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

Vol. 24, No.50 Week of December 15, 2019

Revenue Sources Book forecasts crude oil price continuing to drop

Kristen Nelson

Petroleum News

In its Fall 2019 Revenue Sources Book, released Dec. 6, the Alaska Department of Revenue said its current forecast is based on “relatively stable oil production from Alaska’s North Slope” and on ANS oil prices which averaged $69.46 per barrel for fiscal year 2019 and are forecast to average $63.54 for FY20 and $59 for FY21.

ANS oil production averaged 496,900 barrels per day in FY19, acting Revenue Commissioner Michael A. Barnhill said in a cover letter to Gov. Michael J. Dunleavy included in the forecast, with production forecast to decline modestly in FY20 to 492,100 bpd and to 490,500 bpd in FY21.

While a modest drop is forecast going forward, the difference between the spring 2019 and fall 2019 forecasts impacts revenues, with ANS production down 2.8%, 14,500, from the spring 2019 forecast. For FY20, the production forecast is down 7.1%, 37,400 bpd, and the FY21 forecast is down 4.1%, 21,200 bpd.

The oil price forecast for FY19, up 0.8% for ANS West Coast, from $68.90 in the spring forecast to $69.46 in the fall forecast, is down from the spring forecast for all forward years in the fall forecast: down 3.7% for FY20 from $66 in the spring forecast to $63.54 in the fall forecast and down 10.6% for FY21 from $66 in the spring forecast to $59 in the fall forecast.

The spring forecast for FY20 unrestricted general fund petroleum revenues was $1.755 billion; with both production and oil prices now forecast to be lower than estimated in the spring, the fall forecast for unrestricted general fund petroleum revenue has dropped to $1.559 billion, a reduction of some $200 million.

Declines, increases

The forecast looks at production by oil pools and recognizes both increases and decreases. “The oil production forecast balances projected declines in production at existing fields with incremental production from new fields and new developments,” the department said, with production forecast to decline to 434,300 bpd in FY24 and then increase to 494,500 bpd by the end of the 10-year forecast period.

Cook Inlet production, which averaged 14,900 bpd in FY19, is forecast to increase to 16,200 bpd in FY20, and decline thereafter, dropping to an average of 9,200 bpd in FY29.

National Petroleum Reserve-Alaska production, which averaged 8,300 bpd in FY19, is projected to increase steadily, from 11,500 bpd in FY20 to 52,600 bpd in FY29. ConocoPhillips’ Greater Mooses Tooth began production in October 2018 and the company’s Willow discovery is expected to begin production in the 2025-26 timeframe, the company said at a November analysts’ presentation.

On state lands, Oil Search’s Pikka is listed in the “other” category along with ConocoPhillips’ Narwhal. In that category, which currently has no production, the state is projecting small volumes beginning in FY21 and reaching 128,100 bpd in FY29. Oil Search has said it expects initial production of some 30,000 bpd through Kuparuk facilities in mid-2022, and the beginning of full production in 2023-24 once its own facilities are online.

Change in methodology

Revenue said it has changed its price forecast methodology, with the forecast now incorporating “the most current indications from financial markets.”

In prior years forecasts the department based the official price forecast on a day-long price forecasting session typically held in October. In the Fall 2018 Revenue Sources Book the department gave this description of that method: “The forecast session uses a survey method that relies on a pool of participants from state government, the private sector, and academia. Each participant submits his or her own price forecasts after a day of presentations by experts on oil price markets and market structure. These forecasts are used to calibrate internal models and inform discussions on how effects that occur after the price forecasting session should affect the price forecast.”

That method is no longer being used.

The department said that beginning with the fall 2019 forecast, “the short-term oil price forecast (current and next fiscal year) is derived from futures market expectations for Brent crude. Brent is used because it is a widely followed global benchmark crude that is typically priced similarly to ANS crude. Beyond the next fiscal year, the price forecast is held constant in real terms, increasing with inflation. This approach to price forecasting allows the department to prepare a forecast with minimal expense to the state, while providing a transparent methodology that incorporates the most recent market information available at the time the forecast is produced.”

Production forecasting

The department has not changed its method for forecasting production. Those numbers are developed internally by the Alaska Department of Natural Resources’ Resource Evaluation and Commercial teams with assistance from Revenue.

There are three categories of oil volumes in the production forecast: currently producing, including wells in production prior to the start date of the forecast; under development, which includes new wells and pool expected to be in production in the first 12 months of the forecast period; and under evaluation, including new wells and pool expected to go into production in years two through 10 of the forecast period.

Currently producing “volumes are forecast at the pool-level using decline-curve analysis,” Revenue said, with DNR technical experts using data from the Alaska Oil and Gas Conservation Commission “to develop a time series dataset to assess the future production profile of fields that are already in production.”

Volumes from the under development category are forecast using information provided by operators in plans of development for each pool. “Production from planned infill wells is determined using the well performance from historical analogue wells,” the department said. For projects which have funding, approval and a drilling plan, volumes are categorized as under development “if production is expected to begin in the first year of the forecast period.” Because oil in this category requires some level of capital investment and equipment usage, the potential for delay exists and actual performance is uncertain, so some consideration of risk is required, so “an occurrence risk factor” for individual projects is included in the forecast.

Under evaluation volumes are those likely to begin production in the second through 10th years of the forecast. These projects may still have funding hurdles to overcome, may need to be sanctioned by working interest owners, require regulatory approval, etc., so risk factors are assigned to each project.


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