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State planning for shutdowns Alaska economists put extra weight on potential shutdowns at North Slope fields in crafting state’s fall revenue forecast Eric Lidji Petroleum News
Oil production and oil prices are the two big factors for guessing what Alaska revenues from the oil industry will be in a given year, and while state economists have typically underestimated the price of Alaska North Slope crude oil, they have typically overestimated production at North Slope fields.
Those economists now believe much of the discrepancy can be traced to shutdowns, both planned and unplanned, along the North Slope.
So for the most recent revenue forecast, released Jan. 8, state economists decided to put additional emphasis on how these shutdowns delay production. (See “Production drops, revenue rises,” in Jan. 13 issue, at www.petroleumnews.com/pntruncate/57731828.shtml.)
“We have often planned for shutdowns, but we realized that we haven’t planned enough,” said Department of Revenue Chief Economist Michael Williams.
More ‘proactive’ estimating State economists last year accurately predicted that average daily production in fiscal year 2007, which ended last July, would be 740,000 barrels per day.
But that level of precision is an anomaly.
Over the past five years, for instance, the state has typically overestimated average production by around 20,000 bpd looking a year in advance and around 75,000 bpd looking two years in advance.
But during that same time period, the state typically underestimated the average annual price of that oil, with guesses ranging from $1 to $17 below what the actual price ended up being.
“When we have examined our forecasts in the past, we discovered they were higher than expected,” said Williams. “There was a pattern.”
In the most extreme example, state economists trying to forecast oil production for fiscal years 2006 and 2007 didn’t know Prudhoe Bay would be shut down twice or that corrosion issues on feeder lines in the Lisburne field would result in lower throughput.
“We’ve decided to become a little more proactive,” Williams said.
Production delays, not production declines Typically production declines have revolved around mature fields nearing the end of their lives, but these declines are more like delays, Williams said, because production continues once the maintenance is complete.
The state created the new estimates by looking at each field individually and guessing how much production might be pushed off a year or two.
The move comes at a time when North Slope infrastructure is aging, increasing the likelihood of both planned and unplanned slowdowns and shutdowns for maintenance on facilities, flow lines, pipelines and wells.
Looking ahead for the next six to eight years, the state increased the estimated downtime among the largest North Slope oil fields, including the Greater Prudhoe Bay Area, the Greater Kuparuk Area, the Milne Point Unit and Endicott.
All told, the state “delayed” 50,000 barrels of oil a day on average for the current fiscal year, which ends in July, according to petroleum engineer Dudley Platt.
In the coming years, the fall forecast suggests, 30,000 bpd to 70,000 bpd, on average, will be delayed because of planned or unplanned shutdowns.
“Just because a reservoir is capable of producing, there’s a lot of other things that can prevent it from performing up to the expectations that I have of it, and frankly the expectations that the operators have of it,” Platt told members of the Senate Finance Committee during the special legislative session on oil taxes back in November, when the state began publicly predicting the production decline. (See “Alaska oil forecast shaky,” in Nov. 18 issue at www.petroleumnews.com/ pnads/463243474.shtml.)
Potential shutdowns not the only factor in production estimates Shutdowns are not the only factor used in increasing or decreasing the expected production of a given field, Williams said.
For instance, the state originally thought the Pioneer Natural Resources Oooguruk project in the Beaufort Sea north of Kuparuk would come online this fiscal year, but now believes the field won’t start producing oil until next fiscal year.
Also, the state adjusted its expectations for heavy oil fields like Orion, Polaris and West Sak, because “technical issues” have slowed the pace of development.
And all that comes on top of regular declines on aging fields across the slope.
From an up year to a down year Planning for potential shutdowns helped turn the current fiscal year from one of predicted production increase to one of predicted decrease.
In the Jan. 8 forecast, the state predicts North Slope production will average 731,000 bpd in fiscal year 2008, which ends on July 1. If correct, that would be a 1.2 percent decline from the 740,000 bpd produced in fiscal year 2007.
But back in the spring forecast released on April 30, 2007, the state estimated North Slope oil production would average 764,000 bpd in fiscal year 2008, a 3.3 percent increase over fiscal year 2007.
Considering all factors — from shutdowns, to technical problems, to aging fields — the state re-examined 24 North Slope fields in the fall forecast. Of those, 17 ended up with lower estimates than in the spring, four ended up staying the same and three actually grew.
The state predicted a drop of 5,000 bpd of oil and natural gas liquids at Prudhoe Bay, bringing the estimated production there to 292,000 bpd this fiscal year. The state also predicted a drop of 10,000 bpd at the West Sak field.
Ultimately, though, it’s still a guessing game and the state won’t know how close it got until the actual figures come in, Williams said.
“We’re constantly reviewing this stuff,” Platt said. “We never get it right, but we try to get close.”
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