Despite lower oil prices, industry investment on the North Slope expected to climb

Oil and gas investments on the North Slope will be climbing despite forecasts of lower oil prices. That’s according to the state Department of Revenue’s spring forecast released last week.

State legislators in Juneau were briefed on the latest outlook, spelled out in the latest update on state income.

The Department of Revenue receives estimates of near-term capital spending by companies that are included in the forecast. Dan Stickel, the state’s chief economist, told finance committees of the House and Senate that the revenue department expects North Slope capital investments to be $1.69 billion in the current state fiscal year, which ends June 30. That’s up from $1.31 billion in FY 2022, which concluded last June 30.

Capital investment for FY 2024, the fiscal year beginning next July, is expected to be $1.86 billion, based on information provided by companies.

The FY 2022 data is firm, having been verified by the revenue department, but spending in the current and next year are still estimates, so there could be variations.

While capital costs are estimated to rise operating costs in the producing fields are also increasing, according to the company data. In this case, inflation is a driving factor, Stickel told the legislators.

North Slope field operating costs totaled $2.27 billion in state FY 2022 and is projected to reach $2.57 billion in the current FY 2023 and increase to $2.7 billion in FY 2024, although operating costs next year will include some incremental new projects in producing fields.

While the latest information required from companies is only through fiscal year 2024 it is expected that capital expenditures will continue rising as planned new development projects are constructed, such as the Pikka project now underway by Santos, Ltd. and Repsol.

Also pending is ConocoPhillips’ $8 billion Willow project, where the company will not make a Final Investment Decision until a U.S. Interior Department approval clears a court review.

The state of Alaska has a net profits-type state production tax and producers as well as companies developing new projects are required to submit projected capital and field operating costs to the state revenue department.

The information is used by the state in making revenue forecasts from the production tax. Alaska is one of the few U.S. states using a net profits-type production tax, sometimes called a severance tax. Until 2006 the state had a gross-revenues production tax that used in many states, which applies a tax based on crude oil values in the producing fields after transportation costs, such as for pipelines and tanker, are deducted from sales revenues mostly from transactions on the U.S. west coast.

The net profits tax, however, allows deductions for field operating capital costs not allowed in the gross revenues tax.

While rising capital investments are encouraging for the state, the revenue forecast also predicts lower prices for North Slope oil that will sharply lower tax and royalty revenue to the state treasury.

The latest forecast estimates North Slope crude oil prices averaging $85.25/bbl in the current fiscal year and averaging $73/bb in the fiscal year beginning July 1. Alaska bases its price forecasts on oil market futures and has done so for a number of years, Stickel told the legislative finance committees.

The long-term forecast, again based on oil futures prices, is for prices for remain in the $70/bbl range, on average, through FY 2032, Stickle said.

Oil prices in the mid-$80/bbl for this year and mid-$70/bbl range for next year is unwelcome news for the Legislature’s finance committee, who had based the current year state budget based on an expected average price of $101/barrel.

Lower prices translate to lower petroleum revenues for Alaska leading to an estimate of a $1 billion budget deficit next year. However, the deficit is partly caused by an assumed large Permanent Fund Dividend proposed by Gov. Mike Dunleavy.

The dividend is paid yearly to citizens from earnings by Alaska’s $70 billion Permanent Fund, but the Fund’s earnings also help support the state budget.

If the dividend is trimmed by the Legislature, the deficit will be lowered.