Revenue forecast up on oil prices, but production short of forecast

Income will be up but oil production will be down, according to the state’s Spring Revenue Forecast released March 16.

Department of Revenue officials project the State of Alaska will take in roughly $2.3 billion in unrestricted General Fund revenue during the current 2018 and 2019 fiscal years, which would be an increase of $256 million and $212 million per year, respectively, from the financial forecast issued last fall.

A new state fiscal year starts each July 1.

The Revenue Department issues a comprehensive analysis and projection of the state’s financials each December and, for budgeting purposes, updates the forecast with revised projections during the legislative session.

The department is anticipating unrestricted revenue to increase by between $124 million and $213 million from 2020 to 2026 from the Fall 2017 forecast as well.

“Expected revenue has increased $125 million to $250 million per year across the forecast period,” Revenue Commissioner Sheldon Fisher said in a statement accompanying the forecast release. “This is good news for all Alaskans. Unfortunately, even after this additional revenue Alaska continues to face a budget deficit in excess of $2.3 billion. The (Walker) administration will continue to work with the Legislature to address the fiscal gap during the legislative session.”

Realized earnings from the Permanent Fund — likely to support government services starting with the fiscal 2019 budget currently being debated in the Legislature — are expected to be $4.4 billion in 2018 and nearly $4 billion in 2019.

The Fund’s performance is highly dependent on how domestic and international stock markets fare.

Higher than anticipated oil prices are behind the unrestricted revenue bump. Petroleum-derived revenue from taxes and royalties usually accounts for between 75 percent to 90 percent of the state’s unrestricted General Fund revenue in most years.

Last fall, the Revenue Department estimated Alaska North Slope crude would average a price of $56 per barrel during fiscal 2018, but as of March 14 North Slope oil was averaging exactly $60 per barrel for the year, which is 7.1 percent above the fall forecast price. Daily prices have hovered between $64 and $66 per barrel in March.

The revised forecast projects a final average ANS price of $61 per barrel when the 2018 fiscal year ends June 30. Alaska oil sold for $49.43 per barrel in 2017.

For 2019, the price estimate was increased to $63 per barrel from $57 per barrel.

The forecast for North Slope oil production, however, is not as positive.

Department of Natural Resources officials, who oversee the production projections, estimate North Slope production will fall from an average of 526,500 barrels per day in 2017 to 521,800 barrels per day in 2018 but rebound to average 526,600 barrels per day in 2019.

North Slope production has averaged 518,517 barrels per day so far in fiscal 2018, which is 2.8 percent below the fall estimate of 533,400 barrels per day. Had that forecast come true, it would have been a third straight year of production increases.

Fisher said in a March 19 Senate Finance Committee detailing the revised forecast that an unusually warm North Slope winter has curbed production efficiency and is largely to blame for the production drop this winter.

North Slope temperatures have been about 14 degrees above the long-term average this winter.

Deputy DNR Commissioner Mark Wiggin noted in an interview that Slope oil production is still tracking very close to the Fall 2017 forecast even though the daily numbers are not as high as hoped.

“It’s within the margin of error,” Wiggin said of fiscal 2018 production numbers.

He also explained that the production facilities on the Slope are designed run most efficiently at very cold winter temperatures.

The natural gas compressors that help reinject gas at many wells to enhance oil production are not as effective at warmer ambient temperatures — which is the primary reason for less summer production each year — and can lead producing companies to focus on extracting oil from wells that have a lower gas-to-oil ratio when things warm up, according to Wiggin.

Longer term, North Slope production is expected to grow to a peak of 536,100 barrels per day in 2020 and gradually decline from there, before stabilizing at about 494,000 barrels per day from 2024-27.

ConocoPhillips’ Greater Mooses Tooth-1 oil development in the National Petroleum Reserve-Alaska is expected to come online late this year with about 30,000 barrels per day at its peak and provide a production boost, as is Brooks Range Petroleum’s Mustang project near Kuparuk, which could provide more than 10,000 barrels per day of new oil.

Oil prices over the period are forecasted to gradually climb to $75 per barrel by 2027. With that in mind, Fisher noted in a cover letter to Gov. Bill Walker with the forecast that the price increase over the next decade would still have Alaska oil in the low $60 per barrel range in today’s terms as inflation will likely degrade the real value.

Fisher also acknowledged, “predicting future prices is inherently uncertain.”

Republican legislators have cited the improved oil price and production prices as proof the state does not need to implement a broad-based tax to resolve the deficit, but instead can rely on reduced spending and drawing from the Earnings Reserve of the Permanent Fund to balance the state budget within a few years.

Walker and the Democrat-led House Majority Coalition insist a tax is needed to balance the budget sooner and provide revenue stability in the event oil prices — which Fisher acknowledged projecting is “inherently uncertain” in his letter to the governor — and production do not meet expectations.

The state’s remaining savings will almost assuredly fall below $2 billion at the end of the current fiscal year regardless of what revenue and budget-cutting measures are adopted this session.


Elwood Brehmer can be reached at [email protected].

03/21/2018 - 11:47am