2018 Oil and Gas Forecast
The Caelus discovery at Smith Bay could lead to a significant increase in oil production on the North Slope.
Discoveries, production increases lead to industry optimism
While oil prices are expected to remain low for at least the next decade, Alaska got some good news in late 2017: oil production is rising.
After years of gloomy reports of falling production, state budget deficits, job losses, and a half-empty trans-Alaska pipeline, Alaska’s Department of Oil and Gas revenue and production forecast offered some much-needed good news for Alaska, according to Kara Moriarty, Alaska Oil and Gas Association president and CEO.
“Oil production increases don’t happen by accident—they require a lot of work, commitment, and investment in exploration and development,” Moriarty said in a media release. “We are proud of the men and women of the Alaska oil and gas industry who are on track to pull off the third straight year of an oil production increase.”
What’s remarkable about the production increases is that they occurred during a period of low oil prices, she says.
“In our view, this shows that even at low prices, investment can continue when good policies are in place,” Moriarty says.
The production increase is small, about 1.7 percent, according to a presentation Paul Decker and Ed King of the Alaska Division of Oil Gas gave to the House Finance Committee. They project an increase in production from 514,900 barrels per day in fiscal year 2017 to 524,000 barrels per day in fiscal year 2018. This follows a 3 percent increase in production from 2016. By comparison, more than 2 million barrels of oil traveled through the pipeline daily at peak production in 1988.
The production increase comes even as oilfield operators are “doing more with less.” According to the Alaska Department of Labor and Workforce Development, fewer people were working on the North Slope in 2017 than a decade ago. In May 2017, 8,923 people were employed in the region, almost all of whom work in the oil and gas industry. That’s a steep drop from March 2015, when North Slope operations employed 13,485 people.
In late 2014, oil prices topped $110 per barrel, but slid to $30 per barrel in early 2016. They have recovered somewhat, but are expected to remain in the $50 to $60 per barrel range for years to come.
The precipitous drop devastated the Alaska economy, as state government has relied on oil revenues that comprise as much as 90 percent of the state’s unrestricted revenue. In fiscal year 2017, which began July 1, 2016, and ended June 30, 2017, oil prices ranged between $38 and $56 per barrel, according to the Alaska Department of Revenue.
Oil prices are expected to average $54 per barrel in fiscal year 2018, the Department of Revenue says in its preliminary fall 2017 revenue forecast. By fiscal year 2027, oil is expected to average $75 per barrel, but in real terms oil prices are expected to stabilize at $60 per barrel. Any additional increases are due to inflation. The department expects production to average 533,000 barrels per day in fiscal year 2018, declining to 493,000 barrels per day by fiscal year 2027.
That creates state budgetary deficits of between $2.5 billion and $3 billion per year, according to Department of Revenue Commissioner Sheldon Fisher.
“Compared to the department’s previous forecast, this preliminary fall forecast represents a modest decline in forecasted oil prices combined with a material increase to the oil production forecast, leads to an overall increase in expected revenue during most of the forecast period,” Fisher says. “Alaskans should be pleased with the potential of these new developments to stabilize Alaska’s oil production and add to our economy.”
The state has been unable to come up with a long-term financial plan to balance the budget in the face of current deficits, which it has been bridging by using its savings. It’s a less than ideal solution. Fisher notes that the $2.5 billion “uncertainty gap” “is causing investors to hold back and harming our economy.”
The Department of Revenue notes that the price of oil would have to average between $100 and $110 per barrel to balance the current budget without using savings. (To bridge the gap using the new tax on legal marijuana, according to Cliff Groh, chairman of Alaska Common Ground, every Alaskan over the age of twenty-one would have to buy nine pounds of marijuana.)
In fiscal year 2017, petroleum revenue accounted for 65 percent of the state’s unrestricted revenue. In fiscal years 2018 and 2019, petroleum is projected to represent 70 to 72 percent of the state’s unrestricted revenue, largely due to oil price and production increases.
The production increases can be tied to a number of factors such as improved technology and the payoff from the state’s 2013 legislation for production tax credits. Much of the increased production is from existing fields in Prudhoe Bay and Alpine, but several other fields are only months or years away from production.
Some estimates indicate that Alaska’s North Slope could hold 40 billion barrels of conventional oil, more than any other Arctic nation. Compared to other basins, it is largely unexplored with 533 exploration wells on the North Slope, compared to 19,000 exploration wells in Wyoming, according Alaska Department of Natural Resources Commissioner Andy Mack.
Lisa Bruner, ConocoPhillips’ vice president of North Slope Operations and Development, told the audience at the Resource Development Council for Alaska’s annual conference in Anchorage in November that the company expects to see increased production, as well as new production soon. She notes, however, that much of the future development plans depend on the state of Alaska maintaining a “stable, competitive fiscal environment.”
ConocoPhillips’ 1H NEWS Could Add 8,000 BPD to Pipeline
In the meantime, ConocoPhillips’ 1H Northeast West Sak began producing oil in November, two months ahead of schedule.
“1H NEWS is an exciting project for us,” Joe Marushack, president of ConocoPhillips Alaska, said in a news release. “Viscous oil is more challenging to produce, but state-of-the-art technologies are allowing us to pursue projects like this that put more oil in the pipeline.”
1H NEWS required a 9.3-acre extension to the Kuparuk Drill Site 1H. It consists of horizontal multi-lateral production wells supported by vertical injectors, the news release states. Nineteen wells are planned. It is the first penta-lateral well in which all five layers of oil can be accessed. 1H NEWS is expected to add about 8,000 barrels of oil per day to the pipeline at peak production in 2018. The project cost about $400 million, $60 million under its initial estimate.
“1H NEWS is the largest investment in viscous oil at Kuparuk since 2004,” the release states. “Advances in technology, cost reductions, a positive business climate, and improvement in oil price helped move development forward.”
ConocoPhillips is using coiled tubing drilling to boost production at its Kuparuk field. The technology uses spools of continuous tubing to go back into existing wells and drill multiple lateral wells from a central wellbore. Rotary drilling techniques allowed the company to drill the two longest wells at Kuparuk.
At its Alpine field, ConocoPhillips can reach more than fifty square miles of subsurface from a single drilling pad through extended reach techniques, which also allows the company to limit its footprint. Wells that were once spaced 120 feet apart can now be drilled every ten feet. Lateral drilling can access deposits as much as eight miles from the well. Grind and waste technology allows companies to reinject drilling waste underground instead of storing it in surface pits.
Hilcorp, Eni, Caelus, Repsol in Exploration, Discover Mode
Hilcorp Alaska plans to inject polymers to boost production at its Schrader Bluff viscous oil deposit, Vice President David Wilkins told the audience at the Resource Development Council conference. The polymers are expected to loosen the thick oil and increase production as much as 40 percent. The goal, he says, is to “develop new oil at $40 to $50 a barrel.” The company has several projects on the North Slope, including the offshore Liberty deposit, which could add 80,000 barrels of oil per day to the pipeline if approved.
Another offshore project was given the go-head in October by the Interior Department’s Bureau of Safety and Environmental Enforcement. Eni, an Italian multinational corporation, plans to build exploratory wells from a manmade gravel island in the Beaufort Sea. It’s the first project approved for the Outer Continental Shelf since Shell pulled out of the region two years ago.
Eni’s plan is to use extended-reach techniques to get to deep petroleum deposits in federal lands under the Beaufort Sea from the eleven-acre Spy Island, located about three miles off the Alaska coast. Spy Island is one of four artificial islands used for oil and gas production in the Beaufort Sea.
Other finds such as Caelus Energy’s Smith Bay discovery and Repsol’s Nanushuk Play discovery could hold billions of barrels of oil. Department of Revenue Commissioner Fisher notes that production from several new developments was taken to account in its production and revenue forecast, which predict revenue gains of approximately 2.5 percent annually from fiscal year 2018 to 2027.
However, Alaska Senator Lisa Murkowski released legislation in the Republican tax reform bill passed by the Senate in November that could open the “1002 Area” of the Arctic National Wildlife Refuge to oil drilling. It’s a step closer to development of the region, which has been sought by Alaska’s delegation for nearly four decades.
During a hearing to gauge the potential for oil and gas exploration in 1002, Richard Glenn, Arctic Slope Regional Corporation vice president of lands and natural resources, told the committee, “On the North Slope, we believe that exploration and production can be conducted safely. The reality is that the survival of our region and the development of our communities today depend on continued exploration and production. Without this economic driver, our communities will need access to greater subsidies and programs in order to be sustained.”
AOGA’s Moriarty also welcomed the provision to allow drilling in the 1002 region.
“The US Senate’s decision to include two lease sales in the coastal plain of ANWR in its tax reform bill is welcome news for the 70 percent of Alaskans who have supported development in the area specifically set aside for oil and gas, the 1002 area, for decades,” she says. “We couldn’t agree more with our fellow Alaskans, especially those who live in the region, who want and need the jobs, revenue, and opportunity provided by the bill.
“Allowing access to federal lands for responsible development increases the prospect for more oil flowing through the trans-Alaska pipeline, Alaska’s economic artery.”
Julie Stricker is a journalist living near Fairbanks.
In This Issue
Junior Achievement Turns 100
Locally, Junior Achievement of Alaska has been helping students better understand business and economics for forty-six years. Based in Anchorage with a staff of three, Junior Achievement of Alaska serves more than 14,500 students in fifty-five communities around the state. Many past Junior Achievement students have gone on to become successful professionals and continue to serve as classroom volunteers to help raise the next generation of business leaders.