By Tim Bradner
Alaska Journal of Commerce

High oil prices have sent state revenues soaring, and that's good news for the state budget. The bad news, however, is that oil production from North Slope oil fields is declining faster than expected.

In other words, the good times for the state budget may not last, particularly if oil prices take a dip, something most forecasters think will eventually happen.

"While our revenue picture has improved, I remain concerned about the continued decline in oil production," Gov. Frank Murkowski said. "High prices, to a large extent, have masked the impact of a downturn in production on state revenues."

State officials have also admitted they have been too optimistic in their production forecasts. The new estimate is more conservative.

The latest forecast, released March 7, shows that there will be 117,000 barrels per day less in fiscal year 2008 than 2005, the governor said. As for the current fiscal year, state Revenue Commissioner Bill Corbus said production is now expected to be 6.75 percent down from last year.

Some drop in production was expected due to the natural decline of large, maturing oil fields, but the decline this year is steeper than anticipated due to unanticipated field maintenance problems and unexpected delays in some development projects, according to the chief state petroleum economist, Michael Williams.

A good example of an unanticipated problem is the March 2 oil spill at Prudhoe Bay that shut down production from Gathering Center 2 and 12 well production pads in the western part of the field. This caused a drop of about 100,000 barrels per day, or about one-fourth of the Prudhoe field production rate, although the operating company, BP Exploration (Alaska) Inc., found a way to restart 5,000 barrels per day of production.

Dudley Platt, a petroleum engineer who is a consultant to the state revenue department, said BP's decision last fall to take 70 Prudhoe producing wells offline for maintenance also caught the revenue department by surprise. These wells are now being brought back online after being repaired, but this showed that the revenue forecasters must now assume that a certain number of wells and facilities will be down for maintenance as the North Slope fields continue to age.

One new development that was delayed in its production buildup is the new J-Pad viscous oil project in the Kuparuk River field west of Prudhoe Bay. ConocoPhillips Alaska Petroleum Co., the Kuparuk operator, experienced problems with the producing reservoir and had to slow the flow of viscous oil through new wells, according to Platt.

The problems at J-Pad are being worked out, but the result is that some daily production the state had counted on when it made forecasts last year did not materialize, Platt said at a March 7 revenue forecast briefing in Juneau.

Williams said the revenue department is now revising downward its estimates of future production to take account of possible problems with new projects and the increasing down-time in parts of the producing fields for maintenance on wells and on oil and gas processing facilities.

"We have been too optimistic in our forecasts for the last five to six years," Platt said.

Chief economist Williams said the overall reduction is about 30,000 barrels per day over the next three years. The revised, more conservative estimate for FY 2006, the state financial year ending June 30, is for an average of 854,000 barrels per day of production from the North Slope fields. In FY 2007, which begins July 1, an average of 825,000 barrels per day is now expected. In FY 2008 the revised production estimate is 803,000 barrels per day.

Continued gradual production declines of about 1.2 percent per year are expected between 2008 and 2015, when an average daily output of 772,000 barrels per day is anticipated.

But that estimate depends on new oil fields coming online that are not producing today, Corbus said. Large fields like Prudhoe Bay and Kuparuk are expected to continue declining, but the state is counting on new production from discoveries where oil has been found but where decisions to develop the field have not yet been made.

By 2015, about half of the oil expected to be produced will come from fields that have not yet been developed, Corbus said.

Even though the new production estimates are more conservative, Williams said there's a 25 percent to 30 percent chance that at least some of the long-term estimated oil output will not appear.

Corbus said the uncertainties over future production levels underscore the importance for the Legislature to approve Murkowski's proposed new petroleum profits tax, a revamped state oil production tax that contains investment tax credits intended to spur new development.

However, sources in the industry point out that the tax proposal, which will also impose higher state taxes on both producing and new projects, injects new uncertainty as to whether proposed projects will be actually developed.

Williams said the revenue department has assigned risk factors to its latest estimates. Because the proposed petroleum profits tax has not yet been enacted, the forecast assumes the current tax law.

For the current year, with oil coming from fields now producing, the department has a 98 percent confidence level in the estimate, Williams said.

There's a higher risk with fields not yet producing, however. Projects that are in development now, such as viscous oil and some satellite projects near producing fields, are assigned an 80 percent to 85 percent risk factor, meaning that the department feels there's an 80 to 85 percent chance the production will actually occur.

A lower probability estimate, and a higher risk factor, is assigned for production from fields that are known but where investment decisions have not been made. For these a 70 to 75 percent risk factor is being used.

About half of the reduction in expected production in the short-term is due to increased maintenance in the large producing fields, with the other half due to slower-than-expected startups for viscous, or heavy, oil projects.

Platt said one significant new development that has been delayed is Point Thomson, a large gas and condensate field on the North Slope that is 60 miles east of Prudhoe Bay. Longer-term reduction in the production forecast is mainly related to the Point Thomson field.

Point Thomson was discovered years ago but it is mainly a gas field with an estimated 8 trillion cubic feet of gas. Because there is no gas pipeline, there is no market for Point Thomson's gas. The producers, however, had hoped to develop a project to produce the liquid condensates that are held in the gas, as well as oil from small oil deposits nearby.

The revenue department has included production from Point Thomson in its estimates for several years, and has had to change the expected date of first production three times, Platt said. In 2000 the department expected the field to be producing in 2006, and included it in the forecast. The date was changed to 2008 and then 2010, and the latest date for startup now is in 2015.

Platt said Point Thomson represents a significant amount of potential for hydrocarbon liquids, about 80,000 or 90,000 barrels per day, including the liquid condensate from the gas reservoir and oil from nearby satellite deposits. Those would become economic when the gas field is development and infrastructure is built.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.