North Slope producers expect a substantial increase in capital investment next year, companies have told the state of Alaska.
Capital investment of $3.38 billion is estimated for state Fiscal Year 2021, the state financial year which begins next July. This is up from $2.62 billion estimated for the current FY 2020, which ends June 30. The latest figure for the previous year, FY 2019, ending last June 30, is $2.16 billion.
Estimates of future expenditures are required from oil producers by state production law. Alaska’s Department of Revenue uses the information to help estimate income from the production tax, which is a net-profits-type tax that allows capital and operating expenses to be deducted.
There in no guarantee the spending will actually occur but the forecasts generally track actual expenditures at least in the near-term, said Conor Bell, an economist with the Department of Revenue. “However, there can be variation in years farther (the companies provide estimates out to five years) because projects can be delayed for one reason or another,” Bell said.
Increased investment next year is expected because of new projects under development. However, the higher $3.38 billion estimate for next year, in FY 2021, would not include major spending on two large projects that are planned Pikka, by Oil Search and Repsol, and Willow, by ConocoPhillips.
A final investment decision in Pikka is expected in late 2020, which means spending for this project will be in the $3.38 billion estimate, but most will come in following years. Pikka will see initial production beginning in 2022 and full production at 120,000 b/d in 2024. Willow’s investment decision will come later, with production beginning in 2025 or 2026, ConocoPhillips has said.
“Capital expenditures represent company investment in new developments, as well as field major maintenance,” the state’s revenue department said in statement. “Once new developments begin production, the ongoing costs of operating the fields are reflected as operating expenditures,” in reports to the state, the department said.
“The department receives information about lease expenditures on annual tax returns and monthly information filings from oil and gas companies operating in the state. Semi-annually, the department also receives projections of lease expenditures for each unit for up to five years in the future,” the statement said.
The revenue department also receives projections of transportation costs for moving North Slope oil to markets, mostly on the U.S. West Coast. Marine (tanker) and pipeline tariffs expense are also allowed as deductions in calculating the production tax as well as royalty paid to the state.
In the latest filings to the state the transportation costs are expected to rise, with most of this in the tariff, or per-barrel fee, for moving oil through the Trans Alaska Pipeline System, or TAPS, the 800-mile, 48-inch pipeline connecting the North Slope to south Alaska. The total transportation cost, marine plus pipeline, was $8.02/bbl last year, FY 2019, and is expected to average $9.06/bbl in FY 2020, the current year, and toi $9.78/bbl next year in FY 2021. These costs include TAPS pipeline costs, the tariffs for shipping oil through smaller inter-field pipeline on the slope, and marine (tanker) transport costs.
The bulk of the cost increase is in the Trans Alaska Pipeline System tariff, or fee, for moving oil from Prudhoe Bay to Valdez.
The portion of these costs attributed to the TAPS tariff is projected to rise from $4.49/bbl last year to $5.83/bbl next year and $6.34 per barrel year for the following year, FY 2022, according to information given the state.
The TAPS cost is rising mainly because North Slope production is declining, which means there are fewer barrels being shipping. The fixed costs for operating TAPS must be spread across fewer barrels shipped, which means the per-barrel cost will rise.