Revenue forecasts $46.81 ANS for FY 2017

North Slope crude production increased in FY 2016 to 514,900 bpd, expected to drop to 490,300 bpd in FY 2017, 455,600 in FY 2018

KRISTEN NELSON

Petroleum News

The Alaska Department of Revenue released the fall 2016 Revenue Sources Book Dec. 15, estimating total state revenue of $5.8 billion in fiscal year 2016 which ended June 30 and forecasting $9.9 billion and $9.7 billion in total revenues, respectively, for FY 2017, which began July 1, and FY 2018.

The department said the forecast is based on an annual average Alaska North Slope crude oil price of $46.81 per barrel for FY 2017 and $54 per barrel for FY 2018. Actual ANS prices averaged $43.18 in FY 2016.

“Market prices for Alaska oil have rebounded by over $25 per barrel from the low earlier this year,” Revenue Commissioner Randall Hoffbeck said in a statement. “While the move higher is encouraging, we think the fundamentals of supply and demand will ultimately limit the rise in price, and that is reflected in our forecast.”

The department said ANS production increased from 501,000 barrels per day in FY 2015 to 514,900 bpd in FY 2016, buoyed by new developments on the Slope and is forecasting ANS production of 490,300 bpd in FY 2017 and 455,600 bpd in FY 2018.

“Oil production is expected to decline over the coming decade,” Hoffbeck said, “with North Slope production declining to 331,000 barrels per day by FY 2026.”

He said the department is optimistic about developments not yet in the production forecast, including Armstrong Energy’s Nanushuk prospect and the Caelus Alaska discovery at Smith Bay. “Over the coming years, we will be working to find ways to encourage new production while also protecting the state treasury,” he said.

Revenue said in the Sources Book that future crude oil prices are the most sensitive variable in the department’s revenue forecast and the most prone to uncertainty.

Major factors which contribute to pricing of oil on the world market include inventory levels, infrastructure, geopolitics, natural disasters, supply disruptions, action by the Organization of the Petroleum Exporting Countries, macroeconomic events and financial market trends and speculation, the department said, adding that each of those factors has influenced the price of oil over the last 10 years.

Fundamental economic factors of supply and demand drive oil prices over the longer term, and price prediction requires understanding of demand growth and future supply, the department said.

“On the supply side, advances in horizontal drilling and hydraulic fracturing technology have unlocked billions of barrels of producible crude in the so-called ‘shale revolution.’”

The department said that as of the fall of this year, shale drilling activity appears to have stabilized and even increased in some areas.

Significant undeveloped resources which may become economic to drill as prices rise effectively set a ceiling for oil prices, “with many experts pointing to a price range of $60-$70 (in real terms) as a likely level that if exceeded, would incentivize enough new supplies to keep prices from going much higher over the long term.”

Global economic weakness has delayed balancing of oil markets on the supply side, the department said, adding that when it prepared its fall 2015 forecast, “conventional wisdom pointed to markets balancing in mid-2016; now, experts point to mid-2017 for a likely balancing of supply and demand.”

The department concluded that absent better than expected global economic growth, it is unlikely that oil prices will rise substantially in the short- to medium-term.

Nominal ANS oil prices are projected to average $46.81 per barrel in FY 2017 and $54 in FY 2018, the department said, with the price estimated to rise to $60 per barrel in FY 2019 and $63 per barrel in FY 2020.

While ANS prices are expected to exceed $80 by FY 2026, Revenue said that would mostly be due to inflation, with the ANS price expected to increase slowly, reaching $70 per barrel in real terms by FY 2026.

Revenue said it has changed its production forecast method, moving from an outside consultant to collaborating with Department of Natural Resources’ staff.

For the fall 2016 forecast, Revenue said the new process refines the way risk factors are incorporated, with risks “now modeled for specific types of events on a field-specific basis.”

Compared to the spring 2016 forecast, projected volumes are lower in the near term and higher in the longer term.

For ANS, FY 2016 production was forecast to average 520,200 bpd in the spring; the fall forecast shows 514,900 bpd, a difference of 1 percent. For FY 2017, ANS is forecast to average 490,300 bpd, down 3.3 percent from the spring forecast. Current forecast numbers are lower through FY 2021 and from then through FY 2025 the new forecast has higher numbers, up 15.1 percent for FY 2025, with an estimated 345,900 bpd compared to 300,500 bpd in the spring forecast.

For the period through FY 2026, Prudhoe Bay continues to be the largest ANS producer, followed by Kuparuk, Alpine and offshore fields which include Nikaitchuq, Northstar and Oooguruk.