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Alaska revenue outlook offers mixed bag State spring forecast calls for slow decline in oil prices, short-term increase in production and temporarily higher unrestricted revenue Rose Ragsdale For Petroleum News
Adhering to its trademark caution, the Alaska Department of Revenue has projected a drop in Alaska North Slope oil prices and a modest jump in ANS crude production for the coming year.
In a semi-annual forecast of Alaska’s revenue outlook released May 1, Revenue Commissioner Patrick Galvin said the state can expect to rake in nearly $5 billion in unrestricted revenue this year, up about 19 percent from fiscal 2006. Oil revenues will account for some $4.3 billion, or about 87 percent, of this discretionary portion of the state budget, he said.
“Despite production declines due to a series of pipeline corrosion issues, revenues for fiscal 2007 are forecasted to increase primarily due to the increased production tax revenues under the new Petroleum Profits Tax (PPT),” Galvin said in an April 30 cover letter to Gov. Sarah Palin.
The Revenue Department’s estimates show PPT revenues in FY 2007, which ends June 30, generating about $1 billion more for state coffers than would have collected under the old economic limit factor or ELF system.
The trend, however, may be short-lived, according to state economists.
They predict unrestricted revenues will decline in fiscal 2008 due to lower oil prices, higher operating and capital costs on the North Slope and unused tax credits earned in FY 2007 applied against FY 2008 revenues.
The Department of Revenue publishes the Revenue Sources Book twice a year, in the fall and spring. The forecast is compiled by the Economics Research Group within the department’s Division of Tax and Audit.
ANS crude prices to decline The economists projected Alaska North Slope prices to average $59.81 a barrel for FY2007, up 66 cents from their November 2006 forecast of $59.15 a barrel. The fiscal year-to-date average is about $61 a barrel.
“We believe there will be continued downward pressure on oil prices, and our forecast for ANS crude prices for FY2008 is $54.72/bbl and for fiscal 2009 is $53.86/bbl, Galvin said. “Our long-run ANS crude oil price forecast for 2014 and beyond is $41.03/bbl, increasing at the projected rate of inflation.”
Galvin acknowledged that the predicted prices are lower than current market prices and some expert predictions, but said the cautious approach is appropriate in fiscal planning given the current pricing environment where oil prices are high by historical standards.
Though oil prices may appear to be climbing ever upward with no end in sight, Michael Williams, senior economist and head of Revenue’s research group, says nothing could be farther from reality.
“It is basic market fundamentals. Long-term oil prices are very cyclical. … If prices remain high for several years, there’s high likelihood you’ll change your habits,” and on the supply side, a lot of things become possible such as more investment in developing unconventional sources of crude such as heavy oil fields and using steam in the Canadian tar sands, according to Williams.
Likewise, when oil prices are low for a long time like in the 1990s, people go out and buy big SUVs and investment in developing new sources of oil shrinks up, he said in an interview May 2.
Over time, the effects of higher or lower oil prices filter their way all through society. However, in the past three decades, the world has gotten a lot more efficient in its use of energy, according to Williams.
“This time around, efficiencies of economies worldwide have improved, which means that it will likely take longer for the effects of high oil prices to be felt,” he explained. “Oil prices probably will have to go higher before you get the long-term impacts. It would affect the development of other fuels. When organizations are profitable, they can experiment more. But we see it coming to a head.”
Still, it’s difficult to predict exactly when prices will come down.
“It’s not an exact science, but it is based on sound economic ideas,” he said.
Natural gas outlook uncertain Revenue economists also included a projection for natural gas prices in the forecast this spring, though Alaska currently produces no natural gas for sale on the North Slope.
“Our forecast for natural gas prices at the Henry Hub for FY2007 is $6.64 per million Btu,” Galvin said.
The forecast reflects the extreme volatility that natural gas prices exhibited during the past 18 months, plummeting 76 percent from $15.39 per million Btu in December 2005 to $3.66 per million Btu in September 2006. Since September, prices have more than doubled, closing at $7.93 per million Btu April 13.
Williams said the research group started following natural gas prices about two years ago in an effort to fully understand the market fundamentals if and when an Alaska gas pipeline is developed.
Unlike oil markets, which have existed in the United States for at least 140 years and worldwide for decades, Williams said natural gas markets are a recent U.S. phenomenon and do not even exist overseas where natural gas is sold using contracts between two parties.
He said deregulation of natural gas was begun in the 1970s and only completed in 1996. Since then the markets have sought their footing at a time of unusual weather events, including Hurricane Katrina.
“Looking forward, there is great uncertainty in the markets,” he said.
Large users of natural gas, such as utilities, have the option of converting to much cheaper, but environmentally challenging coal. While coal supplies are plentiful, equipping plants to burn it without giving off harmful emissions is an expensive proposition, Williams said.
At some point coal may become cheaper and more reliable than natural gas even with the cost of the conversion, he said.
One thing that would help stabilize U.S. gas markets is a clear signal that an Alaska natural gas pipeline is really in the works, he added.
Rollercoaster ride for crude output On the production side, the outlook also is mixed. ANS oil production is expected to average 740,000 barrels per day in FY2007, down from the economists’ fall 2006 forecast due to pipeline corrosion problems at the Prudhoe Bay, Lisburne and Milne Point fields.
ANS output is projected to climb slightly in FY2008 to average 764,000 bpd, assuming no major pipeline shutdowns and the Oooguruk field comes on line during the year as predicted with about 3,000 bpd of new production, according to Galvin.
Additional small increments of output from Nikaitchuq, satellite fields in Alpine, and small pools in the National Petroleum Reserve-Alaska along with contributions from heavy oil accumulations are projected to gradually boost ANS output to about 807,000 bpd in 2012 before a slow decline resumes until a bump in 2017 when output from the Point Thomson field is projected to come on line, Williams said.
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