AJOC EDITORIAL: Production forecast leaves room for pleasant surprise

  • The sun isn't setting over Prudhoe Bay just yet. (Photo/File/AJOC)

A brutal year in the Alaska oil patch ended on a positive note as calendar year 2016 followed the fiscal year trend with an increase in North Slope production.

Amid the worst price environment since the late 1990s resulting in thousands of layoffs for the oil industry, production grew in the fiscal year ended June 30 and for the calendar year ended Dec. 31.

With an average of about 514,000 barrels per day for the fiscal year and 517,000 for the calendar year, the state’s most recent production forecast for the current fiscal year predicting a drop to 490,000 appears extremely conservative.

After many recent production forecasts have overshot estimates, the state adopted a new, in-house approach that officials acknowledge will result in lower predictions.

Considering the state’s budget woes, erring on the conservative side is certainly not a bad thing. It will also leave room for a pleasant surprise by the end of the fiscal year.

Current North Slope production from July 1 through Jan. 2 is averaging 507,000 barrels per day, far greater than the forecast as the traditional peak production winter months await.

At 490,000 barrels per day, total fiscal year production would amount to nearly 179 million barrels of oil.

At the current production average, the Slope producers have already pumped 94.4 million barrels through Jan. 2.

What that means is that production would have to average 472,287 barrels per day for the rest of the fiscal year to hit the state forecast of 490,000 per day.

While there has no doubt been a pullback in drilling and well workovers from record levels in 2015, there is as of yet no indication that the production will fall by that much from the current daily average.

In the 2016 period from Jan. 2 to the end of the fiscal year on June 30 while prices averaged less than $40 per barrel, North Slope production averaged nearly 527,000 barrels per day.

That means that to hit the state’s production forecast, the daily average would have to drop by about 55,000 barrels per day during the same period of 2017 — a 10.4 percent decline — even though prices have rebounded to better than $50 per barrel since OPEC announced it would cut production back in November.

There is a conspiracy theory out there that the state is intentionally lowballing price and production forecasts to make the state’s fiscal situation appear more dire than it is — and it is dire — in order to make a harder sell for its package of revenue measures and the use of Permanent Fund earnings to plug the budget deficit.

There is no need to go there, but there is a need to push back on those who keep advancing the idea — including Lt. Gov. Byron Mallott — that the state’s days as an oil realm are drawing to a close.

Given the production increases, the third-best lease sale in decades in December and strong prospects under development, the evidence does not back up those who are spinning the end-of-oil narrative.

Gov. Bill Walker has not exactly expressed enthusiasm for prospects by independents Caelus and Armstrong, and his Natural Resources Deputy Commissioner Mark Wiggin reacted to questions about the 2016 production increase not with celebration but with an Eeyorish comment about how we’re not heading back to our peak production days in the late 1980s.

Production increases should be welcomed, not downplayed, and momentum established after the passage of Senate Bill 21 should be sustained rather than stifled.

The North Slope producers gave the state something to feel good about to end the year, and beating the ultra-conservative forecast in the new year would result in a much-needed boost to the bottom line.

Andrew Jensen can be reached at Andrew.jensen@alaskajournal.com.

Correction: The original version of this column attributed a statement about not returning to late 1980s production levels to Tax Division Director Ken Alper. The statement is actually attributable to Natural Resources Deputy Commissioner Mark Wiggin.

Updated: 
01/05/2017 - 2:53pm

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