Positive signs for oil, tourism, but rebound will take time

Alaska is positioned to possibly become an even more popular destination when travel eventually resumes en masse but oil markets aren’t likely to rebound nearly as well despite relative recent strength, according to the leaders of some of the Alaska Permanent Fund Corp.’s large investment partners.

Recent gains in oil markets have surpassed the expectations of most investors but are also tentative, given the dominant presence COVID-19 continues to have over much of the world, according to the leaders of Riverstone Holdings LLC.

Riverstone is a $40 billion private market investment firm that focuses on the energy and infrastructure sectors.

“While (oil) prices are up in the near-term, they are lower in the medium- to long-term,” said Pierre Lapeyre Jr., co-founder of Riverstone Holdings.

Oil prices have hovered around $50 per barrel for Alaska North Slope crude in mid-December on hopes that the first round of COVID-19 vaccines will translate into greater demand before too long.

Price forecasts in the five- to seven-year timeframe are generally about $5 per barrel less than they were pre-pandemic and prices are likely to flatten in the $45 to $50 per barrel range for domestic West Texas Intermediate-priced crude, according to Lapeyre.

State Department of Revenue officials similarly expect the price for Alaska crude to gradually climb from an average of about $45 per barrel this fiscal year to the mid-$50s by 2027-28. Alaska oil typically trades at a slight premium to WTI.

The Alaska Permanent Fund Corp. Board of Trustees heard forecasts for the oil and gas and cruise industries during its Dec. 10 quarterly meeting.

Lapeyre said Lower 48 shale oil production — a disruptive force in the industry for the past decade — has been permanently weakened by the pandemic and what Riverstone leaders feel will be continued tightening in the access to capital, particularly for small and medium-sized oil companies.

“(Shale) used to be an independent play in the U.S.,” Riverstone co-founder David Leuschen added. “Now it’s a major play and the independents are disappearing.”

He noted that Riverstone was a founding investor and primary owner in Anchorage-based independent Great Bear Petroleum, which held large swaths of acreage on the North Slope and conducted several years of exploration drilling before being sold to London-based Pantheon Resources in early 2019.

“We found a lot of oil and lost a lot of money,” Leuschen said of Great Bear.

Lapeyre said Riverstone managers are seeing indications that “ESG,” or environment, sustainability and corporate governance, issues are starting to influence bond markets and bank lending opportunities for some oil and gas companies.

A growing contingent of large banks have stated policies against investing in future Arctic oil and gas projects in recent months to the natural dismay of Alaska industry representatives and general resource development advocates in the state.

Federal Comptroller of Currency Brian Brooks issued a proposed rule Nov. 20 that would prohibit banks from denying financing for Arctic oil and gas projects after pressure from Alaska’s congressional delegation.

“Otherwise healthy credits or companies that are doing well could easily be denied financing or restricted financing if they aren’t providing — and I underline that word — that they’re making substantial relative progress on carbon intensity (in their operations),” he said. “We’re starting to see the early footprints from bans saying you’ve got some time, but it’s an effort to push the industry to put forth measurable metrics.”

Capital flows into the traditional energy sector are on the most negative trend in decades, according to Lapeyre, who also noted that energy companies that comprised 13 percent of the S&P 500 12 years ago now account for 2 percent of the market.

“The relevance of energy, broadly defined, to the public markets has declined significantly and has hurt capital flows as a result; that’s a self-fulfilling circle as you can imagine,” he said.

Oil markets will mostly be static despite the broad challenges to investment because, according to the Riverstone founders, OPEC nations still have 5 million to 7 million barrels of excess production capacity at current demand and the booming investment scene in renewable energy and other carbon mitigation technologies will keep downward pressure on oil markets.

Leuschen said technological and investment thresholds in the “green energy” sector continue to be met faster than Riverstone, which has been bullish on the transition, expected.

“It doesn’t really matter whether you believe in the (climate) science or not, the world has moved beyond that and it’s getting very engrained in the consumer, the strategic corporate response to the consumer,” Lapeyre added of the push away from hydrocarbons.

However, NGP Energy Capital Managing Director David Hayes said the scale of transitions to cleaner alternatives, such as electric vehicles, still won’t be great enough for many years to drastically impact oil markets.

Even if the global fleet of 5 million electric vehicles were to grow 16-fold to 83 million by 2030 as NGP managers expect, electric vehicles would still comprise just more than 5 percent of the expected global vehicle stock of more than 1.5 billion.

As a result, Hayes said he sees global oil demand — currently about 93 million barrels per day — returning to 2019 levels of just more than 100 million barrels per day by the end of next year with average annual growth of 500,000 to 1 million barrels per day “for the foreseeable future.”

Cruise outlook

Alaska holds the key attributes many post-pandemic travelers will be looking for, according to Kevin Kingman, but the state’s tourist-dependent businesses might have to hold out until 2022 to really start seeing the upside of the situation.

“People miss traveling more than anything else; they’re just finding new ways to meet it,” said Kingman, a principal with Connecticut-based consumer market investor L Catterton.

The firm is “very bullish” on the rebound the cruise industry will have, stressing that the consumer demand is there based on its surveys.

He cited statements from Norwegian Cruise Lines in its third quarter earnings report that bookings for the second half of 2021 are in line with historical averages.

Leisure travel was the top “missed” activity because of the pandemic across all age groups in multiple surveys, Kingman said, adding that 82 percent of respondents said they would be comfortable taking a cruise once COVID-19 vaccines were widespread. More broadly, 91 percent of respondents said they would be comfortable flying once vaccines are common.

More than 1.3 million Alaska-bound cruisers — more than half of the state’s visitors in most years ­— did not show up as expected this year.

As many Alaskans experienced, 2020 was the year of the outdoors, which Kingman said translated into record RV sales and rentals for the country’s largest dealers and is a trend he expects to stick.

“RV-ing is kind of like cruising in that once you’re in, you’re hooked,” he commented.

Kingman also expects travelers to turn dreams into reality more frequently once travel becomes widespread again.

“The notion of a once-in-a-lifetime adventure became a lot less abstract and a lot more concrete for the average person over the course of this crisis and not delaying those bucket-list items but taking advantage of them,” Kingman said.

Permanent Fund Corp. CEO Angela Rodell commented that Kingman’s remarks were “positive but also hard to hear at the same time” because everyone would like the recovery to be quicker than it is likely to be. Rodell also noted that the seasonal nature of Alaska cruises could mean the tourism recovery in the state won’t really mature for another year.

“We’re looking at 2022 and beyond for our (tourism) recovery, which will be really challenging for some of our small businesses,” she said.