Revenue: North Slope costs coming down

Department says in Fall Revenue Forecast that transportation costs will go up; operating, capital expenditures down in near future

KRISTEN NELSON

Petroleum News

The Alaska Department of Revenue tracks costs of oil and gas production in the state because those - along with the price on the market - determine revenues the state receives.

In its Fall Revenue Forecast, Revenue said the tariff deduction companies can claim for moving oil on the trans-Alaska oil pipeline will gradually increase, as costs on the line increase and throughput declines.

Lease expenditures, operating and capital costs for producing or exploring for oil and gas, are forecast to decrease for the North Slope for fiscal year 2017, and then recover slightly in FY 2018.

The department gets lease expenditure information on annual tax returns and on monthly information filings. It also receives semiannual projections of lease expenditures for lease properties for up to five years in the future.

In addition, Revenue said, it also uses information from plans of development and other publicly available information to forecast lease expenditures.

For FY 2016, unaudited lease expenditures reported by North Slope operators and explorers were $3.3 billion in operating expenditures and $3.4 billion in capital expenditures. For FY 2017, Revenue said it is forecasting a drop in Slope operating expenditures to $2.8 billion and capital expenditures to $2.4 billion.

For FY 2018, beginning July 1, Revenue is forecasting opex to remain at $2.8 billion, with capex to recover slightly to $2.7 billion.

The department said oil prices and tax policy are two of the main factors influencing future project spending. “This forecast represents a reduction in expected capital expenditures as compared to the spring 2016 forecast,” Revenue said, with many companies deferring projects, both exploration and development drilling, in response to lower oil prices.

Several major projects are underway - including Mustang, Moose’s Tooth and Shark’s Tooth - the department said. Some development drilling continues in most producing areas and new drilling has been announced for Milne Point.

“The forecasts reflect lower capital spending at legacy fields for the next several years, compared to FY 2016,” Revenue said, but FY 2017 exploration drilling is expected to decline “significantly” in response to lower oil prices.

The Alternative Credit for Exploration ended in mid-2016, so this winter’s 2016-17 drilling season will be the first without the incentive. The department said, “It is likely that some exploration activities were ‘brought forward’ into FY 2016 to benefit from the credit.”

Development expenditures for potential discoveries are not included in the forecast, Revenue said.

Decreased expenditures are also forecast for FY 2017 and FY 2018 for areas outside the North Slope, including Cook Inlet. In FY 2016 total lease expenditures outside the North Slope were $668 million, down more than $200 million from FY 2015.

There are significant resources outside the North Slope, but exploration and development in Cook Inlet, the state’s other producing basin, are “expected to be limited by continued low oil prices, already sufficient gas supply for the local market, and reduced state subsidies for investment.”

Total lease expenditures, opex and capex, outside the North Slope are forecast at $455 million for FY 2017 and $430 million for FY 2018.

Revenue noted that “spending estimates are subject to many uncertainties, including oil prices, and the ability of projects to obtain final company approval and financing,” but said it sees “significant upside potential for investment” in Alaska long term.

Included in the upside potential are projects deferred because of low oil prices or fiscal uncertainty and potential new developments which, the department said, “are not concrete enough to be included in this forecast.”

Expenditures for development aren’t included in the forecast until those developments meet criteria for inclusion in the production forecast. Examples include fields in the undeveloped area between the Kuparuk and Colville River units and National Petroleum Reserve-Alaska development west of Moose’s Tooth, Revenue said.

For the past several forecasts, the department said, “a risk factor has been applied to the lease expenditures forecast to ensure consistency with the department’s production forecast. In practice, this led to a significant discounting of expected spending, and therefore tax credits as well, especially in the five- to 10-year time horizon.”

Starting with the fall 2016 forecast, “the production forecast methods have been adjusted to incorporate risks into the underlying projections for each individual field rather than as a blanket adjustment to all fields,” and as part of that change the department no longer applies a risk factor to the expenditure forecast, but does consider the production forecast for each area when estimating lease expenditures.