Economist Ed King on prices, production

Price of ANS crude oil up for third month in a row; preliminary December ANS production numbers appear about equal to November

Ed King

for Petroleum News

The price of Alaska North Slope crude increased again in December, marking the third month in a row of upward trending prices. ANS averaged $66.96 in December (up $1.77), bringing the fiscal year to date average up to $64.17 through the first half of the fiscal year.

Optimism about winding down the U.S./China trade dispute held on through the holidays, providing analysts with some hope of higher demand growth in 2020. So long as the economy remains stable, prices should be supported at this level from the demand side. However, there is little reason to believe demand will outpace expectations. Meanwhile, a slowdown in the global economy still poses a threat to the downside. Therefore, the risk-weighted demand-side outlook is still pessimistic in the near-term.

On the supply side, OPEC+ agreed to another 400,000 barrels per day of production cuts during its December meeting. By making room for the anticipated additions from some new developments, commodity traders became less concerned about a looming glut of oil on the horizon. Consequently, some supply-side pessimism was alleviated in December, allowing prices to inch upward.

The remaining question comes from the U.S. midcontinent. Rig counts in the shale patch continued to fall in December, although the month did post one week of gains. The slowdown of activity in 2019 has been attributed to investors becoming impatient with continuous reinvestment to grow production rates without increasing the investors’ free cash. That slowdown is already creating consequences in the Texas labor market (which may have a positive impact on Alaska’s) but is yet to result in reduced production levels.

As a result, the major oil production forecasting agencies have not reduced their outlooks quite yet. But traders appear to be unphased by the implications that such production increases would create. So far, futures markets do not seem to be pricing a significant oversupply into contracts over the next six months.

While some analysts see the slowdown as evidence of weakening resource potential, most believe it is a result of lower oil prices and disappointed investors. From where things stand today, 2020 should be a year of consolidation in the shale plays. The first half of the year should have limited opportunities to break-out to the high-side, with ample constrained supply and limited demand growth, putting a ceiling on prices. The floor is lower, with uncertainty about the strength of the economy lingering and as threats of oversupply persist.

North Slope oil production

Turning to Alaska Oil and Gas Conservation Commission data (which is reported on a month lag), the sources of change can be found. Looking at November 2019 vs. November 2018, production is down 12,392 bpd.

Prudhoe Bay is responsible for most of that, posting a year-over-year decline of 4.7%. Including the deeper maintenance cycle last summer, the field is down 8.5% on the year so far. That number should get smaller as the year progresses, but PBU is likely to post a more significant decline in FY20 than expected.

Point Thomson is the other primary culprit. After making substantial repairs last October, ExxonMobil was finally able to get production rates up to the 10,000 bpd target last November. The fix seems to have worked until May. From June to October of 2019, the operator could not keep rate above 5,000 bpd. And, the shortfall was not caused by unexpected downtime - the well was reported as producing on 92% of the potential production days. The November data is even worse, showing just 1,263 bpd without any downtime.

The Kuparuk River unit posted a decline of 4.3% from last November but is supported by West Sak increases earlier in the year. Overall this fiscal year, the decline rate has only been 1,927 bpd (1.8%) so far. Northstar and Oooguruk have also posted similar declines of 1,829 and 1,715, respectively. However, the numbers are starker in percentage terms (down 17%).

Other than Kuparuk, all of these numbers are lower than anticipated, which results in missing our production forecast to the low side and leading to downward revisions. Also contributing to that outcome is the poor performance at GMT1. While ConocoPhillips was expecting to produce over 25,000 bpd from the nearly $1 billion investment, it hasn’t achieved nearly that level of success. Now over a year since commercial production began, the field only produced 8,060 bpd in November - primarily from just one well. Production peaked at 12,526 in February 2019 - half what was expected. It is unclear exactly what went wrong, but this example highlights the risk investors take and the importance of including uncertainty in statements about the future.

Fortunately, there is some good news that is offsetting some of those disappointments. The Colville River unit is currently up 4.8% over this point last year. Nikaitchuq has posted an increase of 4,285 bpd (up 28.4%) in the first five months of the fiscal year - primarily due to the unexpected disruption last year that didn’t happen again in 2019.

More exciting is the increase at Milne Point. The addition of Moose Pad has pushed the Unit production up by 4,706 bpd so far this fiscal year. That number should grow as drilling continues. And this is hopefully just the beginning. Hilcorp plans to add another drill pad or two to the unit, as well as expand its polymer flooding project and heavy oil pilot. We are optimistic about what the success at Milne Point could mean to the future of Prudhoe Bay once the transfer from BP is complete.

Editor’s note: This article is an excerpt from the King Economics Group monthly newsletter. For more information about this article; requests for further research, analysis, or consultation; or, to express interest in hiring Ed King for a speaking engagement, send an email to [email protected].