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State optimistic about new production Revenue forecast shows new production accounting for half of all production by 2020, including several year-over-year increases Eric Lidji For Petroleum News
The new production forecast released by the Alaska Department of Revenue on Dec. 3 includes an unusual feature: lines tilted upward. The state predicts daily North Slope oil production will rise year-over-year in fiscal year 2012, FY 2013 and FY 2016.
That would buck a long-standing trend in Alaska. Since its peak in 1988 at more than 2 million barrels per day, North Slope oil production has fallen every year except one: 2002, when ConocoPhillips brought the Alpine field into production.
The prediction is far from certain, of course, and doesn’t eliminate concerns about how declining oil production will impact state revenues in the future, but it offers a glimpse into the changing nature of the North Slope as it enters its sixth decade of production.
The state expects to earn $4.67 billion in unrestricted oil revenue this fiscal year and $5.06 billion in FY 2012, anticipating rising oil prices to offset declining production.
“It’s fair to say that the State of Alaska right now has the strongest financial position that we’ve had in our history,” Outgoing Department of Revenue Commissioner Patrick Galvin said at a Dec. 3 press conference. “The forecast for revenues for the foreseeable future is strong and stable. That said, because of our reliance on oil, which has a history of volatility in prices, we must maintain a conservative financial philosophy.”
Decline over coming decade The state still expects overall oil production to decline over the coming decade. In FY 2010, the North Slope averaged 644,000 barrels per day. The state is forecasting production to fall to 520,000 bpd by 2020. The three small upticks expected in the next few years, though, represent the cumulative impact of several projects on the horizon.
In forecasting production, the state considers three sources: existing fields, fields being developed and fields being evaluated. The current forecast predicts that existing fields will decline around 9 percent each year on average through the end of the decade, while oil from new fields will slowly offset, but not entirely replace, those annual declines.
The state defines “under development” as recently sanctioned fields and expanded development drilling projects at existing fields. It defines “under evaluation” as “technically viable” projects that are currently undergoing economic evaluations. Those two categories cover many projects across the North Slope, from development drilling and enhanced oil recovery at satellites of Prudhoe Bay, Kuparuk and Alpine, to expanded development at Oooguruk, to new projects like Nikaitchuq, Liberty and Point Thomson.
The state is forecasting a 4.3 percent decline in production in FY 2011, “due in part to increased planned and unplanned maintenance on aging North Slope facilities, flowlines, pipelines and wells,” but a 1 percent increase in FY 2012 “due primarily to production from projects under development at Oooguruk, Badami and Nikaitchuq.” In a field-by-field breakdown, the state also includes first oil from Liberty in its FY 2012 forecast.
New, near-term projects The timing of some of those projects is more certain than others.
Operator Pioneer Natural Resources has been reporting successful test wells at Oooguruk and plans to continue testing a new horizon in the first quarter of 2011. Savant Alaska recently brought the BP-operated Badami field back into production. Operator Eni Petroleum is expected to bring Nikaitchuq online sometime early next year.
Liberty most likely won’t come online in FY 2012, as forecasted. BP recently announced plans to put the Beaufort Sea project on hold while it conducts engineering studies of its huge drilling rig. Although the state only predicted some 5,000 bpd from the field in FY 2012, that small amount of production represents the forecasted 1 percent increase.
The state is forecasting that Point Thomson production will begin sometime in 2015, a tad bit slower than the late 2014 startup date predicted by operator Exxon Mobil.
Heavy oil and federal acreage While the forecast is optimistic, it tries not to be idealistic.
It excludes production from the Arctic National Wildlife Refuge, most of the production from the National Petroleum Reserve-Alaska, and several known oil discoveries in the federal Outer Continental Shelf, like Sivulliq, Kuvlum and Sandpiper. Those regions, while subject to economic rigors, are largely at the whim of the federal government.
It also takes a cautious approach on known heavy and viscous oil deposits, excluding all of the estimated 20 billion barrels at Ugnu, 97 percent of the estimated 10 billion barrels at West Sak, and 93 percent of an estimated 2 billion barrels at Schrader Bluff. Those deposits are at the whim of technological advances aimed to make production economic.
“We exclude these resources, both known and unknown, in order to avoid speculation and to reduce the uncertainty typically associated with the commercialization, timing and magnitude of resource development,” the Department of Revenue said in the forecast.
The forecast doesn’t abandon those two groups entirely, though.
It includes 462 million barrels from West Sak, Northeast West Sak and Schrader Bluff, although the department said it “again slowed the pace of heavy oil development there.”
It also includes oil from Alpine West, also known as CD-5, around 2013. That Alpine satellite, along the eastern boundary of the NPR-A, is held up by federal permitting challenges. Those delays also impact Mooses Tooth, an NPR-A unit that the state includes in the forecast and expects to come online in the second half of the decade. The forecast also includes Umiat, the remote oil field in the foothills of the Brooks Range.
New oil growing in importance Altogether, the forecast shows a shift in the production profile of the North Slope over the coming decade, one that increasingly favors new oil. Existing fields are expected to account for about 95 percent of total production this year, but less than half by 2020.
The state often overestimates oil production. In 2008, forecasters attempted to rectify that recurring problem by putting more emphasis on planned and unplanned shutdowns. Last year the state predicted FY 2010 oil production of 659,000 bpd, still 15,000 barrels high.
Comparing the 2010 forecast to the 2009 forecast shows few major revisions, but several interesting details. The state decreased its production forecast for FY 2011, but increased it for FY 2012 and FY 2013. Looking out over the coming decade, the state is now predicting larger declines from existing production, but also larger increases from new production, enough so the total production forecast remains somewhat the same.
Those new fields will require significant upfront capital before production begins, including some expenditures that qualify for tax credits. The state expects oil companies to spend $2.6 billion on capital expenditures in FY 2011 and $2.9 billion in FY 2012.
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