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Alaska DOR forecasts declining revenues The state expects oil prices to remain below the level assumed for this year’s budget but future price trends are very uncertain Alan Bailey Petroleum News
With a chart of oil prices over the past year looking a bit like a cross section of one of the more rugged parts of the Alaska Range, predicting where prices will go from here might seem like an exercise in futility. But, since the price of oil is a key factor in determining Alaska’s state revenues, the state’s Department of Revenue has had to come up with some numbers to guide its view of the state’s income over the next year or two.
And Patrick Galvin, commissioner of the Alaska Department of Revenue, emphasized the challenges resulting from oil price uncertainty when he introduced DOR’s fall 2008 revenue forecast on Dec. 9.
“This year is a challenge entirely unique in our recent experience,” Galvin said. “Oil prices have experienced unprecedented … volatility over the past year. … There’s nothing more humbling than being a forecaster of future oil prices.”
In the first half of 2008 the oil price shot up more than 70 percent from around $85 per barrel to $144 before sliding back down to about $40 during the first five months of the state’s current fiscal year, which began July 1.
“In the last two months alone the price of North Slope crude oil has dropped 60 percent,” Galvin said.
From the state’s perspective, the two other main drivers behind state oil revenues, oilfield costs and oil production have also been heading in the wrong direction: Oilfield costs, which the oil companies can deduct from taxable oil production income, have been increasing, while Alaska oil and gas production has continued a decline that began quite a few years ago.
$62 oil DOR is now forecasting that the oil price will stabilize at about $62 per barrel for the remainder of the fiscal year ending in 2009, thus resulting in an average price of about $77 for the complete fiscal year. The state forecasts an average oil production rate of 689,000 barrels per day, with oil company lease expenditures of $4.5 billion.
Running these numbers through the state’s financial model and adding revenue from sources other than oil production results in predicted unrestricted general fund revenues of $6.75 billion, a figure that is down substantially from the bumper revenues of $10.79 billion that the state is now estimating for the 2008 fiscal year.
Looking further ahead, the state thinks that oil prices will strengthen to reach an average of around $74 per barrel during the 2010 fiscal year. With an estimated average oil production rate of 665,000 barrels per day and oilfield expenditures of more than $5 billion, DOR anticipates unrestricted general fund revenues of $5.27 billion for that year, Galvin said.
“We have made our forecast in terms of FY 2010 based on the assumption that we’ll soon see signs of economic recovery in both the United States and worldwide,” Galvin said. “We believe that the actions taken by the United States government and governments around the world to stave off the effects of the financial blocks that we’ve experienced … will be relatively effective.”
Although oil revenues add up to around 90 percent of the state’s unrestricted income, the DOR revenue projections include state income from all sources. But, except for federal and investment incomes, non-oil revenue has gone into decline. Mining taxes and corporate income tax have both been dropping, for example, mainly as a result of falling commodity prices associated with mining, Galvin said.
Budget shortfall The revenues that the state expects to collect for the 2009 fiscal year now fall short of planned state expenses by around $430 million to $450 million, Galvin said. However, he also stressed that the projected shortfall in revenues for the current year is not a cause for panic.
“We’re a long way from crisis mode,” Galvin said. “The Legislature and the administration have a number of options available to them to deal with the (low) oil prices.”
Options include cutting expenditure and drawing on budget reserves — the reserves are standing at especially high levels at the moment, Galvin said.
But the volatility in oil prices is creating some formidable challenges in developing the next state budget.
“The administration will be participating in the budgeting process with the Legislature with the knowledge that by the time the FY 2010 budget process is complete we may have a significantly different revenue,” Galvin said. “With that in mind I understand that the governor will likely introduce next week a budget that proposes to spend less than our current revenue forecast. And she retains the option during the budget process to amend her requested budget as necessary to respond to updated revenue projections.”
DOR says that it may issue an interim oil price and revenue forecast prior to the release of its official spring 2009 forecast.
New sources
Because of the oil price volatility DOR derived its oil price forecast for 2010 from a wider variety of sources than normal, Galvin said.
“Normally we rely almost entirely on a price forecasting method that utilizes the collective views of a large group of economists … in early October,” Galvin said. “… The relevance of that information was quickly undermined this year by the rapidly gyrating price.”
So this year DOR has blended that result with a number of other price forecast sources, including the U.S. Department of Energy and the Nymex futures exchange.
The department also considered a previous DOR low-end oil price forecast as a guide to what may happen in the current economic climate.
“The environment that we predicted that would result in that low forecast was beginning to take shape,” Galvin said. “We’re seeing a number of the forces with regard to recessionary economics.”
But DOR considers the early December prices at around $40 per barrel as a price level that oil speculators have driven below a supply and demand equilibrium price above $60 per barrel, Galvin said.
Production decline The estimates of future oil production that form key drivers for the revenue forecasts are based on 3.8 percent and 3.5 percent production declines during fiscal years 2009 and 2010. The decline figures take into account increasing production from Pioneer Natural Resources’ new Oooguruk field and assume that ENI’s Nikaitchuq field will come on line during the first quarter of calendar year 2010. DOR has assumed continued development of satellite fields around ConocoPhillips’ Alpine field.
However, DOR has taken a conservative view of future viscous oil production on the North Slope by excluding 96 percent of West Sak viscous oil and 87 percent of West Sak viscous oil from its projections. And DOR has not included any heavy oil production from the Ugnu formation in its forecasts. No future oil production is assumed from as yet undiscovered or undeveloped oil pools, such as resources expected to exist in the National Petroleum Reserve-Alaska, or known to exist in the Sivulliq, Kuvlum and Sandpiper fields in the Beaufort Sea.
DOR has also limited future production expectations from new low-salinity waterflood techniques and has discounted the use of carbon dioxide injection as a means of future improved production.
“We exclude the aforementioned 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,” DOR said in the 2008 Revenue Sources Book that contains its new revenue forecasts. “Accordingly, we believe that our current estimates of ultimate recovery from the North Slope are conservative.”
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