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State: oil at $67 in FY 2010 State expect prices to rise through 2019, production to rise slightly in 2013 before falling again; Galvin says industry spending expected to be $4.5B in FY 2010, $5B in FY 2011 Eric Lidji For Petroleum News
When the State of Alaska released its revenue forecast in December 2008, guessing the price of oil in the coming year seemed as reliable as guessing the weather in the coming year. In the previous six months, the price of a barrel of oil fell $100, among the fastest declines ever.
“What a difference a year makes. … At this time last year, I was talking about how humbling it was to be a prognosticator of oil prices,” Revenue Commissioner Pat Galvin said on Dec. 10, as he unveiled the state’s forecast of revenue for the coming year.
Through the remainder of fiscal year 2010, the state expects oil prices to average $66.93 a barrel, bringing $4.8 billion in revenue to the state. That projection shows increased confidence in the stability of oil prices. In its forecast in April, the state predicted oil prices would average $58.29 a barrel in fiscal year 2010, bringing $3.2 billion in revenue.
For fiscal year 2011, the state expects average oil prices to jump to $76.35 a barrel, bringing revenues of $5.2 billion to the state, and to continue rising through the next decade, eventually topping $100 a barrel again sometime around fiscal year 2019.
Oil continues to dominate the budget. The state expects oil production to provide more than 87 percent of the unrestricted revenue coming to the state through fiscal year 2019.
The fiscal year ends June 30.
Production to rise, then fall While the state expects oil prices to stabilize and rise slightly in the near term, it expects oil production from the North Slope to actually increase in the middle of the next decade.
“We continue to see the two-decade-long decline in production of oil from the North Slope, although the rate of decline is moderating,” Galvin said.
Oil production fell 3.3 percent between FY 2008 and FY 2009, and the state expects production to fall 4.8 percent in FY 2010, down to 659,000 barrels per day.
In FY 2011, the forecast calls for production to fall 5.4 percent, down to 623,000 bpd.
But while the state expects production to drop again, to 617,000 bpd, in FY 2012, it forecasts increases in FY 2013 and FY 2014, as the Nikaitchuq unit and new Alpine satellites come into production and offset declines. The expected arrival of production from the Point Thomson unit in FY 2015 is also projected to temper declines.
However, production is expected to fall sharply through the end of the next decade.
The production forecast relies heavily on new investment. For FY 2010, the state is forecasting that “new oil” will account for around 2 percent of total production, but by FY 2019 that figure is projected to rise to around 47 percent of total oil production.
Spending expected to increase Galvin said industry spending on the North Slope should remain steady or increase in the near term with expenditures of $4.5 billion in FY 2010 and $5 billion in FY 2011.
That contradicts some of the public statements from industry that the most recent tax system put into place in late 2007 is starting to direct investment to other oil basins.
Gov. Sean Parnell recently said the state planned to examine the current tax structure to see whether it continued to work as intended, but Galvin said there is a “disconnect” between what industry is saying in public and the expense projections it is providing to the state.
“We’re trying to figure out where that disconnect is coming from,” Galvin said.
Galvin said the state has asked the industry to back up claims that the current tax regime is stifling investment, but that no companies have provided that information so far.
“Show us what you need,” Galvin said.
Galvin also noted that the changing profile of the North Slope, where independent companies are exploring and bringing projects online, means “we can’t focus on just the three major producers or the two major operators as indicators of economic activity.”
The tax regime created in late 2007, called ACES, or Alaska’s Clear and Equitable Share, continues to bring additional revenue to the state. Galvin said the $3 billion in revenues earned in FY 2009 would have been less than $2 billion under the Petroleum Profits Tax, or PPT, and less than $1 billion under the Economic Limit Factor, or ELF.
He added, though, that the state still thinks ACES “balances” the back end and front end of investment in new oil and gas projects by taking a larger share of industry profits through increased production taxes in return for tax credits to encourage exploration.
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