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Alaskanomics's Blog March 3, 2017

Yes, Oil is Down, For Now...But Hold On!


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By Tim Bradner

It’s easy to feel uneasy about our state’s petroleum industry right now. Let me cite some reasons:

  • Crude oil prices are still down. They are slowly rising but conventional wisdom is that $60 per barrel may be a kind of price ceiling, the threshold where those prolific shale oil drillers flip the switch and bring more supplies, sending prices down again.
  • The newspapers are full of articles about layoffs in the oil industry that are now rippling out through the economy, affecting even retail.
  • Legislators in Juneau are again talking about increasing taxes on oil producers even though many are still operating in the red. Question: Shall we shoot ourselves in the foot?
  • The big gas pipeline/LNG project, which is thought to be our long-term economic savior, now seems more distant than ever.

All the above is true and it is enough to make one feel blue.

But here’s a secret: Whatever we think about our situation now will turn out to be wrong. That’s because we’re always wrong when we think the future will be like the present. It won’t be.

Here are some big positives. Yes, we do need to diversify the economy along with our state revenue sources, which are too dependent on oil. But our petroleum industry has a lot of life left in it, and we now know there’s still a lot of oil on the North Slope. Recent discoveries by ConocoPhillips, Armstrong Oil and Gas and its partner Repsol, and by Caelus Energy confirm that.

This is actually a new paradigm. Until recently, in fact until those discoveries were made, most geologists, particularly government geologists, believed the big heyday of the North Slope was past and that from here on out only small or medium-sized fields will be found.

While there’s a lot we don’t know about the new discoveries – there are still uncertainties about them – but what we do know shows how wrong the past assumptions have been.

For example, it’s a good thing that ConocoPhillips didn’t believe the U.S. Geological Survey when it predicted the National Petroleum Reserve–Alaska would hold mostly natural gas and very little oil. ConocoPhillips is finding a lot of oil, and is now pretty busy with three discoveries there. 

The lesson that ConocoPhillips, Armstrong/Repsol and Caelus is teaching us is that you never know until you drill. (On the other side of the coin, the same must be said about the Arctic National Wildlife Refuge, where there’s a lot of high expectations by Alaskans. Until we can drill, we’ll never really know.)

But this gets me to another point: Those oil incentive tax credits. A lot of legislators call them subsidies. I prefer to call them investments. It’s true that we can no longer afford them and Gov. Bill Walker and legislators are correct that the program, in its present form, needs to wind down.

But the basic idea behind the incentives was to bring more companies to Alaska and get more exploration wells drilled – because that’s the only way more discoveries can be made. The fact is that the incentive program has performed brilliantly. It resulted in new companies coming to Alaska. More natural gas was discovered in Cook Inlet, ending fears of electrical brownouts because of fuel shortages for power generation. More exploration wells were drilled on the slope, with those recent discoveries made.

We can never say that the newcomers, firms like Hilcorp Energy and BlueCrest Energy, Armstrong, Repsol and Caelus, came to Alaska because of the tax credits. They came because we have good rocks. But the tax credit program was what caught their attention. No other place in the world has anything like it. It caused them to come here and take a look and once here they really liked what they saw, in the rocks. Financially, the tax credits allowed them to do more work and at a quicker pace, which speeded the discoveries.

They also allowed companies to tackle new ideas, like the work that Great Bear Petroleum, an Alaska-based company, Burgundy Xploration of Texas and 88 Energy of Australia are going to test the potential for producing oil from the large North Slope shale formations.

That’s out in the future, but let’s put some numbers around what’s been discovered so far.

  • ConocoPhillips says its newest NPR-A discovery, Willow, could produce up to 100,000 barrels a day by 2023. Two other ConocoPhillips projects in the petroleum reserve, GMT-1 and GMT-2, are in construction (GMT-1) or in permitting (GMT-2). Together they could add 55,000 barrels a day by between 2019 and 2021.
  • Armstrong and Repsol are planning production facilities for their discovery that will be capable of producing 120,000 barrels per day.
  • Brooks Range Petroleum, a small independent, has a small project, Mustang, in development that could produce 12,000 barrels per day.
  • Caelus has a small project, Nuna, which is in advanced planning that could produce 20,000 to 25,000 barrels per day. Caelus’ big project, further out, is the Smith Bay discovery, which still needs tests but which the company hopes could produce 200,000 barrels per day.

All that adds up to about 400,000 barrels per day of new oil. Let’s not forget that there’s still a lot of undeveloped oil, several billion barrels, left in the big producing fields, like Prudhoe Bay and Kuparuk River. This gives us a lot of reasons to be optimistic.

We are going through some tough times in our state’s “oil patch” but let’s not forget that we’re also coming off several years of boom when oil prices were $100 or more. Our industry is now back to where it was in 2012, and that wasn’t so bad.

Given the uncertainties in future prices we may not see $100 oil, and boom times, again. That could be wrong, of course (and probably will be) but we should plan for what we know, and that includes the knowledge that there’s a lot of oil on the slope.

We can take comfort in that. Meanwhile, let’s not shoot ourselves in the foot. That’s a message to our legislators.

 

Tim Bradner is editor of the Alaska Economic Report and co-publisher of the Alaska Legislative Digest.

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