Production predicted to rise for third straight year
The State of Alaska is forecasting an increase in oil production for the third year in a row. Officials from the departments of Natural Resources and Revenue briefed legislators on the latest forecast Oct. 30, predicting an average of 533,000 barrels per day on the North Slope during the current fiscal year.
This estimate is based on four months of production data since July 1, the beginning of fiscal year 2018, said Ed King, a petroleum economist with the Department of Natural Resources.
King said he believes the trend will hold through the upcoming winter months, which are typically peak production time for oil fields on the Slope.
If the trend holds it would be 9,000 barrels per day up from last year’s average of 524,000 barrels per day. Fiscal year 2017 ended this past June 30, and state analysts now have actual production data for the 12-month period, King said.
Last year saw a similar increase of 9,000 barrels per day over fiscal year 2016, and that year saw a 13,900 barrels-per-day gain over 2015, he said.
Cook Inlet oil production, which is holding steady at about 18,000 barrels per day, is not included in the numbers but would be in addition to the North Slope totals, King said.
The increase for the North Slope is remarkable because crude oil prices began a slide in late 2014 and dropped from more than $100 per barrel to less than $30 per barrel by January 2016. Prices have recovered since then, and Alaska’s Department of Revenue is predicting an average price of $54 per barrel for North Slope crude this year, Commissioner Sheldon Fisher told the legislators at the Oct. 30 briefing.
The price per barrel on Oct. 30 estimated by the Revenue Department was $60.73.
King said the state had been forecasting declines in production based on historical decline rates and also because North Slope field operators cut capital spending by 44 percent last year in reaction to low oil prices. The spring forecast released this past April was for just 459,000 barrels per day in fiscal year 2018.
“What surprised us is that operators of the large ‘legacy’ producing fields were able to find enough efficiencies to increase production despite laying off drill rigs and drilling fewer wells,” King said. “We assumed reduced capital expenditures and rig laydowns would result in accelerated decline. The operators outperformed expectations, doing more with less.”
The field operators also beat their own forecasts, King said. Under state law producers are required to provide the state with forecasts of production and capital and operations spending on a field-by-field basis, but in fiscal year 2017 the actual production exceeded the companies’ estimates to the state he said.
About half of production increase in the last two years can be attributed to improved performance at the large BP-operated Prudhoe Bay field, which produces about half of total Slope production, and about half to expanded production in the ConocoPhillips-operated Alpine field, mainly at CD-5, a new drill site that has enjoyed exceptional output, King said.
With greater confidence in the ability of North Slope producers to sustain production and develop new prospects, the state has revised its long-term production forecast to remain essentially flat, at about 500,000 barrels per day or more, through 2027.
Previously the state had estimated that production would drop to about 300,000 barrels per day by 2025 or 2026, which is the point that the Trans-Alaska Pipeline System would experience severe operating problems.
Paul Decker, a geologist who heads the DNR resource evaluation group, said a factor in the improved long-term outlook is that the state assumes that certain new discoveries now in development will actually be come online.
Previously the state discounted any new oil from wells not beginning production within 12 months of the forecast, Decker said. This proved to be conservative because several years are required to bring new North Slope discoveries into production.
The higher production will result in a modest increase in revenue this year and next, according to a revised state revenue forecast also released Oct. 30. State unrestricted general fund, or UGF, revenues are expected to be $1.83 billion this fical year, officials told the Senate Finance Committee.
For next fiscal year 2019, the budget legislators will prepare next spring, the outlook is for $2.01 billion in UGF revenues.
Greater oil production is good news, but things on the budget side are more sobering. Pat Pitney, the state budget director, told the Senate Finance Committee Oct. 31 the $4.4 billion unrestricted general fund spending planned for the current fiscal year will likely increase to $4.7 billion next year because of increases basically built into the budget such as state spending on health care for Medicaid, state employees and retirees.
If the health care trends hold, the increase for the following year will be to $4.9 billion and to $5 billion the year after.
State health care expenses have been rising at an annual rate of about 5.25 percent.
State administration officials acknowledged the state has an obligation to pay past tax credits applied for under an oil incentive development program ended by the Legislature this past summer.
Under questioning by Senate Finance co-chair Sen. Anna MacKinnon, R-Eagle River, state Revenue Commissioner Sheldon Fisher said Oct. 30 the state accepts the liability but the timing is uncertain as to when they can be paid.
The following day MacKinnon asked the same question of state budget director Pat Pitney, who agreed that the state has the liability.
MacKinnon said she and other legislators have been contacted by banks who loaned money to oil developers, mostly small independents, based on the expectation that tax credits paid by the state would allow borrowers to repay loans.
“I just want it on the official record that the administration accepts the liability,” MacKinnon said.
Fisher said the state is making minimum payments on the money owed, which totals more than $700 million according to the Revenue Department, but the plan is to increase the payments from about $78 million in fiscal year 2018, the current budget year, to nearly $200 million in fiscal year 2019 and with varying annual payments ranging between $120 million to $150 million until the liability is paid off in 2025.
The Legislature has ended the incentive program but some tax credit refund applications are still coming in, Fisher said. Those will end as the program winds down, Fisher said.
Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected].