Providing coverage of Alaska and northern Canada's oil and gas industry
February 2019

Vol. 24, No. 5 Week of February 03, 2019

Alaska is a region on a rebound for oil

Wood Mackenzie sees good economics for new North Slope projects although returns on investment are not necessarily top tier

Alan Bailey

Petroleum News

With breakeven oil prices in the high $30s to low $40s, well below the current price, the economics of new oil development projects on Alaska’s North Slope look pretty good, Mark Oberstoetter, Wood Mackenzie director of upstream for Alaska and Canada, told the Alaska Support Industry Alliance Meet Alaska conference on Jan. 18. Alaska is a region in a rebound, he said.

“If you want onshore oil, Alaska’s been the place to go in the last three years. There’s a lot of excitement in the Nanushuk, in the Brookian age finds,” Oberstoetter said.

However, companies tend to look at internal rates of return when evaluating projects, he cautioned. From that perspective there is a huge range of anticipated returns across the world, with Alaska projects not necessarily appearing in the top tier. On the other hand, many new resources are being discovered in parts of the world with unstable political regimes.

Over the past few years Alaska has ranked seventh around the world for resources discovered, Oberstoetter said.

New Alaska production

In Alaska new developments in the Greater Mooses Tooth unit, and planned for the Willow and Pikka finds, have the potential to add pretty large wedges of new oil production to the state’s production profile. Sanction of overlapping development projects could see capital expenditure of $4 billion on the North Slope. However, it will also be necessary to keep legacy fields operating at as high a rate as possible, to support the new developments, Oberstoetter said.

Oberstoetter also commented on changes being seen in the Alaska oil industry, as new players have come to the state. ExxonMobil and BP, while active in the state, are now also big players in tight oil and gas, with their Alaska operations being relatively small components of their overall portfolios. ConocoPhillips, on the other hand, while having good tight oil assets, sees Alaska as a meaningful part of its portfolio. So, there is “a bit of a shuffle going on,” with Hilcorp ramping up its activities in the state and ConocoPhillips now having a $20 billion North Slope portfolio, following recent asset swaps in its North Slope acreage, Oberstoetter said.

Supply and demand

Oberstoetter’s comments about Alaska came within the context of a global view of the oil market, in which he emphasized that oil is a commodity, subject to the whims of supply and demand: If supply and demand are out of synch, there will be a price correction.

However, the Wood Mackenzie analysts see the global demand for oil continuing to grow, albeit at a slowing rate. Asia, as a region, is crucial to this growth, as more families move into the middle class and seek the convenience of modern technologies. And oil fuels everything, from transportation to the manufacture of plastics. The emergence of electric and natural gas-powered vehicles will impact future oil demand, but alternatives to petrochemicals and jet fuel will be difficult to find - currently eight new refineries being built in the Middle East and Asia will essentially be petrochemical facilities, with refinery front ends, Oberstoetter said.

But forecasts have a habit of being wrong, and there are many uncertainties around future oil demand projections. For example, Wood Mackenzie thinks that in the mid 2020s the price of batteries will drop below $100 per kilowatt hour, a phenomenon that would render electric vehicles cost competitive with internal combustion engine powered vehicles. There is much consumer backlash against single use plastic products. And future government polices relating to oil products may become more aggressive.

Supply gap

However, Wood Mackenzie envisages oil demand growth of about 6 million barrels per day, mainly for petrochemicals in Asia, between now and 2025. On the supply side, production from currently operating fields and wells will decline, leaving a shortfall of about 13 million barrels per day, if no new oil resources are developed. And, although there are a number of oil development projects underway, they are insufficient to fill that supply gap. Taking account of the climbing oil demand, it will be necessary to bring about 15 million barrels of oil on line by 2025, to maintain supplies in balance with demand, Oberstoetter said.

Tight oil in the Lower 48 is by far the fastest growing source of new oil but is not, by itself, sufficient to fill the supply gap. Oil from other sources, such as OPEC, deepwater developments and Alaska, will be needed. Stacking up the economics of the various potential sources of new oil production has led the Wood Mackenzie analysts to a view that a long-term oil price in the range of $70 to $80 will be necessary to keep the oil market in balance. The company sees the recent oil price drop as a “mini-bottom,” with prices likely to be around $65 this year but climbing to the high $60s in 2020. This assumes that OPEC will continue to apply constraints to oil production, to balance the market, Oberstoetter said.

From the perspective of U.S. tight oil, the Permian basin is particularly important in terms of production growth - the pipelines being built to alleviate constraints in the shipment of oil from the basin will have a sharp impact on oil prices, Oberstoetter said. The Wood Mackenzie analysts predict that the Permian output rate will grow by 430,000 barrels per day each year for the next five years.

“That’s essentially adding the entire North Slope production each and every year,” Oberstoetter said.

Returning confidence

However, the analysts are also seeing confidence returning in the rest of the world, following the downturn in the oil industry in 2014. Typically, Wood Mackenzie expects to see about 40 major oil projects around the world each year. In 2014 there were only 10 projects, but the project count has started to climb again. Exploration, on the other hand, is still suffering, with fewer wells being drilled and less being found in the way of new oil reserves.

“It’s been a pretty dire story for exploration and we’re not expecting to see exploration budgets grow too much,” Oberstoetter said.

On the other hand, companies that are looking at new plays and oil exploration frontiers are being rewarded.

“Some of these new plays and basins are very promising and adding a lot of value to the companies’ assets,” Oberstoetter said, adding that Alaska is an area of exploration excitement.

Natural gas

From the perspective of natural gas and liquefied natural gas, global gas demand has been exceeding expectations in recent years and is expected to continue to grow. Currently there is a supply shortfall projected for 2025. With many new LNG projects close to sanction, 2019 will be a very busy year in this sector, Oberstoetter said.

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