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DNR addressing COVID-19 challenges
Department working with North Slope producers to address issues that are arising while DOG re-assesses its oil production forecast Alan Bailey for Petroleum News
During a May 8 presentation to the Alaska House Resources Committee, officials from the Alaska Department of Natural Resources described how they are working with North Slope oil producers to address COVID-19 issues, and how they are reassessing the state’s oil production forecast in the light of the COVID-19 pandemic.
DNR Commissioner Corri Feige told the committee that DNR has continued actively working through the crisis, with a peak of 70% of personnel out of the office, teleworking. The department has now started to bring people back to the office, Feige said.
Stabilizing the industry To help stabilize the industry, DNR is pursuing policies such as managing requests from lessees and operators for help with the deferral of payments on lease rentals, and helping manage production curtailments, Feige said. The department has also been paying attention to issues such as ensuring access to common carrier pipelines for all pipeline users when a pipeline operator has to curtail its throughput. In addition, DNR has been continuing its monitoring of environmental and permit compliance, for both normal production and production curtailment, Feige said.
“From early on it became clear that the best way that DNR could protect the state’s interests and the interests of the people in Alaska was working through our framework of statutes and regulations, to be sure that we did everything we could to stabilize the businesses operating in the industry,” she said. “We are trying our best to have open and frequent communications with all of our operators and any of our lessees.”
Impacts on oil production At the same time DNR’s Division of Oil and Gas has been busy assessing the potential impact of the COVID-19 pandemic on activity in the North Slope oil fields and, hence, on North Slope oil production. Reflecting on announced reductions in capital expenditure by several companies operating on the North Slope, Pascal Umekwe, a division petroleum reservoir engineer, told the Resources Committee that rig laydowns and the deferral of non-essential oilfield work appeared to be having the greatest immediate effect of expenditure reductions on production. In new, revised evaluations of oil production in fiscal years 2020 and 2021 DNR now estimates a 5.2% production decline between the two years - that compares with a more typical historic decline rate of around 4% to 5%, Umekwe said.
However, the new estimate does not factor in the impacts of the recent proration of North Slope production by Alyeska Pipeline Service Co. to balance shipments off the North Slope with storage and tanker schedules, nor the April 30 announcement by ConocoPhillips that it would reduce production from Alpine and Kuparuk by some 100,000 barrels per day in June, part of a company-wide production reduction.
Also, new drilling in the legacy fields of the Slope in recent years has significantly flattened the production decline curve, moving the annual decline rate downward from an earlier level of 9% to 10%. So, a sudden hiatus in drilling programs could send the future decline rate above that 5.2% level.
And the situation continues to evolve, with very high levels of uncertainty in the division’s numbers, Umekwe emphasized. In the longer term, the oil price will become increasingly important in determining production levels, he commented.
“Some companies are still going through the changes that COVID-19 and low oil prices are causing to their programs. We can only present a snapshot at this particular point in time,” Umekwe said. While the scale of rig laydowns suggests a pause in new rig workovers for the remainder of the year, some operators had already completed about half of their planned drilling for fiscal year 2020 prior to suspending development activities.
Update to production forecast The division’s revised oil production forecast represents an update to the forecast that it published in February. In its re-assessment of that forecast the division has now assumed that no new wells will be drilled on the North Slope for the remainder of this year. However, it has left unchanged other assumptions in the February forecast and has used the state’s official spring forecast for the oil price. Excluded from the production forecast are oil production reductions by the oil companies, the impact of facility maintenance projects and the impacts of production management activities such as rate protection well work and rig workovers.
Adding to the uncertainty are questions over the extent to which companies may ramp up field management and development activities next year - operators are poised to bring production back if the commercial climate continues to improve, Umekwe said. In addition, different companies will ramp up in different ways, he said.
Based on its findings through April, the division reduced its forecast production rate for the 2020 fiscal year to 506,000 barrels per day from the forecast of 519,000 barrels per day that it published in February. For fiscal year 2021 the forecast dropped to 479,000 barrels per day from 512,000 barrels per day.
Other impacts Division Director Tom Stokes emphasized that the new forecasts represent maximum projections, assuming no restrictions in the oil production system and no company prorations of production rates. Subtracting a recent 10% proration from that 506,000 barrels per day forecast for this year leaves a production rate of 460,000 barrels per day: That estimate, which would reflect the 10% proration, is close to this week’s production nomination by the producers of 452,000 barrels per day, Stokes commented.
Division production forecasts form key inputs to the Alaska Department of Revenue’s state revenue forecasts. Dan Stickel, DOR chief economist, told the committee that DOR has been working with the division on the updated production scenario while also analyzing potential prorations of oil production, layering the impacts of prorations on top of the division findings. Revenue anticipates releasing some information about its analysis soon, Stickel said.
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