Oil production up for second year in a row

  • For the first time in 30 years, Alaska will see two consecutive years of production increases on the North Slope. (Photo/File/AJOC)

Don’t spend it all in one place.

Better than expected oil production and price figures mean the State of Alaska should have an extra $191 million when the 2017 fiscal year ends June 30, according to Revenue Commissioner Randy Hoffbeck.

While the extra $191 million equates to about a 20 percent increase in the spendable portion of the state’s overall petroleum-sourced revenue — including royalties, corporate, property and production taxes — in the big budget picture it means the state will likely finish the fiscal year with a budget deficit of about $2.6 billion instead of the previously estimated $2.8 billion gap.

The 2017 Spring Revenue Forecast projects an average Alaska North Slope oil price of $50.05 per barrel, up from $46.81 in the 2016 Fall Forecast, which was released in December.

Alaska North Slope crude has sold for about $55 per barrel in recent days.

Daily production in fiscal 2017 is now pegged to average 523,700 barrels per day, up from 490,300 barrels per day in the fall forecast.

Coincidentally, both the revised price and production numbers are 7 percent greater than the fall predictions.

If the new 523,700 barrels per day forecast is correct, it would mark the second consecutive year of increased production on the North Slope, the first time production has increased in consecutive years since it peaked at more than 2 million barrels per day in 1988.

Producers pulled an average of 514,900 barrels per day in fiscal year 2016.

Prior to 2016, 2002 was the only year of increased production — when ConocoPhillips brought its large Alpine field online — after the late 1980s peak.

The current daily production average for 2017 is 525,900 barrels. However, daily production typically slows in spring and summer each year as companies perform maintenance on North Slope facilities and other infrastructure.

Additionally, Hoffbeck said during an April 14 morning Senate Finance Committee hearing that North Slope oil producers also reported a $348 million, or 7 percent, decrease in their actual deductible lease expenditures for the entire fiscal year versus what was reported to the Revenue Department last fall.

The lease expenses — estimated now at $4.5 billion in 2017 — are what it costs the companies to extract the oil and therefore are deductible from the state’s net profits production tax calculation. Fewer deductions means more taxable revenue to contribute towards the state’s final revenue calculation.

‘Stale’ production forecast

Much was made by legislators that the spring forecast still contains the fiscal 2018 production estimate of 459,800 barrels per day found in the fall forecast despite the fact that 2017 production has not only outpaced expectations, but last year as well.

A 2018 daily production average of 459,800 barrels per day would equate to a 12 percent decline rate from this year.

Finance Co-chair Sen. Anna MacKinnon, R-Eagle River, noted that even if the historical average North Slope production decline of about 5 percent resumes in 2018 the fiscal year-end average would still be well above the official spring estimate.

“We had always been wrong on the high side and now we’re a little concerned that we’ll be on the low side in distorting that (production) number,” MacKinnon said.

DNR provides the production estimates that Revenue incorporates into the annual fall Revenue Sources Book, which serves as a guideline for legislators to budget off of. For many years DNR hired a private consultant to come up with the production forecasts and for many years those forecasts were consistently higher than what played out.

Last fall, in an effort to save money and produce a more accurate — therefore conservative — North Slope oil forecast, DNR did its own forecasting in-house.

Senate Majority Leader Sen. Peter Micciche, R-Soldotna, emphasized the importance of the role production estimates play in the Legislature’s budgeting — particularly this year, given the House and Senate majorities have diametrically opposed views on the need to impose a state income tax this year.

Hoffbeck and Department of Natural Resources officials acknowledged the fiscal 2018 production estimate is “stale” because current numbers are outpacing the fall forecast, but DNR has not typically revised the longer-term production figures in its spring updates.

Division of Oil and Gas Director Chantal Walsh said the fact that current production is outpacing not only the state’s official forecast, but also last year, will play a major role in how the department prepares future forecasts.

The decline was expected because of decreased drilling activity in the large legacy fields of Kuparuk and Prudhoe Bay due to low oil prices, Walsh explained, but it didn’t happen.

“The major oil companies also outperformed their forecasts,” she said. “These are anomalous years we’ve been through.”

Ed King, a special assistant to DNR Commissioner Andy Mack said anecdotally that the actual fiscal 2018 daily production average would likely come in closer to the original 2017 estimate of about 490,000 barrels per day.

King and Walsh also said DNR would provide a production estimate range incorporating realized production figures for the upcoming fiscal year in future spring forecast updates. A full production estimate includes technical well data reviews and takes several months.

Some Republican legislators have alluded to the possibility that administration officials are trying to use the closely tied state revenue and oil production forecasts as subtle political leverage by making the state’s fiscal picture look worse than it is; Gov. Bill Walker supports a state income tax to help balance the budget.

Micciche discredited that notion, saying he is not suspicious of the administration’s motives, but added it is just “a rough time to use a stale number.”

“I think we’re all sort of saying the same thing,” Micciche said to Walsh and King. “You have work to defend and I have to come up with a number that helps fund this government and the right answer is somewhere in between.”

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
05/24/2017 - 5:43pm

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