effects is who gets the jobs; this affects the distribution of income
increases. There is reason to believe that a large portion of the OCS
sector jobs will go to non-Alaskans, particularly in the exploration
and development phases. To the extent these high-wage jobs are taken
by nonresidents, the effect on Alaska resident real per capita incomes
‘will be reduced.
A+22
ACE 7421691
A similar consideration determines the effect on proprietors' income.
Only income earned by proprietors in the state is relevant to our discus—
sion. To the extent national or international firms participate in the
development, increased proprietors' incomes will not accrue as Alaska
income.
Changes in the population and price level are the other two determi-
nants of changes in real per capita income. Changes in population deter-
mine the number of people over which any income change is spread.
Changes in prices affect the amount of goods and services a dollar can
buy. Changes in prices are the one way in which petroleum development
can affect residents of the state not directly associated with petroleum
job creation. If prices increase, the effect is to lower the real per
capita income of other residents. There are two types of price effects
which can result from this type of development: boom and scale effects.
Boom effects result primarily from rapid, nonmarginal {relatively large)
population and employment increases which place pressure on resources in
inelastic supply such as land, housing, services, and certain types of
labor. The other effect is of a long-term nature; increases in the size
of the economy have a tendency to reduce the price level (or reduce the
rate of increase). The scale effect results primarily from an increase
in the market size. We assume that because the population .and employ-
ment effects of this development are relatively small, the price effects
of this development will be negligible.
A-23
ACE 7421692
Tables A-12 and A-13 show our estimate of yearly real income increases
which result from Lower Cook development. These tables assume there is
no price effect from Lower Cook development and that 1979 real wage
rates remain constant. We also assume that proprietors’ income equals
8 percent of the total increase in resident wages and salaries and that
all proprietors are currently residents in the state.
The numbers in these tables reflect our assumptions about the dis-
tributions of jobs between current residents, in-migrants (who become
residents), and nonresidents who simply work in the state. The tables
also reflect the assumption that the division of man months between
these groups would be similar to the division of peak employment. This
may not be the case (in fact, the peak distribution may be a minimum),
but the assumption is not unreasonable.
Under our assumption, the maximum increase in income to Alaska
residents occurs during production when current Alaska residents earn
$8.34 million from the development, and current residents plus in-
migrants earn $9.88 million. This means the real per capita income of
current residents would be increased by $21. Real per capita income
would be increased by $25 if the new residents and their incomes wére
counted. This means that Lower Cook development increases real incomes
more than population. In spite of this, the effect on real incomes can
be considered insignificant.
A-24
ACE 7421693
St-V ogtzyL dV Employmedt” ; (Man-months)
Year
Offshore |Offshore
98
163
163
254
296
1920 DULwonre
*Al1 dollars in 1979 constant dollars.
216
360
360
568
704
288
182
304
304
473
560
1200
berom Tables A-6 = A-8,
71
118
118
185
224
331.
LOWER COOK REAL INCOME EFFECTS*
(Alaska Resident)
TABLE A-12
Offshore® Offshore?
EM —
1518
1518
1518
1518
1518
2800
Wage Rate
(Per ee aa ic
2400 2400 2400 2400 2400 2400 _
1205
1205
1205
1205
1205
1205
1242
1242
1242
1242
1242
1242
Personal Income
(1979 Dollars)
Total
Personal
Income
(Millions $$)
Other‘
Income (Millions $)
Total
Wage & Salary (Millions $)
0.975 +078 1.053
1.624 +130 * 1.754
1.624 +130 1.754
2.549 +204 2.753
3.092 +247 3.339
9.148 +732 9.880
Assumes both residency split and multipliers are the same for man-months as for peak employment.
“offshore equals 63 percent of Kenai wage (based on Socioeconomic Studies Program Technical Report No. 55).
Based on average 6f Kenai oil and gas and construction monthly wage rates.
“Based on average Of trade and service monthly wage rate in respective region.
Other incomes equals .08 times onshore and support employment based on 1979 Personal Income Printout, Bureau of Economic Analysis,
U.S. Department of Commerce.
| WNWA\t s69tzbz2 39V 9¢-V Year
Offshore
1 98
2 163
3 163
4 254
5 296
6 1152
Employment
(Man-months)
Offshore uppor
Kenai Anchorage
184 155 60
306 258 100
306 258 100
483 402 aS?
598 476 190
259 1037 281
TABLE A-13
LOWER COOK REAL INCOME EFFECTS
Wage Rate
(Current Residents)
(Per Month)
Offshore
1518
1518
1518
1518
1518
1518
Offshore
2400
2400
2400
2400
2400
2400
1205
1205
1205
1205
1205
1205
Anchorage
1242
1242
1242
1242
1242
1242
Personal Income (Millions $)
Total
0.853
1.416
1.416
2.224
2.694
7.597
Wage & Salary
-078
+130
+130
+204
+247
+732
Total
Personal
Income
0.931
1.546
1.546
2.408
2.941
8,339