Upside down: Alaska crude prices chart negative territory
Market forces that not long ago pushed refiners to pay a premium for Alaska oil have been turned upside down, further depressing an already collapsed oil market and deepening the financial pain of producers and the state.
Alaska North Slope crude sold for an unprecedented price of -$2.68 on April 20, a daily drop of $18.09 according to the state Department of Revenue.
At prices near zero, North Slope producers are losing an average of more than $30 on each barrel and oil royalty and production tax revenue to the State of Alaska is nonexistent.
Longtime Alaska petroleum economist Roger Marks noted that while the prices for Alaska and West Texas Intermediate, the primary benchmark for Lower 48 oil are shockingly low — WTI sold for -$37.63 on April 20 — the price for Brent crude stayed relatively stable at $25.57 with a daily drop of just $2.51.
The price for Alaska oil rebounded somewhat April 21 to $9.01 per barrel and WTI was back to $10.01 per barrel at the end of trading.
Brent is the primary benchmark price for many of the water-borne oil trades made worldwide. The name originated from the Brent oil field in Europe’s North Sea.
Marks said it’s possible just a small number of “distressed” sales by sellers needing to find a place to offload their oil in a vastly oversupplied market could have contributed to driving the ANS price down further.
“ANS is a pretty thin market. There’s just a few sales a month that drive the public market,” Marks said.
The vast majority of ANS oil is exported from Valdez to West Coast refineries and transportation constraints limit the amount of oil produced east of the Rocky Mountains that can be sent west. That soft barrier has led to the development of ostensibly two oil markets in the U.S.
Per state regulations, Revenue officials estimate daily ANS price in part via reports from Reuters and Platts reporting services. There is no instant spot price data for the ANS market as there is for more widely traded oil benchmarks.
The fact that the West Coast oil demand is largely from transportation — a sector hit particularly hard by the virus-induced economic shutdown — just adds to the challenges for those selling ANS crude, Marks said. He also said much of the oil refined in state is traditionally used to produce jet fuel, for which demand has all but dissipated as well.
“If you want to buy (ANS crude) you can really lowball them right now,” Marks said.
Chief Department of Revenue Economist Dan Stickel said state officials have also heard reports of West Coast refiners slowing their production due to COVID-19 infections among refinery personnel.
Analysts expect extremely low or even negative oil prices to be a short-term phenomenon, as prices globally have not bottomed out to the degree of U.S. oil markets that appear to be even more saturated.
According to the Energy Information Administration, West Coast refineries processed an average of 1.75 million barrels per day in the week ending April 10, which was down nearly 20 percent from more than 2.1 million barrels per day a year ago.
The U.S. had a 35-day supply of oil as of April 10, the most recently available data. That is up about 25 percent from a year prior, according to the EIA.
Recent reports worldwide have indicated oil tankers are being used as storage vessels in some instances where traditional storage means are full.
Marks said Brent futures for June are still in the $30 per barrel range, indicating buyers feel there will be at least a little more balance to oil markets as global production is scaled back.
“Not that $30 is good but at least there’s the right symbol in front of it,” he said.
“(Oil prices) will come back. The world’s in a very, very weird place these days on a number of fronts and oil prices are just a response to that.”
Leaders from the world’s top oil producing nations on April 12 announced a global agreement to cut 9.7 million barrels from daily production in May, or about 10 percent of oil production worldwide.
The spread between the ANS and global Brent prices that is now hammering Alaska was benefiting the state just a few months ago. As recently as January ANS crude was trading at a $2 per barrel premium to Brent and in prior months Alaska oil had sold for up to nearly $4 per barrel more than Brent.
At the prior price plateau of $60 to $65 per barrel, each dollar to the positive netted the State of Alaska an additional $42 million over the course of a year, Tax Division Director Colleen Glover said at the time.
Industry observers then attributed the positive — for Alaska — differential to increased exports from Valdez to South Korea and President Donald Trump’s re-imposed economic sanctions against Iran that restricted the country’s ability to export oil.
However, Marks, Stickel and other oil industry analysts have said ANS crude has been forced to compete with more Middle East oil of late on the West Coast, particularly from Saudi Arabia.
Sen. Dan Sullivan has been among members of Congress pushing the administration to respond to Saudi Arabia’s part in flooding oil markets.
Trump said April 20 his administration is considering a ban on Saudi oil imports in an attempt to stabilize domestic oil prices.
An oil price war between Russia and Saudi Arabia ostensibly ended with the April 12 deal, but the full effect of the drastic production cuts isn’t expected until May and the consequences of the conflict, which started after the countries couldn’t agree to a production cut in February, have already been felt.
Oil imports to the West Coast averaged just more than 1 million barrels per day during the four-week stretch ending April 10, a 9 percent year-over-year increase, according to the EIA, while refiners are using much less.
Stickel emphasized that even though the current price situation is a scary one for the state’s finances, it’s not nearly as bad as it would have been a few years ago. That’s because since the Legislature and former Gov. Bill Walker approved an annual structured draw from the Permanent Fund’s earnings in 2018, oil now accounts for less than 20 percent of the state’s unrestricted revenue, he said.
The Permanent Fund draw provides roughly $3 billion per year to state coffers.
Stickel noted that revenue from oil and gas property taxes, which generated $121 million in 2019, is stable regardless of prices. Corporate income taxes from the large producers, on the other hand, will likely be “very minimal” in fiscal 2020, he said.
Oil and gas corporate taxes netted $217 million to the state last year, according to the 2019 Annual Tax Division Report.
Stickel also said oil production tax calculations are made based off of monthly average prices, so a given day or cluster of days with highly abnormal prices will not dramatically alter the overall calculation. Additional provisions of the state’s blended gross-net production tax system are based off of calendar year prices, making it even less likely that the immediate situation will significantly impact state finances over the long-term.
The 4 percent gross tax “floor,” — which kicks in when the gross production tax calculation is greater than the net tax payment — gradually steps down to zero if prices average less than $25 per barrel for a calendar year.
ANS prices have averaged about $45 per barrel so far in calendar 2020. The Revenue Department’s official forecast published April 6 for the average price in state fiscal year 2020, which ends June 30, is $51 per barrel. Alaska oil was selling for about $28 per barrel at the time.
Additionally, the state receives royalties of at least 12.5 percent of the gross value of the vast majority of oil produced on the North Slope.
Royalties are calculated based on the wellhead value of the oil minus transportation costs, which average about $9 per barrel, according to the Revenue figures.
“As long as prices are above that (transportation cost) level, there will be a gross value so we’ll get some royalty,” Stickel said.
If prices stay extremely low much longer than expected, issues between state auditors and producers could arise from having to interpret portions of the production tax law that haven’t previously been considered, he surmised.
“It’s kind of an unprecedented situation,” Stickel said.
Marks added that an extended period of ultra-low ANS prices could also lead producers to curb production beyond deferring drilling and other capital expenses.
“The last place you can store oil is in your reservoir,” Marks said. “You can’t shut down an oil field but you can throttle it back.”
That would go against traditional state policies that typically require companies to produce what they are capable of, but Marks said it could benefit both parties to wait until prices improve — if that’s what the markets eventually dictate.
ConocoPhillips announced April 16 it would be cutting production by approximately 225,000 barrels per day in the Lower 48 and Canada.
Division of Oil and Gas spokesman Sean Clifton wrote in an emailed response to questions that North Slope oil production typically hasn't fluctuated with oil price swings in part becasue it is sold on futures contracts negotiated well before the oil is produced and delivered. Clifton also noted that maintaining a certain level of throughput in the Trans-Alaska Pipeline System, or TAPS, is important for the operational integrity of the pipeline and upstream assets.
Leaders at Alyeska Pipeline Service Co. have said there could be operational challenges with TAPS if daily throughput consistently falls below about 300,000 barrels per day; the pipeline currently carries roughly 500,000 barrels of oil per day.
Division of Oil and Gas officials are holding discussions with producers to ensure a balance between resource development, infrastructure integrity and commercial sales, according to Clifton.
Elwood Brehmer can be reached at [email protected].