North Slope operating costs rising, state officials say

North Slope operators are reporting higher costs as industry activity increases on the slope. Estimates of future capital and operating costs filed by the companies with the state Department of Revenue show expectations of higher costs with projects being developed, state officials say.

Between state revenue forecasts published last December and in March, estimated capital spending on projects increased from $3.14 billon to $3.38 billion for 2021; $3.24 billion to $3.35 billion in 2022 and $2.6 billion to $2.9 billion in 2023.

“We attribute the increase in forecasted capital expenditures, compared to the fall forecast, to higher expected costs for new developments. Our understanding of the cost of these developments has changed and we’ve increased the forecast,” said Commissioner of Revenue, Bruce Tangeman.

The companies’ estimates were published in the annual fall 2018 revenue forecast published in December and the spring, 2019 updated forecast published in March.

New discoveries made recently by major companies ConocoPhillips and Repsol, and independents Armstrong Oil and Gas and Oil Search in the Nanushuk, a geologic formation extending across the western North Slope.

Two of these, Willow, by ConocoPhillips, and Pikka, by Repsol and Oil Search, are in advanced stages of development planning, with several hundred thousand barrels a day of new production expected in 2023 or 2024.

The increase in drilling and development work may now be causing prices to rise. Contractors on the slope were hit hard in layoffs and cutbacks in work during three lean years of low oil prices and layoffs. Now, as work starts to pick up, there’s less competition, according to sources familiar with the industry.

Rising costs could pose a problem, however. There is concern that developers could be squeezed between higher costs and crude oil prices that are static. The Department of Revenue’s long-term forecast for North Slope oil is for prices to remain in the low-to-mid $60-per-barrel range, inflation-adjusted, for the next decade.

But new projects could cost more than was expected, particularly in remote areas like the National Petroleum Reserve-Alaska, where ConocoPhillips has made significant new finds.

The expected capital and operating costs published by the revenue department are from estimates given by companies in state production tax returns filed with the state.

Alaska has a net profits-type oil and gas production tax and state law requires companies to provide estimates for expected future costs in producing fields and new developments.

One indicator that activity is rising is the gain in Alaska petroleum employment, after years of decline. Jobs in the industry rose 5.4 percent in February compared with the same month in 2018, according to data from the state Department of Labor.

Construction jobs, many which are linked to industry, rose 7.7 percent. The total numbers employed in both fields are still well below the industry’s peak years in 2015, however.

Activity is up because companies are moving to further test and plan for development of recent oil discoveries. Natalie Lowman, spokesperson for ConocoPhillips Alaska, said her company has about 800 employed this winter in drilling, ice road construction and support work, which is 100 over winter employment levels in recent winters. “It’s a very robust season for us,” she said.

While capital costs for new projects are expected to increase the revenue department’ estimates for field operating expenses are expected to be stable, according to data from the December and March frevenue department forecasts. Total operating costs for producing fields are estimated at $2.808 billion in 2020, rising to $3.06 billion in 2024 as new fields comes on line.