Alaska: A Rich Source of Washington Growth

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Mike Garvey skipped his high school prom and graduation in 1956 and headed for Alaska to spend the summer working at the U.S. Mining and Smelting Company.

About 25 years after that “great adventure,” Garvey, the son of a longshoreman, acquired Totem Ocean Trailer Express, or TOTE, a shipping firm that carries cargo to and from Alaska, and the foundation piece of Saltchuk Resources, a transportation business with $2 billion in annual revenues.

“Alaska-related business is responsible for more than 100,000 jobs in the Puget Sound [region],” says Garvey, “but many people here see Alaska as a pristine place that shouldn’t be developed in any way.”

This tension between the environmentalist leanings of Seattle and the great wealth of natural resources available in Alaska has come to the fore in recent years. On the one hand, prices of commodities such as gold, copper, oil and fish have risen dramatically, thanks to growing demand from the developing world. China, for example, is on track to be Alaska’s top importer of seafood.

On the other hand, Alaska, which has continued to experience steady growth through the recession, sees clouds on the horizon. The federal government is under pressure to cut spending on such items as the cost of operating military bases, which represents an estimated 13 percent of Alaska’s economy. Meanwhile, oil production, the state’s largest industry, has been steadily shrinking for more than two decades. Although a constant increase in oil prices has insulated the Alaskan economy so far, that situation cannot last forever. Oil delivered through the Trans Alaska Pipeline has fallen from a peak of 744 million barrels a year in 1988 to about 212 million barrels last year.

What’s frustrating to many Alaskans is that while the developing world hungers for the rich natural resources the state has to offer, taking advantage of those resources while satisfying business owners and environmentalists alike has proved difficult.

Multinationals such as Shell Oil, Mitsubishi, Rio Tinto and Barrick Gold are investing billions of dollars in hopes of opening new mother lodes of oil, gold and copper. Oil fields in the Chukchi and Beaufort seas off Alaska’s northern coast contain an estimated 22 billion barrels. Development of the region could triple oil production in the state, producing $1 trillion worth of oil during the next five decades, while mining companies have identified undeveloped sites in west Alaska that hold hundreds of billions of dollars’ worth of gold, copper and rare earth minerals.

Tapping these resources would not come without a cost. In addition to potentially compromising the environment, those oil fields and mines require billions of dollars of investment in new power plants, water-supply infrastructure, roads, ports, pipelines and airstrips. Oil developments alone could create 35,000 jobs during the coming 50 years. Mines could create thousands more. A proposed natural gas pipeline would generate 6,500 direct and more than 50,000 indirect jobs during the next two to six years, according to the Alaska Department of Labor and Workforce Development.

But there are many good reasons the oil fields, mines and gas pipelines have been slow to receive federal and local approval. The harsh climate of the Arctic makes any development both a gamble and an expensive undertaking. Mines run the risk of polluting the state’s fragile ecosystem, perhaps even damaging Alaska’s valuable fishery, an industry worth $3 billion a year in revenue and a lifeline for many native tribes. Natural gas development, meanwhile, has been hampered by a plunge in natural gas prices in North America.

How these issues are addressed is of critical importance to both Alaska and Washington state. In 2003, the last time the numbers were calculated, the export value of services from the Puget Sound area to Alaska was $675.3 million, more than double its level in 1994. And that amount doesn’t even include the valuable oil flowing through the pipeline to Washington refineries or the salmon shipped to Washington restaurants and processors.

More growth in Alaska would lead to more jobs in Seattle. Less development could mean fewer jobs. Most of the oil from Alaska comes from North Slope oil fields developed in the 1970s; much of the recoverable oil there has been extracted. Although in 2010, Washington imported about $8 billion in crude oil from Alaska, up from $6.9 billion the year before, much of that rise was from the increase in the price of oil. The quantity of oil being shipped through the pipeline has actually fallen by about 6 percent a year, reports Karen Matthias, Alaska consultant to the Port of Tacoma.

The amount of oil flowing through the Trans Alaska Pipeline is declining by about 6 percent a year.

Soon, the decline in the amount of oil shipments—North Slope production is down to about 600,000 barrels a year— may exceed the rising oil prices, resulting in a drop to Alaska’s income, which could have a punitive effect on its residents. Oil provides money to the state’s Permanent Fund, which cuts checks that vary from $1,000 to $2,000 a year for each Alaskan resident, depending on oil revenues. Oil money also fuels jobs in processing, shipping, retail and social services.

“Every aspect of our economy is touched by the oil industry,” says Matthias.

Washington’s five refineries, which used to get all their crude oil from Alaska, now get less than 50 percent of it from there. Imports from Canada, the Far East and West Africa make up the difference. The drop in oil flow through the Trans Alaska Pipeline is also an environmental challenge. As the flow of oil slackens, there is a greater risk that external climate conditions could damage the pipeline and lead to damage of the surrounding landscape.

So the search is on for new oil to push through that pipeline. Shell, which spent $2.1 billion on oil leases in the region in 2008 alone, has won permission to carry out exploratory drilling about 80 miles offshore in the Beaufort and Chukchi seas. If all goes well, that oil could be transported through the pipeline in about 10 years.

Many Alaskan leaders believe resource development makes environmental and economic sense, not just for Alaska, but also for the whole country. United States Senator Lisa Murkowski of Alaska suggested in a November 2011 Wall Street Journal essay that if America does not pursue environmentally responsible offshore resource development, it will enable the involvement of foreign oil suppliers who do not put environmental safeguards in place.

The challenge is that little is known about offshore drilling in a harsh region covered with ice much of the year. It’s unclear how effectively a Gulf-style oil spill could be dealt with in that environment, and many people are not optimistic. In addition, scientists agree that the use of fossil fuels only worsens climate change, which has already had substantial effects on coastal villages and regional ecosystems in the North. But the fact remains that Alaska’s economy is inextricably linked to oil.

“Alaskans want it all—resource development and environmental protection,” says Jean Craciun, CEO of Craciun Research, a marketing firm with offices in Anchorage and Seattle. How Washington handles this delicate balance in its relationship with Alaska will go a long way toward determining Alaska’s economic future as well as the extent to which the states share in any future prosperity.

Washington’s business relationship with Alaska dates to the Columbia River fur trade at the close of the 18th century, explains Rose Ragsdale, editor of Mining News North and author of the annual news series Alaska-Washington Connection. Seattle is, as a result, home to the oldest fur auction house in the world. But what really bolstered business in the Puget Sound region and provided formal infrastructural links was the Klondike Gold Rush, which began in the late 1890s.

Encouraged by a nationwide media campaign selling Seattle as the gateway city to Alaska, early miners and merchants invested in trade—valued in 1905 at $20 million annually—with Alaska and Canada’s Yukon Territory. The infrastructure and trade ties laid down during the gold rush have allowed both regions to develop and prosper in concert. “There has never been a time when Alaska has been prospering [and] Seattle and King County haven’t,” says Cathy Allen, president of The Connections Group, a public policy, research and campaign firm based in Seattle.

“The share of Puget Sound jobs that are created by exports to Alaska are an important element in a diversified regional economy,” argues Ties That Bind, a report on Washington’s economic relationship to Alaska commissioned by the Seattle and Tacoma-Pierce County chambers of commerce in 2003.

Although global warming is a humanitarian issue as well as an environmental crisis, receding sea ice that has resulted from warming could increase Alaska’s strategic importance to the world by placing it close to critical resources and potential future trade routes. Norway recently gained approval to ship natural gas to Japan via the Northern Sea Route (north of Russia). Northern routes are also being considered for undersea cables to create faster internet links between Europe and Asia. The occasional European tour boat now pops up in Alaska.

The United States has no coherent strategy to address these new challenges. In fact, there’s a startling lack of onshore supplies and emergency support for Arctic shipping. Polar-class icebreakers are necessary to underpin any kind of increased shipping or oil exploration in the Arctic. Russia and Denmark already have fleets of icebreakers and China is currently building one. Yet two of America’s three icebreakers are tethered to a dock in a Seattle shipyard, out of commission.

The Vigor shipyard in Seattle recently had three Alaska-related contracts: Coast Guard icebreakers, right, an oil-drilling platform, foreground, and a mobile radar station, rear. Photo courtesy of Vigor Industrial.

Without developing regulatory measures to ensure the safety of ships and the environment, wrote Lawson W. Brigham, a professor at the University of Alaska-Fairbanks, in the October 2011 issue of Nature, increased Arctic maritime traffic could lead to disaster.

Recently, January’s delivery of fuel to the icebound city of Nome illustrated the importance of icebreaking capability. The United States Coast Guard icebreaker Healy guided a Russian fuel ship through about 300 miles of sea ice, often breaking through floes two to four feet thick.

And while Russia has already staked claims for control over parts of the Arctic, the United States Senate has yet to ratify the United Nations Law of the Sea Treaty, which would allow participants to make claims for undersea resource development in the Arctic Ocean and to oversee development of those claims.

Whatever happens in Alaska, the Puget Sound region will play a key role. Most air and marine shipping routes to Alaska are from Puget Sound. Ninety percent of passengers flying to Alaska pass through Seattle-Tacoma International Airport, according to Sam Petite, branch manager for Apex Maritime Company and chair of the Alaska Committee, the oldest committee on the Seattle Chamber of Commerce, founded 130 years ago. Alaska Airlines, which moved its headquarters from Anchorage to Seattle in the late 1940s, dominates the market for air travelers from Anchorage to Seattle, with 93 percent market share.

In 2010, Alaska was the Port of Tacoma’s number three trading partner, with $3.5 billion in business. And Seattle is currently the second-most important point of export for Alaskan seafood products after Anchorage. Fishing fleets directly support more than 5,000 jobs in Seattle, and fisheries bring hundreds of millions of dollars into the Washington state economy. In 2007, local businesses earned more than $800 million in revenues from fishing-fleet purchases, and state and local governments received $167 million in related tax revenue. Cruise ships headed to Alaska from Seattle generate more than 1,700 jobs and $208 million in annual revenue for the Puget Sound region.

Alaska continues to depend heavily on Washington for a range of services, including engineering and consulting. In CNBC’s Top States for Business 2011 report, Alaska ranked poorly in all categories except the overall strength of its economy. While the state has money, Alaska simply can’t provide a full range of services with a population of only 710,000, about a fifth that of the Puget Sound region. In 2003, Alaskan students spent about $23.5 million on higher education in the state of Washington. Alaska Governor Sean Parnell obtained his undergraduate degree at Pacific Lutheran University in Tacoma and his law degree from the University of Puget Sound Law School, which is now Seattle University Law School.

In November, Parnell spoke at a Seattle University Law School reception in Anchorage held as part of the school’s aim to become the law school for Alaska, the only state without its own law school. “This is a rich land,” the governor told his audience. “It’s rich in resources, it’s rich in people and it’s rich in opportunity.” And, as if to underscore the inescapability of the Alaska-Washington connection, he noted that when he decided to attend law school he had a choice between California, where he had been born, and Washington. “I chose Washington for the reason that more Alaskans are going to school there. It’s a place where we could graduate with our classmates and come back [to Alaska] and practice with them.”

This link exists across all disciplines, not just the law. And Barbara Grant, cofounder and managing partner of Seattle’s Barbara Grant Consulting Group, emphasizes that, to foster a successful relationship, Washingtonians must be careful to understand the nuances of Alaskan business and culture instead of immediately swooping in and forcing a northern landscape to conform to the preconceptions of the Lower 48. Cathy Allen agrees that relationships are extremely important to Alaskan business people and that many “expat” Seattleites now conducting business in Alaska profit from a network of their shared experiences up north.

The continued evolution of this business relationship shows that the innovation economy of the Puget Sound region is not limited to software and high tech. Washingtonians have always adaptively driven northern expansion. As Alaska continues to develop, as the politics and practices of new resource extraction unfold, and as climate change alters the physical landscape of the northern state, Washingtonians have the opportunity to build on more than 200 years of trade relationships.

From fur to gold to oil and natural gas, base commodities have always driven this partnership. Washingtonians have proven—through application of business practices, commitment to the natural environment, dedication to building world-renowned research communities, and development of world-class air and sea shipping infrastructure—that the economic forces uniting the two states can evolve and modernize.

Besides, as Mike Garvey points out: “If you prohibit development in the U.S., it’s going to go to areas with fewer regulations. In a perverse way, the environmentally friendly thing to do would be to permit the development under stricter regulations. We’ve got to be make sure that we operate in a way that does us all proud.”

 

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